Risks vs. return

Investing can be a highly effective way to grow your money and build a foundation for the life you want to create for yourself. It’s also important to be aware that investing is not a risk-free strategy and there’s always a chance you could lose money or not make as much as you expected. This is known as ‘investment risk’. All investments carry some risk due to factors such as inflation, tax, economic downturns and drops in particular markets.

Different types of investments carry different levels of investment risk, and also different returns. As a general rule, the larger the potential investment return, the higher the investment risk.

Cash provides lower returns and a lower risk of loss, while growth investments such as shares may provide higher returns and are higher risk.

Managing investment risk

While taking on any kind of risk can be a scary prospect, there are four key strategies you can use to minimise your exposure to investment risk.

• Timeframe. The longer you stay invested, the less investment risk you are exposed to. Fluctuations in the value of your investment will even out over time.
• Tolerance. If you’re not comfortable with a certain type of investment, or a certain level of risk, it’s not worth investing in that product. See below for more information on how to gauge your risk tolerance.
• Diversification. Spreading your money across different types of investments rather than relying on one asset class may help shield you from drops in particular markets and deliver more consistent returns over time.
• Knowledge. The more you understand about investments and financial markets, the better you’ll become at selecting investments that are appropriate to you. Do your research and reap the rewards of your learning.

Gauging your risk tolerance

How much risk you are willing to take on will depend on your situation. For example, if you have been saving for retirement and only have 12 months to go before you reach your goal, you would probably not want to risk losing the majority of that money. In this case, it would make sense to ensure you had an appropriate mix of defensive or conservative investments to protect the bulk of your money so you can access it in 12 months, while keeping a portion in growth investments for the years to come.  

Some people remain relaxed and calm while their investments moves up and down, while others become nervous if their assets drop in value by even the tiniest amount. If you’re going to lie awake at night worrying about your investments, no matter what returns you earn, they’re not likely to be worth the personal cost. That’s why before you begin investing, it’s important to assess your tolerance for investment risk and talk with a professional.

If you’d like advice on managing investment risk and selecting investments that suit you, you can book an appointment online to organise your complimentary, no-obligation consultation with a Commonwealth Financial Planner.

• Important information
  The information contained on this web page is of a factual nature only and is not intended to constitute financial product advice. It has been prepared by Commonwealth Financial Planning Limited without considering your individual objectives, financial situation or needs. You should consider its appropriateness in light of your circumstances and consider seeking professional advice relevant to your individual needs before making a decision based on this information. Commonwealth Financial Planners are Representatives or Authorised Representatives of Commonwealth Financial Planning Limited ABN 65 003 900 169, AFSL 231139, a wholly owned but non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124.