Understanding investment risk and return

28-Feb-2015

If you find the world of investments a little overwhelming, here are some valuable basics.

All investments are designed to generate a return and are subject to some degree of risk. This means that, as well as making money, there’s also a chance you could lose it. You might think of risk as the possibility your investments don’t achieve your financial objectives. In other words, it is the chance an investment doesn’t give you the outcomes you want.

Different types of investments have different risk and return tendencies. As a general rule, the bigger the potential investment return, the higher the investment risk and the longer the suggested investment timeframe.

Historically, shares have tended to outperform other types of investments over 10 years or more but over shorter periods investors may see significant spikes up and down in performance.

In contrast, investments like cash have been more consistent and calm in their performance, but with lower returns over the longer term.

While cash is generally seen as a safe option, it’s often important to include growth assets like shares in a long term super portfolio so your investment has an opportunity to increase in value, at least keeping pace with inflation. Remember the value of a dollar erodes over time.

Key points

  • All investments have different risk and return tendencies
  • Diversification is a key way to reduce risk
  • Investments should aim to at least keep pace with inflation
  • Consider your attitude to risk, the potential investment return and expected timeframe

Tactics to manage risk

A key tactic to reduce risk is to diversify so all your eggs are not in one basket. VISSF investment options are diversified across a broad range of assets, even within the cash option.

Your choice of investment option or combination of options should match your attitude to risk, the likely investment return and your investment timeframe.

Take a couple of minutes to complete our quiz using the risk profile calculator. Click on the Resources tab and select 'Calculators'.

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