{"id":5018,"date":"2015-03-05T09:08:34","date_gmt":"2015-03-05T17:08:34","guid":{"rendered":"http:\/\/www.wealthfront.com/blog\/?p=5018"},"modified":"2026-07-24T16:28:47","modified_gmt":"2026-07-24T23:28:47","slug":"attempting-max-return-not-always-good","status":"publish","type":"post","link":"https:\/\/www.wealthfront.com/blog\/attempting-max-return-not-always-good\/","title":{"rendered":"Attempting to Maximize Your Return Isn\u2019t Always a Good Thing"},"content":{"rendered":"

I<\/span> am often asked \u201cwhy shouldn\u2019t I always choose the highest risk portfolio if it\u2019s expected to generate the highest return?\u201d That seems like a very reasonable question. In fact if everyone were rational they should choose the highest risk portfolio for exactly this reason. Unfortunately, very few people are rational.<\/p>\n

Chasing Returns Will Hurt You<\/h2>\n

As our chief investment officer Burt Malkiel pointed out in Investors\u2019 Most Serious Mistake<\/a>, individual investors tend to chase returns. In other words they invest after markets have risen and sell when they decline. The chart below illustrates this behavior.<\/p>\n

\"This<\/a>

This chart plots mutual fund flows against market performance<\/p><\/div>\n

As you can see cash flows into mutual funds when markets are up and are withdrawn when markets decline. The correlation is almost scary.<\/p>\n

It doesn\u2019t matter how many times most people are told not to chase returns \u2014 they just can\u2019t help themselves. It just doesn\u2019t feel right to invest when the market is down \u2014 but clearly that would result in better returns. Now please don\u2019t interpret my statement as encouragement to time the market. I think it is almost impossible to time the market. Therefore the best results over the long term are likely to result from investing a constant amount every year no matter how the market has performed. We explain our logic in detail in Invest Despite Volatility<\/a>.<\/p>\n

Investors Usually Change Their Risk Profile At The Wrong Time<\/h2>\n

As we explained in The Right and Wrong Reasons to Change Your Risk Tolerance<\/a>, many investors who want to heed the best practice advice of not chasing returns end up doing the opposite unconsciously by increasing their portfolios\u2019 risk when the market has increased and decreasing it when the market has declined. You can see this behavior even among Wealthfront clients in the chart below. It plots our clients\u2019 risk score changes relative to the performance of the S&P 500\u00ae<\/sup>.<\/p>\n

\"Blue<\/a>

Blue bars indicate net change in risk score (left Y axis; positive numbers indicate increases in level of risk while negative indicate instances of lowered risk tolerance) versus the monthly S&P 500\u00ae return (red line; right Y axis)<\/p><\/div>\n

You\u2019ll notice how similar this chart looks to the earlier one \u2014 and this despite a sample of people who are bigger believers in trusting the market (you need to believe in index investing to become a Wealthfront client). Fortunately the number of Wealthfront clients who try to game their risk score is a very low percentage of our total client base.<\/p>\n

Clearly changing risk score is no different from chasing returns. Increasing one\u2019s portfolio risk after the market has risen is only likely to increase the amount of the loss when the markets revert to the mean. The loss will increase because a higher risk portfolio will have higher volatility, which means bigger upswings in an up market and bigger downswings in a down market. Again increasing risk in a down market is likely to improve your returns if you could<\/em> time the market, but that\u2019s impossible.<\/p>\n

Portfolio Risk Can Be Counterintuitive<\/h2>\n

Now back to our original premise. If you were truly immune to market behavior and had a long time horizon, then it would make logical sense to choose a portfolio of the highest risk score available (risk score 10). That\u2019s because portfolios with higher risk scores have higher expected returns, but they aren\u2019t generally that much \u201criskier\u201d over long time horizons.<\/p>\n

I know that sounds counterintuitive, but it\u2019s true. A higher expected return can compound so much over a long period of time that the chance of loss actually barely increases. This seemingly argues for everyone maxing out their risk.<\/p>\n

Few People Can Resist The Power Of The Market<\/h2>\n

Before you make the plunge to a high-risk portfolio remember that very few people can resist the scary power of a down market. DALBAR, an investment research firm that has been analyzing individual investor behavior for more than 20 years has consistently found the average individual loses approximately 4% per year based on buying and selling at the wrong times.<\/p>\n

Choosing an appropriate<\/em> risk level (behavioral economists have consistently found that individuals on average overstate their tolerance for risk which we factor into our risk assessment algorithms) will protect you from yourself. A proper portfolio risk profile will be less likely to decline by an amount with which you are uncomfortable in a down market, which will make it less likely that you will sell at the wrong time.<\/p>\n

Maxing out your portfolio risk should maximize your returns if you weren\u2019t prone to emotion \u2014 but almost every human being is \u2014 so think twice before you start using logic as your justification.<\/p>\n

____________________________________________________<\/p>\n

Disclosures:<\/span><\/h6>\n
Investment management and advisory services are provided by Wealthfront Advisers LLC (\u201cWealthfront Advisers\u201d), an SEC-registered investment adviser, and brokerage related products are provided by Wealthfront Brokerage LLC (“Wealthfront Brokerage”), a Member of<\/span> FINRA<\/span><\/a>\/<\/span>SIPC<\/span><\/a>. Financial planning tools are provided by Wealthfront Software LLC (\u201cWealthfront Software\u201d).<\/span><\/h6>\n
The information contained in this communication is provided for general informational purposes only, and should not be construed as investment or tax advice. Nothing in this communication should be construed as a solicitation, offer, or recommendation, to buy or sell any security. Any links provided to other server sites are offered as a matter of convenience and are not intended to imply that Wealthfront Advisers or its affiliates endorses, sponsors, promotes and\/or is affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise.<\/span><\/h6>\n
Data from the DALBAR, Inc. 2014 Quantitative Analysis of Investor Behavior (QAIB) report is provided for informational purposes only. The statistics presented are based on DALBAR\u2019s independent analysis of investor behavior. Wealthfront does not endorse, sponsor, or guarantee the accuracy of this data.<\/span><\/h6>\n
All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance. Please see our<\/span> Full Disclosure<\/span><\/a> for important details.<\/span><\/h6>\n
Wealthfront Advisers, Wealthfront Brokerage, and Wealthfront Software are wholly-owned subsidiaries of Wealthfront Corporation.<\/span><\/h6>\n
\u00a9 2026 Wealthfront Corporation. All rights reserved.<\/span><\/h6>\n","protected":false},"excerpt":{"rendered":"

I am often asked \u201cwhy shouldn\u2019t I always choose the highest risk portfolio if it\u2019s expected to generate the highest return?\u201d That seems like a very reasonable question. In fact if everyone were rational they should choose the highest risk portfolio for exactly this reason. Unfortunately, very few people are rational. Chasing Returns Will Hurt […]<\/p>\n","protected":false},"author":4,"featured_media":7304,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[1282],"tags":[1290,1452,1453,1454,1365,1446],"coauthors":[99],"class_list":["post-5018","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing","tag-andy-rachleff","tag-rate-of-return","tag-risk","tag-risk-score","tag-risk-tolerance","tag-risk-adjusted-return"],"acf":[],"yoast_head":"\nAttempting to Maximize Your Return Isn\u2019t Always a Good Thing - ...<\/title>\n<meta name=\"description\" content=\"Before you make the plunge to a high-risk portfolio to maximize your return remember that very few people can resist the scary power of a down market.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.wealthfront.com/blog\/attempting-max-return-not-always-good\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Attempting to Maximize Your Return Isn\u2019t Always a Good Thing - 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