Investment risk

What is investment risk?

Investment risk is the possibility of losing money on your investment. It’s also known as negative returns. There are a lot of different risks in investments including market risk (share market declines), concentration risk (all your investments in one basket) and foreign investment risk (including currency risk).

Many factors play a role in investment risk, including government or corporate policies, legal decisions, international markets and politics, new technology, and even environmental factors.

Why would I take a high risk path?

Commonly, (but not always) higher risk investments carry the potential for higher returns over the long-term. It is this timeframe that can make all the difference.

A well-managed balanced or higher-risk portfolio would expect to see positive returns in about three out of every four years. That means, over a 20-year period, it can expect five or six negative ones. Given that length of time, your portfolio should be able to cope with those few bad years, because the total earnings across all the good years would exceed the losses in the bad years.

On the other hand, a lower risk portfolio may only see one negative return in a 20-year cycle, but the overall earnings in that period are also quite low.

Negative returns

Almost all investments lose money from time to time. Some can lose money very quickly, such as during a stock-market crash, while others lose slowly like a cash investment that does not keep up with inflation.

The big question you need to consider is, how long are you planning to remain invested? If it’s for many years then, as long as you’re prepared for those times when shares etc. go down, your overall average return can be in healthy, positive territory.

Short-term versus long-term risk

This one trips lots of people up. Short-term stability may mean longer-term losses. For example, if you sell your shares and invest all in cash, you lower your short-term risk. However, in the long-term, shares outperform cash. So, over the course of a decade, by staying in cash you might get less for your investment and your long-term risk of low returns could actually increase.

Time is of the essence

Put simply, if you are nearing retirement and don’t have a lot of time to absorb potential losses (remembering that you may see two or more negative years in a row), a more stable, lower-risk option is often preferred. You won’t necessarily see huge returns, but you’re less likely to lose money.

Those with plenty of time until they retire, often aim for growth because they have more time to make up any negative years.

But don’t forget, living too long is a risk! This is also called longevity risk. Some new retirees now plan for 25+ years of retirement. This requires a different mindset.

Luckily, all Industry SuperFunds have financial planners who can guide you through the investment choices.