Managing investment risk
Invest with your head, never your
No investment is completely risk-free, but some investments
carry more risk than others. Generally, the higher the expected
return, the greater the risk.
Here we explain why having some investment risk is important and
how you can minimise risk without sacrificing returns.
What is investment risk?
Investment risk is the possibility that you might lose some or
all of your original investment or that the investment may not
perform as expected. Generally, the higher the chance of a loss
occurring, the higher the investment risk and the higher the
expected returns should be.
Why some investment risk is
When you invest, you expect to get a return on your money.
You're probably also hoping you'll be able to buy more with your
money in the future than you can today. If so, your return needs to
be higher than the rate of inflation.
This is how the amount of risk you take on can affect your
- No risk - You can hold on to cash and
eliminate risk but your money will be going backwards because
inflation will increase the cost of goods and services so you'll be
able to buy less with your money over time.
- Low risk - If you choose a low-risk
investment, such as a bank account or government bond when interest
rates are low, your returns may not be much higher than the rate of
inflation, so you'll probably be standing still financially.
- Higher risk - If you want your money to grow,
you'll need to take on more risk. This means putting some money
into growth assets like shares and property. You will usually get
higher returns, on average, over the longer term, but the trade-off
is that they may lose value over the shorter term.
Market and economic conditions can change rapidly, but a
knee-jerk reaction to change your investment strategy can make
Any investment decision should be based on your long-term
investment plans, not short-term market fluctuations. Review your
goals and risk tolerance
and, if your investment still fits into your long-term plan, you
would need a good reason to change it.
How to minimise investment risk
Volatility in financial markets can affect your confidence but
it's important to remember the principles of good risk management
when it comes to investing:
- Diversification - Having a diversified
portfolio means you'll be less exposed to a particular economic
event. You can diversify across and within asset classes, industry
sectors and geographic regions. If your investment portfolio is
well diversified, a fall in the value of one asset may be offset by
an increase in the value of another. Learn more about diversification.
- Focus on your investment goals - Usually
when you buy growth investment assets you expect some short-term
volatility, so it's important not to panic when markets drop.
Consider whether the assets you hold are still appropriate to
achieve your long-term goals. Look at how market volatility has
affected your investment in the past and consider whether there is
any information available that suggests any short-term losses won't
- Monitor your investments - As assets gain or
lose value, the balance of your assets may change and reduce the
diversity of your portfolio. If the percentage of any asset strays
too far from its target weighting you may need to rebalance your
portfolio. This usually involves selling some of one asset type and
buying more of another. Learn more about keeping track of your
- Consider financial advice - If you need
assistance with developing a financial plan or selecting financial
products that are appropriate for your risk appetite, it can help
to seek professional financial advice.
- Beware of scams - When markets are
volatile scammers try to take advantage of investors. Find out how
to avoid investment scams.
In times of uncertainty and increased
volatility, stick to the key principles of managing investment risk
and you'll be more likely to make good investment decisions.
Last updated: 05 Dec 2018