Diminishing Returns

What is the Law of Diminishing Returns?

The law of diminishing returns is the idea that benefits gained from something will represent a proportionally smaller amount as more money or energy is invested in it. The realms of fitness and retirement planning both provide countless examples to illustrate its effect.

Diminishing Returns with Weight-Loss

For example, in the fitness realm, weight loss is subject to the law of diminishing returns. At a very high-level weight loss can be reduced to burning more calories than you take in. This can be done by either decreasing your caloric intake or increasing your caloric expenditure. However, at a certain point, the law of diminishing returns begins to take effect.

You can only restrict your calories to a certain extent. Beyond that, it can begin to affect your energy levels, performance at work or in the gym, and increase your focus on food. Also, the more extreme your caloric deficit the shorter you will likely be able to maintain it.

Additionally, you can only exercise so much. Meaning you can only burn so many calories in a day before there are negative side effects. This can include the inability to recover, injury, and the sheer time it takes to workout can begin to detract from the rest of your life.

The Importance of a Sustainable Weight-loss Strategy

With this in mind, reasonable (sustainable) weight loss can only happen so quickly and will likely include a combination of moderate calorie restriction and greater energy expenditure. Where this can become an issue is when you want to lose a certain amount of weight in a constrained timeframe.

Often, reaching this short-term goal requires you to engage in unsustainable behavior, which could have long-term consequences. You may be able to lose a majority of all, of the weight before your deadline, but all too often the pounds are quickly regained. It is not uncommon for you to be worse off, from this yo-yo style diet than if you weren’t to diet at all.

Diminishing Returns in Retirement Planning

The law of diminishing returns can also be seen in retirement planning when someone wants to accumulate an investment nest egg sufficient enough to fund their retirement. At a high level, this requires you to spend less than you earn, and save/invest the difference in a way that allows you to transfer economic value through time.

With that being said, for someone who wants to build their nest egg more quickly, they can save/invest more. Or they could look to generate greater returns from their investing. When it comes to boosting their saving, they can either reduce current spending or increase their income.

However, frugality can only get you so far, and at some point, you are left with the basic necessities for survival. On the other hand, earning often means working more, but there are only so many hours in the day.  

The Risk of Seeking Higher Returns

The other possibility is to try and generate greater returns from your investments. Greater potential returns are usually accompanied by taking more risks. This can be done by allocating a larger portion of your assets to riskier investments such as stocks. 

But even a 100% stock portfolio is limited in its long-term growth potential. What also increases as the potential for return increases is the risk associated with a given investment. 

This means the more risk you take, the more likely you could experience a negative outcome. Especially for those who are risk-averse, after a certain point, the extra risk they must take on for a potentially high return becomes undesirable.

Finding a Balance

Just like with weight loss, going to extremes may be tolerable in the short term, but isn’t likely sustainable in the long run. Understanding the law of diminishing returns and applying it to your situation can allow you to develop a strategy that lets you find the sweet spot between the benefits gained and the effort given. 

Feel free to email us at info@westernreservecm.com with any questions you have. If you would like to schedule time with us to discuss your specific situation click here.

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