Chris Exley DipFA Creator of MoneyGeek

MoneyGeek Digest - Issue 11: Higher investing returns, lower chance of success...

I was sitting with a client last week — we'll call him Bill. Age 55. Decent pot, sensible saver, realistic about what he needs.

The conversation about asset allocation came up. Should he hold mainly equities — or mainly bonds?

More equities = more volatility.
More volatility = higher potential returns.
Higher returns = better chance of hitting his goals.

Right?

Not quite.

When we actually ran the analysis, higher returns led to a lower chance of his retirement spending goals being funded.

The thing most people get wrong about risk

We're conditioned to think more risk = better outcome. Higher average return. Bigger pot at the end.

That's true in the textbook version.

But in real life, high-growth investments have an opportunity cost: volatility.

The danger is this — markets drop 20%, and if you're withdrawing money at the same time, you're depleting a fund that's already shrunk.

That loss compounds in reverse.

Avoiding that downside risk, and settling for lower but steadier returns, can actually give you a greater chance of success.

A real example

Dave has £650,000 invested. He wants to spend £40,000 a year in retirement.

He'll retire at 62, with the State Pension kicking in at 67 — covering around £12,000/yr of that spend. He wants his money to last to age 90.

I ran his numbers using Monte Carlo analysis — 1,000 simulated futures using random sequences of market returns. It shows you the probability of hitting your goals across all those scenarios.

Here's what came back:

High-risk portfolio (adventurous, ~100% equities):

• Average return assumed: 11.19%
• Average result at death: £16m
• Probability of success: ~94%

Low-risk portfolio (cautious, ~60% equities):

• Average return assumed: 7.91%
• Average value at death: £5.6m
• Probability of success: ~98%

The lower-return portfolio has a higher probability of success.

Fewer big upside scenarios, yes. But also far fewer scenarios where a bad run of early returns wipes out his ability to recover.

Why does this happen?

Volatility cuts in both directions.

A high-equity portfolio might average 11.9% — but if markets drop 25% in year one of retirement, Dave is drawing down on a shrunken pot. He never fully recovers.

The cautious portfolio averages 7.91%. Some years 10%. Some years flat. But the bad scenarios are shallow enough that Dave's spending stays funded, the State Pension bridges the gap at 67, and the plan holds.

The adventurous portfolio has some scenarios where Dave ends up with £20m+. The cautious one tops out far more modestly.

But Dave doesn't need £20m. He just needs the money not to run out.

The takeaway

Risk is only worth taking if you need or want the return.

If a modest growth rate already meets your goals, taking more risk doesn't improve your odds — it can actually reduce them. You're adding volatility without adding a proportionate benefit.

That said — could Dave choose the higher-risk route anyway?

If there's something meaningful he'd do with a larger pot — leave a legacy, buy a house in Spain, help the kids — then the calculated risk might be worth taking. That's a values question as much as a maths one.

As always — run your own numbers. This is education, not advice.

Until next time, Chris

As always — run your own numbers. This is education, not advice.

Until next time, Chris