Risk versus Return

Unfortunately in Australia there are those who want the highest return possible from their investments with a 100% guarantee that they will get their capital back. The number one lesson from investing is that the higher the expected return the higher the risk you are taking. If you can get 5% from having your money in a Bank and someone is offering 10% for your money then your capital is at risk. This doesn’t mean you won’t get your capital back but it is possible to lose some or all so you need to be aware of this.

There are ways to reduce your risk and the obvious ones are diversification and time. If you had all your savings in Westpoint you wouldn’t be happy right now, however if you had 10% in Westpoint and the balance spread amongst other investments then you wouldn’t be hurting so much. The downside of diversification is that your overall returns over time could be less. Accordingly if you want to take the gamble and are prepared to risk your capital then that investment in the one project could pay off handsomely.

Time also reduces risk. If you have $50000 and need that money in six months for whatever reason then chasing a higher return for that period is very risky. If you place these funds in the market and there is a downturn you will most likely suffer a capital loss. If you have a minimum of 5 years plus then you can invest in more volatile investments and the risk of a loss of capital over that time is reduced.