One thing we all love is speed. We love it when groceries are delivered in 10 minutes, we want to reach our destinations faster, and, of course, we want to grow our wealth faster through higher returns.

“Nobody wants to get rich slowly,” Warren Buffett once said. I think about this often.

In our cars, we have a speedometer that tells us exactly how fast we are going. While it shows our accurate speed, it fails to show us how much additional risk we take on as we accelerate.

Let’s look at the math of a 50km drive on a highway.

Notice how the incremental time saved becomes negligible compared to the surge in risk:

• Accelerating from 40 to 60 km/h saves a significant 25 minutes (High utility).

• Accelerating from 60 to 80 km/h saves another 12.5 minutes (Moderate utility).

• However, pushing from 120 to 140 km/h is drastically more dangerous.

 
At that speed, your braking distance has increased significantly, your margin for error is nearly zero, and a small pothole can become a life-threatening event.

All this risk for what? To arrive just 3 minutes and 36 seconds earlier??

Your portfolio works in the same way

Your portfolio works like that highway journey. Most investors focus solely on the CAGR (the speedometer), but they ignore the Volatility (the risk of a fatal crash).

Here is how different portfolio mixes performed over the last 9 years. Notice how volatility drops when you add uncorrelated assets into the mix:

Think about this:

• Would you accept 41% higher risk (volatility) for just a 0.6% extra CAGR? (Comparing C to F)

• Would you accept 85% higher risk for a 1.2% extra CAGR? (Comparing A to F)

 
This isn’t merely due to the recent outperformance of gold.

Look at the difference between Scenario D and Scenario F, where the allocation to gold is only 10%. To generate just 0.3% of extra CAGR, the risk (volatility) increases by 24%.

Your specific allocation will vary based on your risk appetite, goals, and age.

However, this analysis highlights the hidden dangers of chasing that last bit of return. Before you floor the accelerator, ask yourself if the marginal gain is worth the risk of a fatality.

Or in terms of investing, Is the extra return high enough to lose your mental peace?

Author: Nihit Kshatriya, Head of Investor Relations, Capitalmind Mutual Fund.