Risk and return
When you see a financial adviser they will talk to you about your 'risk profile'. This is a measure of how big a risk you want to take with your money in order to achieve a bigger return. Generally speaking, the bigger the potential return for an investment, the bigger the risk that you may not make a return or that you may make a loss.
Different types of investments carry varying levels of risk and deliver varying returns.
Shares and property, known as growth assets because their capital value has the potential to grow over time, are generally higher risk investments than income assets like fixed interest and cash because the capital and any earnings are exposed and susceptible to fluctuations in the market. This means shares and property may deliver a higher return than cash and fixed interest, however they also pose a greater risk of producing a negative return.
It is also important to consider the impact that fees may have on the extra return that would be expected for taking on additional risk. If an investment strategy produced an expected return that is for example 2% above the return that can be achieved on cash but you are paying 'management' fees of 2% then in reality that strategy results in taking on additional risk without an increase in the expected return. Comparisons between alternative investment strategies should consider the expected after fee returns that can be achieved and whether any "bells and whistles" associated with an investment will result in a better outcome.
Everybody has a different 'risk profile'. Your appetite for risk is a personal choice. However your risk profile can often be influenced by your investment timeframe and what stage you are at in life. A financial adviser is best placed to determine and discuss your risk profile with you.
