Education Centre - Sandhurst Trustees
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Risk vs Return

All investments carry risk – and managed funds are no different.

Perhaps the biggest risk when investing in managed funds is the volatility of returns and capital growth. Interest rate changes, inflation, market conditions and poor investment decisions can all have an impact on your investment.

Just as you should be aware of the benefits that come with investing, you should also fully understand the risks, act to minimise them and select a suitable investment and investment manager for your financial goals.

Ask Yourself?

  • So what type of investor are you?
  • Are you willing to accept added risk of potential losses for the opportunity to earn greater returns?
  • Are you more comfortable with less risk and lower returns?
  • Or would you prefer a more balanced approach?

 

Generally, the higher risk you’re prepared to accept, the higher the potential return. Higher risk however, will also increase the chances of incurring a loss in capital. The more volatile the investment, the greater the time required to ‘ride out’ any possible downturns in the investment’s value and maximise long-term returns.

This graph demonstrates the decline and recovery of markets that were affected by Australian and world events.

Source:

  • Australian shares - S&P/ASX 200 Accumulation Index
  • Australia Fixed Interest - Bloomberg AusBond Composite 0+ Yr Index
  • Australian Listed Property Trusts - S&P/ASX 300 Property Trusts Accumulation Index
  • Cash - Bloomberg AusBond Bank Bill Index
  • International shares - MSCI World ex Australia (Net TR) AUD
  • Inflation-CPI Consumer Price Index Percentage Change from Previous Period, All groups

 

The following graph illustrates the best and worst performance by each asset class over a 20 year period – along with the average annual return during the same period.

For instance, Australian shares’ strongest 1 year return for the period was 29% however, its weakest 1 year return was -20% over the same period, illustrating that growth assets have the potential for both significant returns and significant losses.

Source:

  • International shares - MSCI World ex Australia (Net TR) AUD
  • Australian shares - S&P/ASX 200 Accumulation Index
  • Property - S&P/ASX 200 A-REIT TR
  • Fixed Income - Bloomberg AusBond Composite 0+ Yr Index
  • Cash - Bloomberg AusBond Bank Bill Index