Understanding risk

All investments have some risk, so the key to success is to understand the different types of investments and their risk and reward profile. To do this weigh up the pros and cons of each type of investment and put in place an investment strategy that is right for you. Learn more about the balancing act managing risks and achieving your investment goals.

A general investing principle is: ‘The higher the perceived risk the greater the potential return’.  Our perceptions of risk may differ, so it is important to understand how much risk you bear personally. Don’t just concentrate on return.

Types of investment risk

• When you invest, you’re exposed to different types of risk.  Learn how different risks can affect your investment returns.

Risk and reward

• Learn more about the risk and reward trade off when you make an investment.

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. Learn more about investment risk from Moneysmart.

Determining risk and the risk pyramid

• Investopedia provides a framework for investors to assess their personal risk level and how this level relates to different investments. After deciding how much risk is acceptable, you can use their risk pyramid approach to managing your risk.

What is risk?

• Risk takes many forms, but broadly means the chance an investment’s actual return will differ from the expected return. Investopedia breaks down risk with a short video.

Worried about risk?

• History shows that time is on the side of the patient investor – take a look at the long-term trend of the ASX. Below is some more great information on managing risk.

Using diversification to manage risk

• The goal of building a diversified portfolio is to lower risk without impacting the level of returns. Read Morningstar’s simple and practical approach to risk and diversification.

Diversification across sectors and markets

• Some investors believe that their portfolios are diversified when in fact they may just own a lot of assets with similar risks. Use the suggested approach in this article from Canstar to analyse and review your current portfolio allocations.

Risk profile calculators

• Risk profile calculators can help you work out what sort of investor you are and the sorts of investments that are right for you.  There are no right or wrong answers – just the ones right for you. Check out these calculators and try a few to help you understand your risk profile.
• Money solutions
• Hesta
• CalcXML

Risk profiling

This video that explains risk profiling and understanding your own profile.