Understanding Investment Risk

Managing risk

There are an increasing range of investment options in the market today. These different investments pose different levels of risk. Generally, the riskier the investment, the greater the potential returns – and losses.


However diversifying your investments may help to reduce risk you could be potentially exposed to as well as increase earnings.


A financial adviser can help you determine the level of risk you’re comfortable with and can help guide you in your choice of investments.

Risk and return

Before making any investment decisions, you should understand the relationship between risk of loss and return (earnings).

What’s risk got to do with return?

Simply put, the riskier the investment, the greater the potential gains or losses.


For example, shares are one of the riskiest asset classes as their value can fluctuate dramatically either up or down.


Shares however, also offer the greatest potential to make returns or losses over the long term.

How does time affect risk?

Generally, by taking a long term investment view, you can reduce your exposure to risk by investing over a longer period of time. This is because over the longer term the short-term ups and downs in the market have more chance of being smoothed out or counteracted. Having a short term investment view does offer the opportunity for some fast gains but also fast losses.


While your personal risk outlook may differ, generally the following categories exist:

  • The short term (under 12 months) is likely to be better suited to low-risk investments.
  • medium term (1 – 5 years) are suited towards medium-risk investments
  • For long term (5+ years) a profile holding a greater proportion of high-risk investments is more suited.

What level of risk are you comfortable with?

Understanding your risk profile can help make you feel more comfortable with your investment choices. It will also guide you find the investments that best suit you.


Helping to understand your risk profile, you should consider the length of time you’ll be investing for and the level of returns you’re hope to achieve.


It’s generally risky to put all your eggs in the one basket. Diversifying your investments can help reduce risk and may improve your returns.

How does diversification work?

Diversification is the act of spreading investment money over a wide variety of different areas such as:

  • asset classes (property, shares, bonds and cash)
  • sectors within asset classes (e.g. manufacturing, mining)
  • overseas markets

Further more uou can also diversify by targeting different Fund managers for their particular investment style and also choosing from a range of managed funds sectors.


Fund managers also provide diversification through their managed funds. A PGFS Financial Adviser can assist you to determine

Why diversify your investments?

Not all asset classes perform as well as each other year after year. We all want to be able to pick the investment that’s going to perform best.


This is not an easy job. There are many investment options available and markets can be unpredictable. You must also consider that the best-performing asset class or sector can change each year.


By diversifying your investments, you have more chance of picking the best-performing asset class and therefore reducing the risk of low and poorer returns.

How do managed funds make it easy to diversify?

Managed funds allow you the benefits of diversification and with only the minimum investment amount. Managed funds invest your funds with that of many other investors there by creating ‘economies of scale’. This allows investors to invest in a larger range of asset classes and industries as well as open the doors to investment opportunities they would not normally have access to.


Remember: it’s important to keep in mind your appetite for risk and particular financial goals before choosing from the wide range of managed funds on offer.