Chasing returns: the pot of gold at the end of the rainbow [#24]
The returns everyone chases are the one thing you can’t control. What actually decides your future is sitting below the waterline.
Here’s the temptation-as-stubborn-hope: somewhere, someone has a smarter way to do this. A better fund. A sharper manager. Some edge the crowd hasn’t spotted yet. I feel it too — I’ve felt it my whole career. It’s the most natural wish in the world, and it’s the one the market has learned to sell straight back to you.
You’ve only got to express mild interest in the idea on your social media account and the algorithm will do the rest. You’ll immediately be flooded by offerings boasting double-digit returns with ‘risk protection built in’.
The hard truth I have for you here may well risk our friendship. But as an independent adviser I have no option but to give it to you straight.
This quest for the pot of gold at the end of the rainbow is a fool’s quest.
To be fair, though, none of us is immune to the siren song of stellar returns. But if you find yourself lured by this fool’s quest and you’re in your career’s second half (or later) then you don’t need me to tell you how this is likely to end. The closer you get to the rainbow the more it moves, the pot was never really there. All you’ve lost is time.
Having quite literally written the book on this illusory pot of gold*, when I see these market-beating advertisements I can’t help but click (you should see my social media’s algorithm!) The first thing that pops into my head is ‘maybe I missed one’.
But rule 1 is ‘demand real proof’ so that’s where I start. In over three decades I have never once found a reproducible, reliable way to earn higher returns that didn’t come strapped to more risk than the extra return was ever worth.
Alchemy
And yet, in the face of overwhelming, global, decades-long evidence, a new one arrives every single year. A new manager, a new fund, a new system — and every one of them, whether they’d ever put it this way or not, is an alchemist.
For the better part of two thousand years, clever and sincere people were convinced they could turn lead into gold. Not as a figure of speech — literally. Melt down the right base metals, add the secret ingredient, and out would come gold. They never could, of course, because the universe simply doesn’t work that way. But the dream refused to die, because the wish refused to die. Free gold. Something out of nothing.
Modern finance has its alchemists too, and they’re selling the identical dream in a better suit: reliably beat the market, year after year, their way, with their picks. And the evidence on whether the lead ever actually turns to gold is not remotely ambiguous. The SPIVA scorecard has kept score on this globally for more than twenty years. In Australia, roughly three-quarters of active equity funds underperform the index in a given year — and stretch the window out to fifteen years and it climbs to nearly nine in ten. Go global and it’s worse again: north of ninety-five per cent underperform over a decade or more. And the longer you look, the uglier it gets.
Get it? Not only do they fail to beat the market, they charge you a premium for the privilege of losing to a cheap index fund. They don’t just fail to make gold. They melt down gold you already had.
Ai, the new alchemist
The newest alchemist wears a virtual lab coat and calls herself artificial intelligence. And I went looking here too, because the rule is the rule, and because if anything were ever going to break the pattern, surely it’d be a machine that reads a million documents a minute.
The flagship AI-picked fund has underperformed the index almost every year since it launched (and at a fatter fee — which is odd, when you think about it: the machine was supposed to replace a whole floor of expensive analysts, so why did the bill go up rather than down? I might be missing something, but it smells more like a premium price for a cheaper process than a genuine breakthrough). And eventually, in a detail that’s almost poetic, that fund silently gave up and started hugging the very index it couldn’t beat.
AI didn’t repeal the arithmetic of markets. It rediscovered indexing. It’s repackaging the consensus and calling it cutting edge — which is precisely the crime the active manager has always committed: a premium price for closet-index results. Same wine, new label, same fat fee.
One honest caveat, because the rule has to cut both ways. It’s early days, and if the machines ever do turn up something real and repeatable, it won’t be a free lunch — it’ll be a genuine risk you’re paid to carry, the way smaller companies and unloved value stocks always have been.
And if it is real, take heart: it isn’t going anywhere. A true, repeatable edge will still be waiting once the evidence is in and your pulse is steady. If it can’t survive that wait, it was never investing — it was gambling. Which of the two it turns out to be is a story for another day.
What actually keeps you afloat
So if the answer isn’t chasing returns then what is it? It’s this …
The returns you’re chasing are, almost entirely, outside your control. They’re the weather. You cannot make the market do a single thing you want it to, and the evidence says the harder you try, the more it costs you. Effort spent above the surface is effort punished.
But there is a whole other domain — larger, duller, and almost completely within your control — and it sits below the waterline.
Picture your financial house as a vessel, carrying you toward the future you actually want. Most of what keeps that vessel afloat is invisible; it’s beneath the surface. The Titanic, you’ll recall, wasn’t sunk by a bad quarter of returns. It was sunk by something below the waterline that nobody had properly accounted for.
Below your own waterline is all the unglamorous work nobody puts on a billboard — because “we optimised your drawdown sequencing” doesn’t sell like “we beat the market.” Take just the investment corner of it: the order in which you draw down your accounts, which assets you hold in which structure for tax, how and when you rebalance, how you set your withdrawals. Researchers have actually tried to put a number on the value of getting that structural work right, and the striking thing isn’t the number — it’s the nature of it. Unlike chasing returns, which is a game most participants must mathematically lose, this is not a zero-sum contest. You’re not fighting anyone for it.
Anyone prepared to do the work can capture it.
And investment structure is only one compartment of the hull. There’s how you’re structured legally. How you’re protected when something catastrophic hits — the fraud, the illness, the cyber attack I wrote to you about last time. And whether you’re holding enough in reserve to ride out a shock without being forced to sell good assets at the worst possible moment. That last one — a proper rainy-day buffer — is very often the difference between a household that weathers the storm and one that gets scuttled by it.
None of that asks you to predict anything. That’s the entire point. It’s the part of your financial life you can actually reach out and touch.
A longer voyage, and a certain storm
And it matters more now than it ever has, for two reasons I’ll keep short.
The first is that your voyage is almost certainly longer than you’re planning for. Most people organise their money for a version of later life that ends years — sometimes a decade or more — before they do. A hull that only has to stay afloat for fifteen years is a very different hull from one that has to last thirty.
The second is simpler still: there will be another storm. I don’t know which one — a market crash, a health event, a scam, a family rupture, a tax change nobody saw coming. I only know that if you wait five minutes, there’ll be one along. The single question that matters is whether the vessel was built to take it. And that gets decided long before the storm arrives — below the waterline, in calm weather, when nobody feels the slightest urgency to look.
The question I’m not going to answer
Which leaves one uncomfortable question hanging in the air. If the work that actually protects your future is the structural work below the waterline — and if the returns everyone’s selling are mostly noise — then who, exactly, has any incentive to help you with the dull, invisible, unglamorous stuff instead of the shiny stuff?
I’m not going to answer that today.
But I’ll say this much, and then I’ll leave it alone: be every bit as sceptical of the flattering research as you are of the fund brochure. Follow the money. Are you being enrolled in a ‘funds under management’ business or are you appointing a shipwright to reinforce your hull.
-- Daniel Brammall
The WealthSpan Letter is general financial information, not personal financial advice. Consider whether any information is appropriate to your circumstances before acting on it.
* Shattering the Crystal Ball Myth, 2024