The law of diminishing returns

We live in a world where more is often seen as better: more money, more investments, more security, more financial strategies. But what if there comes a point where adding more doesn’t necessarily add value? The law of diminishing returns suggests that beyond a certain point, additional effort or resources result in smaller and smaller benefits.

And this principle applies directly to financial planning.

Investing
At the start of your investing journey, each rand, dollar, pound or euro invested has the potential to grow significantly, thanks to compounding interest. Diversifying your portfolio further improves returns while reducing risk. However, there’s a tipping point. Chasing ever-higher returns by taking on excessive risk doesn’t always yield greater rewards; it can simply increase volatility and stress.

Some investors fall into the trap of over-optimisation—constantly tweaking their portfolios, timing the market, or pursuing high-risk investments that promise big returns. But the more complexity you introduce, the harder it becomes to manage effectively. Instead, a disciplined, diversified approach with a long-term perspective often delivers the best outcomes.

Spending
Money can absolutely improve quality of life—there’s no denying that. But after a certain point, spending more doesn’t always bring proportional happiness. Research in behavioural finance shows that once our basic needs and comfort are met, additional wealth doesn’t significantly increase life satisfaction.

Think about the first time you upgraded your car. It probably felt fantastic… until you got used to it. Then, maybe you wanted something newer, faster, or more luxurious. But does a car that costs twice as much make you twice as happy? The same applies to homes, holidays, and possessions. Beyond a certain level, the returns on spending diminish, and the pursuit of ‘more’ can become endless.

Saving
We always advocate for a strong savings strategy. An emergency fund, retirement savings, and smart investments all contribute to financial security. But, saving excessively at the expense of enjoying life can also become a form of diminishing returns.

If you’re constantly depriving yourself of experiences, hobbies, and opportunities because you’re obsessed with saving every possible cent, you might be missing out on what financial freedom is really about.

Finding the balance between financial security and living in the present is crucial.

Some people get stuck in a loop of financial decision fatigue (or analysis paralysis). Researching endlessly, second-guessing investment strategies, and checking their portfolio daily. While financial literacy is essential, there comes a point where too much analysis leads to paralysis.

Instead of chasing the perfect financial move, consider a ‘good enough’ approach. A well-thought-out financial plan, reviewed periodically but not obsessively, often leads to better outcomes than constantly reacting to short-term market fluctuations.

Knowing when enough is enough
The law of diminishing returns teaches us an important lesson: more isn’t always better. Sometimes, it’s just more. Whether it’s investing, spending, saving, or decision-making, understanding where to draw the line is key to achieving a healthy, balanced financial life.

Financial success isn’t just about accumulation—it’s about knowing when to stop chasing, when to be content, and when to focus on what really matters.

So, ask yourself: Are you in pursuit of more for the sake of it, or are you building a life that truly aligns with your values?