7 minute read
What is risk versus return?
Investing can be a great way to grow your money and reach your financial goals. However, it’s important to understand that you may lose money, or not receive the return you were hoping for.
What is risk?
Put simply, risk refers to the chance of an investment’s returns differing from the expected outcome.
All investments carry risk. Generally, investments that are expected to yield large returns, are higher in risk. And investments forecasted to achieve lower returns, usually have a lower risk. This principle is commonly referred to as risk-return trade-off.
Risk tolerance
Before you decide to invest, understanding your risk profile is important. This means getting to know what level of risk you’re comfortable with. In doing so, this will help inform you what type of investment is suitable.
While some investors are content to take on more risk for potentially higher returns, other investors are uneasy with risk. Market conditions and periods of economic downturns can also influence an individual’s risk profile.
It's crucial to understand your risk appetite. In doing so, you can avoid exposing yourself to too much risk, or underestimating what you can realistically tolerate. It’s also important to remember that no two investors are the same.
Time
Time is central to your investment strategy. When you’re thinking about making an investment, consider the suggested investment timeframe. Usually, the higher the risk, the longer the recommended investment timeframe will be.
Longer term investments are often considered to be more resilient if there is market downturn. Investors have time for the market to respond and for their investments to recover. On the other hand, if your investment is shorter term you may choose to avoid the volatility of the share market.
Diversification
Distributing your money across different asset classes may help deliver more consistent returns. This is known as diversification.
Diversifying your investments can help to lower your portfolio’s risk. Because various asset classes perform well at different times, having diverse investments can help shelter you from lower-than-expected returns.
This way, if one of your investments performs poorly, you’re unlikely to lose all your money because you have balanced the overall risk of your portfolio.
Knowledge and expertise
In time, your understanding of investments and financial markets will grow. And as you gain experience and learn more, keep in mind that your risk profile might change too. In time, you may feel as though your investments no longer match your goals or risk appetite.
If you choose to outsource more investment knowledge and expertise, a managed fund could suit your needs. Pooling your money with other investors and allowing a professional to manage your investment could help you to reach your goals. You can also talk to a financial adviser.
For more helpful articles, visit the Education HUB today.
A Wealth specialist can help guide you. Make an enquiry today.
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Things you should know
Sandhurst Trustees
Sandhurst Trustees Limited ABN 16 004 030 737 AFSL 237906 (Sandhurst) is a wholly owned subsidiary of Bendigo and Adelaide Bank Limited ABN 11 068 049 178 AFSL 237879. Sandhurst is the responsible entity and issuer of the managed funds available on this website. Additionally, Sandhurst is the issuer of commercial lending products and the provider of traditional trustee services available on this website. Each of these companies receives remuneration on the issue of the product or service they provide. Investments in these products are not deposits with, guaranteed by, or liabilities of Bendigo and Adelaide Bank nor any of its related entities, and are subject to normal investment risk, including possible delays in repayment and loss of income and capital invested.
Information on the website is jointly prepared by Sandhurst and Bendigo and Adelaide Bank and subject to change without notice. Advice in relation to managed funds and commercial lending products is provided by Sandhurst. The information contains general advice only and does not take into account your personal objectives, situation or needs. Before making an investment decision in relation to these products you should consider your situation and read the relevant Product Disclosure Statement available on this site.
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