Speed limits for investors

Recently, I was watching a fascinating talk by Rory Sutherland, Vice Chairman of the Ogilvy & Mather group, where he discussed an unconventional speedometer display. Beyond the standard km-per-hour markings around the outside, it showed something more revealing on an inner dial: the minutes needed to travel 10 km at any given speed.

Sutherland, a witty and engaging speaker known for his original thinking, founded the behavioural science practice within the Ogilvy Group. His goal has been to develop marketing techniques inspired by psychology and economics rather than shape customer desires through conventional advertising. In this particular talk, he revealed a profound truth about speed and time that has surprising parallels with investing.

What's striking about this display is how it reveals a crucial truth about speed and time. When you're driving slowly, say at 20 kmph, accelerating to 30 kmph saves you a substantial amount of time - about 10 minutes over a 10 km journey. However, when you're already travelling at 70 kmph, pushing the accelerator to reach 80 kmph saves barely a minute over the same distance. Yet the additional risk you take for yourself and others increases dramatically.

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This perfectly mirrors a fundamental truth about investing that many struggle to grasp. Just as the relationship between speed and time saved isn't linear, neither is the relationship between investment risk and potential returns.

Consider someone just starting their investment journey. Moving from keeping all savings in a current account to investing in a balanced mutual fund through SIPs is like accelerating from 20 to 30 kmph - it creates substantial benefits with relatively modest risk. The difference between the initial steps and long-term wealth creation is dramatic, as the first acceleration significantly reduces journey time.

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However, once you've established a sensible, diversified investment portfolio - let's say you're cruising along at the equivalent of 65 kmph - pushing for even higher returns through increasingly risky strategies is like flooring the accelerator on the highway. The potential additional returns (like the time saved) are minimal, while the risk of a catastrophic outcome rises exponentially.

Sutherland mentions how drivers often floor the accelerator when their GPS shows they're running five minutes late, only to find that eight minutes of dangerous driving saves just one minute of arrival time. I've seen countless investors make the same mistake. When they feel they're "running late" on their financial goals, they're tempted to take outsized risks - investing in obscure small-cap stocks, cryptocurrency schemes, or using leverage - only to discover that the potential benefit rarely justifies the enormous risks taken.

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This insight is particularly relevant in today's market environment. Many investors feel compelled to 'drive faster,' with the Sensex hovering around 78,500 after a year of significant volatility - having swung between 70,000 and 85,000 through 2024. Whether the market is near its peaks or in a dip, there's always a temptation to accelerate - either to capture more upside or to make up for lost ground.

But just as the speedometer's inner dial reveals the futility of excessive speed, investment history shows the diminishing returns of excessive risk-taking. Like safe driving, the key to successful investing isn't finding the fastest way to your destination. It's about maintaining a sensible pace that gets you there safely while managing risks appropriately.

The biggest gains in investing, like the biggest time savings in driving, come from moving from inaction to action - starting those SIPs and creating that diversified portfolio. Resist the urge to floor the accelerator once you've reached that cruising speed. The minimal potential upside isn't worth the exponential increase in risk.

My advice? Start with a solid foundation - a mix of diversified equity mutual funds and debt investments appropriate for your goals and risk tolerance. Then stick to your chosen speed. Don't let market swings or peer pressure tempt you into dangerous acceleration. Keep your SIPs running consistently, review your portfolio annually, and make changes only when your life circumstances demand them. Remember, in driving and investing, arriving safely at your destination is far more important than shaving a few minutes - or a few percentage points - off your journey time.

Also read: A dangerous game