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The Principles of Risk and Return www.financiallywellorganised.com info@fwo.net.au


The Principles of Risk & Return: alignment to goals and preservation of capital. The Chinese philosopher Confucius once said that life is very simple, but we insist on making it complicated. You could say the same thing about investing. However, investing does not need to be complicated. One of the most fundamental decisions for any investment is to understand the risk and return relationship. Risk and return are related, the higher the expected return the higher the expected risk. The chart below highlights how different asset classes have different risk and return characteristics: Higher risk

Tim Ward Shares Financial Adviser FWO Chartered Accountants

Unlisted assets (growth) Property Unlisted assets (defensive) Fixed interest Cash

Lower risk/return

Source: JANA Investment Advisors Pty Ltd

Higher return

Hence, you would expect shares to have a higher return over the long term when compared with fixed interest investments. This fundamental relationship underpins the portfolio construction of an investment portfolio. It’s important to remember that we all take risks each and everyday. There are routine risks to our safety in crossing the road, in riding public transport, in exercising at the gym, in choosing lunch. Then there are the big decisions like selecting a career, finding a life partner, buying a house and having children. These are all risky decisions, all uncertain, all involving an element of fate.


It is important to remain disciplined in your approach and to ensure your personal goals and objectives are correctly aligned with your portoflio.

In making these decisions we seek to mitigate risk by carefully weighing up alternatives, researching the market, judging possible outcomes and balancing what feels right emotionally and intellectually, both in the short and long term. The same principles apply to constructing an investment portfolio be it for superannuation monies or ordinary money. We need to align our personal goals and objectives with our investments. For example you would not have 100% of your portfolio invested within equities if you plan to retire within 12 months. By having 100% of your portfolio invested within equities you would be exposing your portfolio to risks which do not match the personal goal of retirement within 12 months. Therefore it is important to remain disciplined in your approach and to ensure your personal goals and objectives are correctly aligned with your portfolio. This process starts with making sure your portfolio is reviewed regularly to ensure it matches your personal goals and objectives. Higher

Aggresive Growth Growth

Expected return

Moderate Growth

Balanced

Conservative

Fixed Income Equities

Lower

Volatility/Risk

For more information on becoming Financially Well Organised contact: Tim Ward Financial Adviser FWO Chartered Accountants tim@fwo.net.au (07) 3833 3999

Higher


Ground Floor, Green Square North Tower 515 St Paul’s Terrace, Fortitude Valley QLD 4006 GPO Box 81, Brisbane QLD 4001 www.financiallywellorganised.com Ph: 07 3833 3999 Fax: 07 3833 3900 info@fwo.net.au


The Principles of Risk and Return