Risk & return
Is it worth the gamble?
Risk is the chance an investment won't give you the outcomes you
want. For example, you may expect your investment to grow but its
value falls. Or you may expect regular interest of 10% but interest
payments fall to 5%. Or you may expect to be able to get your money
whenever you need it but your managed fund suddenly freezes
It's impossible to avoid all risks when you invest. Higher
potential returns usually come with higher risks. The important
thing is to understand the risks and then keep within a level you
are comfortable with.
Successful investors understand the main types of risk that can
hit their investments. This knowledge gives them a much better
chance of avoiding the 'ouch' factor from taking too many
The specific risks to keep an eye on depend on your needs and
the type of investments you make.
Compare with low risk investments
Some investments are low risk. For example, a term deposit or
bank account is low risk as the deposit you make is government guaranteed for up to
$250,000. This account may offer interest at 4%. Any investment
offering a return above this rate has some kind of risk and you'll
need to find out what it is.
If you want to spend your money within 3 years, your main
concern will be to protect your capital. A high interest savings
account, with an authorised
deposit-taking institution is safe and your money will be
available when you need it.
The case study short-term
saving looks at when 'low risk' is the way to go.
If you're investing for the long term, say more than 7 years,
you want your capital to grow in value. Some risks you may face
- Inflation may erode the purchasing power of your money (this
means that a fixed amount of money will buy fewer things in the
- The timing of your decisions may cause lower returns or loss of
capital (buying at a market peak, selling when the market is
The case study about capital
growth gives examples of how to deal with such risks.
As a retiree, you rely on your investments to give you money to
live on. You need them to give you regular, reliable income
Some of the risks you may face include:
- Your investments not producing a regular, consistent income.
For example, share dividends are usually only paid twice a year and
are not guaranteed.
- Interest rates going down, reducing your income.
- Inflation eroding the purchasing power of your money.
The case study about regular
income tells one retiree's investing story.
There are other types of risk that can hurt your investments if
not managed properly. Interest rate changes, currency movements and
changes in the law can all affect how your investments perform.
Tactics to manage investment
As a general principle, the lower the risk, the lower the likely
rate of return. You'll need to take some investment risk to end up
with a healthy return over time.
Your aim is to meet your goals, protect your capital and
maximise returns, without exposing yourself to too much danger.
Diversification is a key way to reduce risk. Don't put your life
savings into one investment.
Some ways to manage investment risk include:
- Choosing investments that match your needs and investment
- Sticking with mainstream strategies, investment types and
- Diversifying - you'll kick yourself if you lose half your money
by putting it all in one place. See diversification
- Putting some of your money in low risk assets (such as
interest-bearing deposits) that you can draw income from when
markets are performing badly.
Test your knowledge of risk and return, diversification and
Watch out for investment
There are no shortcuts to investing success. The combination of
high returns and low risk does not exist. The golden rule is 'if it
sounds too good to be true, it probably is too good to be
For more information see investment scams and investment
Investing is never going to be risk free. With
careful planning, you can identify and manage the risks that are
most likely to trip you up. Diversification is the best tool you
have for overcoming investment risk.
Last updated: 07 Jun 2018