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Understanding the relationship between risk and return 

  • Understanding risk and return can help you make more informed investment decisions
  • Different investments like shares, property or bonds have different risk-return profiles
  • Your investments should match your risk comfort level and financial goals

What is risk in investment?

Investment risk is the chance that unexpected events could impact how your investment performs and how much return you earn. Think of it like a trade-off:

  • Higher risk means a greater chance of losing money, but also a greater chance of earning higher returns
  • Lower risk means a lower chance of losing money, but also lower potential returns

The relationship between risk and return varies across different types of investments. Here are four common types of investments (also known as asset classes) you may come across:

  • Cash
  • Fixed interest or bonds
  • Property
  • Shares

Here’s a risk-return graph to illustrate their typical risk profile.

A graph of risk and return. Risk is on the X axis and Return is on the Y axis. The order of items from lowest risk and return goes from cash, bonds, property to shares (highest risk and return)

To understand this a bit better let’s look at each of these asset classes as potential returns in terms of risk. The graph below is for illustrative purposes only and represents the indicative levels of volatility in returns for each asset class at any given time.

An image showing the level of volataility in returns for each asset class at a given time. The order from lowest to highest goes from cash, bonds, property and shares (highest).

Volatility shows the highest peaks and lowest troughs in terms of returns. Let’s look at some historical data of how this works in real life, the graph below represents performance of a $10,000 investment over a 25-year period from 1996 to 20221.

The performance of a $10,000 investment over a 25 year period from 1996 to 2022 sourced from Reuters.

The above graph shows that both cash and bonds have fewer variations in their performance and remained relatively stable over the timeline, however, have produced lower returns. Conversely shares and property have experienced more variations in their performance but have produced higher returns.

Investment asset performance is not guaranteed and will vary over time due to various factors, and it is important to consider your own personal circumstances, investment timeline, amount of investment in line with the above information relating to risk and return. 

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1 Sourced from Reuters, Real Estate Institute of Australia, CoreLogic and IRESS. Data from: 1996-2022 – to June 30.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. As the information has been provided without considering your objectives, financial situation or needs, you should, before acting on this information, consider if it is appropriate to your circumstances. You should consider seeking independent financial and/or tax advice before making any decision based on this information.

The information in this article and any opinions, conclusions or recommendations are reasonably held or made, based on the information available at the time of its publication but no representation or warranty, either expressed or implied, is made or provided as to the accuracy, reliability or completeness of any statement made in this article.