Understanding investment risk is the key to developing a successful investment plan. While every investment has potential risks, they can be managed and minimised.
Everybody worries about risk. By getting the right guidance you can keep risk in perspective and identify the types of risk that are acceptable and those that are best avoided.
Getting started
If you'd like more information, talk to your financial adviser. If you don't have an adviser, we can help you find one.
Permanent loss of capital
This is the risk that you probably fear most - the thought of losing all of your money.
It's this risk which gets most of the newspaper headlines, but in reality it's the risk which can most easily be avoided.
The key to managing this risk is to buy only quality investments and to buy a number of investments so that if one does fail, it will only have a small effect on your overall portfolio.
So, should you accept the risk of permanent loss? Are the rewards worth the risk? The answer is yes and no.
No, you shouldn't accept the risk of loss of capital associated with poor quality investments. The risk is too high, and the rewards are often illusionary.
But, yes, you should consider accepting the risk of loss of capital associated with high quality investments. The risk is low, and the potential returns are acceptable. Moreover, the risk can be minimised with the help of a diversification strategy.
Fluctuating returns
In one way or another, all investments suffer from this risk
The asset class which fluctuates the most is shares; their values can change on a minute-by-minute basis. Even over longer timeframes, share returns can fluctuate strongly.
The key is that the returns from quality investments will fluctuate upwards more often than they will fluctuate downwards. In so doing, they will reward you with a superior return over time. As Graph 1 highlights, despite short-term volatility, the value of the Australian share market has increased substantially over the past 60 years.
Graph 1: Australian Share market always bounces back
Following a fall, the market has never failed to rise above the previous high point
You can minimise the risk to your portfolio of fluctuating returns by:
- investing in quality investments
- investing for the long-term
- diversifying your investments
Graph 2 shows how investing over a longer timeframe reduces risk. The Australian share market has had a number of negative single-year returns since 1986.
However the graph shows that keeping your investment for five or more years substantially reduces the risk of negative returns - there hasn't been a single negative five-year return in this period.
Graph 2: Investing for the long-term reduces risk
There hasn't been a single negative five-year return since 1986
The third way to minimise risk is to diversify your investments
Graph 3 shows how a diversified portfolio smooths your return. The line is the return you would have received had you invested in a basket of all the asset classes rather than any particular one. You can see that the highs and lows have been smoothed out along the way, providing you with a more consistent return.
Graph 3: Diversification can smooth your investment return
Annual asset class performance
Not achieving your goals
This risk occurs when you don't use investments which will generate a sufficient return in order for them to meet your financial goals. It typically occurs when you decide to 'play it safe' by investing in cash and term deposits to ensure that you don't lose capital.
However, this can sometimes lead to a worse fate - not having enough money to achieve your goals. Graph 4 shows the difference in the long term returns of investing in term deposits compared with industrial shares. The income and capital value generated from the share portfolio outperforms that of the term deposits.
Graph 4: Return on investment of $100,000
Invested from January 1986 to December 2005
Why choose Asgard?
- Great service. Asgard is one of Australia's most awarded investment platforms, currently administering more than $38 billion for over 400,000 investors.
- Peace of mind. Your money is in good hands - Asgard has over 18 years' experience in investment and super administration.
- Solid backing. Asgard is owned by Westpac*, one of Australia's largest and most respected service companies.
- Make choices. We have one of the largest investment menus in the industry, giving you access to over 400 managed funds and a wide range of ASX listed securities.
- Have control. Choose from a range of preset managed investment portfolios or build your own from managed investments and shares.
- Save money. You can save on transaction costs and paperwork by keeping your investments in one place.
* Please note an investment in Asgard Super/Pension is not a deposit or liability with Westpac. Westpac does not guarantee your capital or the performance of your investment.
