Forget individual investment returns, REAL gains come from considering your investment returns collectively

People exercise to get healthier in the same way people invest to get wealthier.

I have no idea whether there’s a way to achieve more from my workouts, such as spending less time exercising or benefiting more from the time I spend exercising, but I have learned the equivalent efficiencies that can be achieved when investing.

exercise returns vs. investment returns

Note: Efficient investing will not lead to a better beach body, but it may result in you spending more time at the beach… or exercising!

To clarify, efficient investing is not achieving better returns from less time investing, I’m referring to improving returns while lowering investment risk.

How do you achieve higher investment returns with lower levels of risk?

Welcome to the science of risk-efficient investment portfolios

harry markowitz Nobel prize winner
Harry M. Markowitz receiving the Nobel Prize for his pioneering work in the theory of financial economics.

Back in ‘52 Harry Markowitz published a paper that changed the way investments were selected and grouped. Harry explained that performance can be improved without increasing risk by combining investments in a very selective way…

What did he mean by investing in a very ‘selective way’? Simply put, finding a selection of higher growth, higher risk investments where the fluctuations cancel each other out.

i.e. Aligning investments where the best years of one happens during the worst years of another – Imagine if Harry was a personal trainer.


Selective investing in action

To illustrate risk-efficient investing, consider all the different companies where the temperature has a significant impact on sales performance; and out of these companies – separate the ones who experience stronger sales performance during warmer years, from the ones who experience stronger sales during cooler years.

For the example below, we use an air conditioning company and a heating company.

Our air conditioning company returns 20% during warmer years and nothing during cooler years, with an average return of 10% p.a. across a 10-year period (illustrated below), though a few additional cooler years would see this average drop.

Average 10 year investment returns for air conditioning company

Our heating company also returns 20%, but during cooler years and nothing during warmer years, with average investment returns of 10% p.a. across a 10-year period (illustrated below), though a few additional warmer years would see this average drop.

Average 10 year investment returns for heating company

Because some years deliver great returns and other years no return, we are weathering a lot of volatility to achieve an average return of 10% (and there is no guarantee that warm/cool years would be sequential as per our example).

When combining these two companies, average returns are maintained during both the warmer years and the cooler years (as illustrated below).

Average combined 10 year investment returns for both companies

The outcome of holding both these companies in a portfolio of investments is an average return of 10% p.a. without increasing the overall risk in the portfolio, even if a string of warmer or cooler years were experienced.

Average combined 10 year investment returns for both companies

“Successful investing is about managing risk, not avoiding it” – Benjamin Graham

These days, risk can be measured mathematically, and with the speed of information technology, any stock that is underpriced relative to its risk is snapped up instantaneously – immediately bringing the stock back to its risk-weighted value.

– Excerpt from The Top 10 Investment Mistakes Made by Mum and Dad Investors

Many investors get caught out searching for underpriced opportunities, chasing the latest investment trends or following investment tips – or generally relying on the merits of individual stocks rather than considering investment returns as a collective.

With the right investment structure and approach, it is possible to mathematically reduce your investment portfolio’s risk or conversely, increase your investment returns without increasing the portfolio’s risk-weighting.

What our clients say…

John has been working with my partner Jarryd and I for roughly six months to one year now, we are both young professionals and were looking to buy our first house. Obviously not knowing anything about the property industry or setting up long term wealth in general we really wanted to set ourselves up for the best chance of success. After meeting with John and the team at Nexus there was no question in our minds that we were going to utilise their services. John has spent copious amounts of hours with us imparting his wealth of knowledge and carefully guiding us to now having just signed the contract on our first property. From the very first meeting with John we felt extremely comfortable. He has made making such a huge decision as easy as it possibly could be and we could not recommend his and Nexus’s services more. Jarryd and I are both looking forward to a long, mutually beneficial relationship with John and the team.

I had no experience in working with a financial advisor or wealth management group. I also did not have the time or interest to research information myself. It has been a pleasure to work with John and Steve, as they have guided me through my journey of starting an investment plan for my future. I would highly recommend Nexus for anyone who would like to grow their wealth and learn about the process while doing so.

After many hours of searching for financial advice within the Brisbane city, I was left with very little to choose from at a professional level. I came across the Nexus page and started researching. I liked what I saw and found it very user-friendly. Nexus offered us first class service with no hidden costs and was hassle free from the beginning. We have every confidence in the team at Nexus to help us create wealth and guide us to a healthy investment portfolio. With no hesitation whatsoever, the team at Nexus is highly recommended.

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