Investment and Managing Risk

Like everything in life, there is a risk, that usually refers to something not happening as we want, usually worse, or less than expected (downside risk) but there can also positive risk, in that we are surprised at an outcome that is better that expected (upside risk). The Oxford English Dictionary defines RISK as “(Exposure to) the possibility of loss, injury, or other adverse or unwelcome circumstance; a chance or situation involving such a possibility”. See

For investors risk is the chance that an investment’s actual return will be different than expected. Risk includes the possibility of losing some or all of the original investment.

Marcus Padley, writing in The Age 27 nov 2010,, explains more –  What is risk? It’s actually quite simple. In the financial world it is the difference between an investment whose returns fluctuate wildly and one that doesn’t.

Take two stocks. Both return an average of 5 per cent a year. But one stock’s annual return deviates from the average by 2 per cent a year (so it can return 3 per cent to 7 per cent in any given year) and the other one deviates by as much as 10 per cent a year (so it returns anywhere from minus 5 per cent to plus 15 per cent).

Clearly the first one is pretty predictable and the second one is moving around all over the place. It is much more risky. It is called standard deviation.

But you can’t tell from the average return alone how risky something is. That’s why, to judge the suitability of an investment, you need to calculate standard deviation as well. It is a measure of the volatility of returns or, in common parlance, risk. It is a measure of how reliable your returns are.

A further fundamental idea in finance is the relationship between risk and return. The greater the amount of risk that an investor is willing to take on, the greater the potential return. The reason for this is that investors need to be compensated for taking on additional risk.

Accordingly, government bonds are considered to be one of the safest (risk-free) investments and, when compared to a corporate bond or shares, provides a lower rate of return. The reason for this is that a company is much more likely to go bankrupt than the government. Because the risk of investing in company shares is higher, investors are offered a higher rate of return.


About SuperBenefitnews

Self-Managed Superannuation Service Providers in Australia. SuperBenefit will SET UP your SMSF and provide investment education for a better result. We take care of all your administration, accounting, ATO lodgement and audit of SMSFs, working with you and your advisors. If you want advice we can arrange one of our recommended advisors and accountants to meet with you, as we do not give advice, but take instruction only. Take control of your super, including property shares and other assets. Learn how to be your own advisor - make better decisions - by being mentored and coached to invest your own super wisely and strategically by qualified partners. Book to come to an event to find out more, or - Call us 0407 361 596, no obligation FREE strategy call.
This entry was posted in SMSF Investing. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s