Goals & risk tolerance
Choosing investment goals
You can't choose the right investment strategy until you're
clear about your investments goals and timeframe. Working out your
goals will help you identify the types of investments that are
suitable for you and how much risk you can take.
Set your investment goals
Investing is about putting your money to work to achieve your
personal goals, so start by identifying what you want to achieve by
when. Setting goals forces you to plan, and having a clear goal -
ideally written down - helps motivate you to stick to your
Think about your goals first. Perhaps you are saving for a
holiday, for a home deposit or to pay for a child's education. Or
your goal may be to boost retirement savings. Different goals have
different timeframes. You may only have 6 months or a year to save
for a holiday but, if you're saving for your retirement, you might
have 25 or 50 years.
Setting a timeframe for each goal helps you stay on track. You
may have several goals, each with a different timeframe. Allocating
a timeframe to each investment goal will enable you to think about
how much you can afford to invest and how long it will
realistically take you to reach your goal.
Sample goals and timeframes
(up to 3 years)
(more than 7 years)
|Save for child's education
|Boost retirement savings
|When do you want to spend the money
||In 2 years
||Starting in 5 years
||Starting in 25 years
Set your investment timeframe
Setting a timeframe for each goal will help you work out how
much investment risk you can afford to take.
If you are saving money over a short period of time it may be
tempting to use higher-risk investments. But growth investments,
such as shares, are not appropriate for short
investment timeframes as their value might drop suddenly, just when
you need your money.
If you're saving for a long-term goal, such as retirement in 25
years, then you have time to ride out the ups and downs in the
investment markets. This means you can take on a higher level
of investment risk.
How do you feel about risking your
Risk tolerance also depends on your
ability to cope with dips in the value of your investments. Factors
that can influence your risk tolerance include your age, your
ability to recover from capital losses and your health.
To decide where you fit on the risk tolerance scale, ask
yourself this question: 'How would I feel if I woke up tomorrow and
found my investment balance had dropped 20%?'
If this drop would cause you to worry a lot and pull out of the
investment, then a high risk investment is not for you. This is
because you could pull out at the worst possible time and actually
compound your losses.
If, on the other hand, a drop in the market causes you to start
looking for bargain buys, then you are probably very comfortable
with market fluctuations. You will be comfortable with a higher
level of investment risk.
Your comfort level could be somewhere in between.
How much investment risk should
Your overall risk tolerance is the lesser of the risk you are
comfortable with and the risk your timeframe will allow you to
take. Use the investment grid below to work out where you fit on
the investment risk scale. Cash is low risk and growth is high
Your partner may not have the same risk tolerance as you. If you
are considering a joint investment, you may need to compromise on
an investment option you are both comfortable with.
How comfortable are you?
What we mean by growth, balanced and conservative
When we use the terms 'growth', 'balanced', 'conservative' and
'cash', this is what we mean.
- Growth - invests 70-90% in shares or property. Aims for higher
average returns over the long term.
- Balanced - invests 50-70% in shares or property, and the rest
in fixed interest and cash. Aims for reasonable returns, but less
than growth funds to reduce risk of losses in bad years.
- Conservative - invests 30-50% in shares and property with the
majority in fixed interest and cash. Aims to reduce the risk of
loss and therefore accepts a lower return over the long term.
- Cash - invests 100% in deposits with Australian deposit-taking
institutions. Aims for stable returns over a short term.
Different funds may have different names for their portfolios
and asset allocations may not be the same as ours. Read the fund's
product disclosure statement to find out
how money will be allocated for each investment option.
Case study: Carissa plays it safe
Carissa is studying and
working part-time. She is saving for a post-graduation trip but is
extremely cautious and doesn't want any risk of losing her capital.
She is happy to accept a steady rate of return from a high interest
online savings account.
'I may not be getting the same returns as a share investment in
the good times but I want to take this holiday when I graduate in 2
years time, so preserving my capital is my main concern. The share
market? Not at the moment. I don't have time to get back any
You've identified your goals, know your
timeframes and considered your risk tolerance. Be aware
that borrowing to invest adds even
more risk to a strategy. While there is potential to greatly
increase your returns there is also a risk that you will greatly
increase your losses.
Last updated: 15 Oct 2018