investment risk by lindayy

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investment risk

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									A guide to
investment risk

Understanding investment risk is the key to developing a
successful investment plan. While every investment has
potential risks, they can be managed and minimised.


                Everybody worries about risk. By getting the right                                                                                                       But, yes, you should consider accepting the risk of loss
                guidance you can keep risk in perspective and identify                                                                                                   of capital associated with high quality investments.
                the types of risk that are acceptable and those that are                                                                                                 The risk is low, and the potential returns are
                best avoided.                                                                                                                                            acceptable. Moreover, the risk can be minimised with
                                                                                                                                                                         the help of a diversification strategy.
                Permanent loss of capital
                This is the risk that you probably fear most – the
                                                                                                                                                                         Fluctuating returns
                thought of losing all of your money.                                                                                                                     In one way or another, all investments suffer from
                It’s this risk which gets most of the newspaper                                                                                                          this risk.
                headlines, but in reality it’s the risk which can most                                                                                                   The asset class which fluctuates the most is shares;
                easily be avoided.                                                                                                                                       their values can change on a minute-by-minute basis.
                The key to managing this risk is to buy only quality                                                                                                     Even over longer timeframes, share returns can
                investments and to buy a number of investments so                                                                                                        fluctuate strongly.
                that if one does fail, it will only have a small effect on                                                                                               The key is that the returns from quality investments
                your overall portfolio.                                                                                                                                  will fluctuate upwards more often than they will
                So, should you accept the risk of permanent loss? Are                                                                                                    fluctuate downwards. In so doing, they will reward you
                the rewards worth the risk? The answer is yes and no.                                                                                                    with a superior return over time. As Graph 1 highlights,
                                                                                                                                                                         despite short-term volatility, the value of the
                No, you shouldn’t accept the risk of loss of capital
                                                                                                                                                                         Australian share market has increased substantially
                associated with poor quality investments. The risk is
                                                                                                                                                                         over the past 22 years.
                too high, and the rewards are often illusionary.


                   Graph 1: Australian Share market always bounces back
                   Following a fall, the market has never failed to rise above the previous high point
                                $180,000
                                $170,000                                Australian Shares (S&P/ASX200 Accumulation Index*)                                                                                                                         Hurricane Katrina devastates
                                                                                                                                                                                                                                                   New Orleans – 29 August 2005

                                $160,000                                                                                                                                                         Estimated world population
                                                                                                                                                                                                                                          Indian Ocean tsunami causes
                                                                                                                                                                                                                                          massive destruction along Asian
                                $150,000                                                                                                                                                         reaches 6 billion – 1999                 coastlines – 26 December 2004

                                $140,000                                                                                                                                                           Sydney hosts Olympic                   US coalition invades
                                                                                                                                                                                                   Games – September 2000                 Iraq – 20 March 2003
                                $130,000
                                $120,000             Estimated world
                                                     population reaches
                                                                                                 The recession
                                                                                                 “we had to have” – 1991
                                                                                                                                           Bond market
                                                                                                                                           crash – 1994
                                                                                                                                                                                                     “Tech Wreck” –
                                                                                                                                                                                                     14 April 2000
                                                                                                                                                                                                                                   Attack on New York
                                                                                                                                                                                                                                   World Trade Centre –
                                $110,000             5 billion – 1987                                                                                                                                                              11 September 2001


                                $100,000                                               Iraq invades Kuwait –
                                                                                       2 August 1990
                                                                                                                          Sydney wins
                                                                                                                          2000 Olympics bid –
                                                                                                                                                    Barings Bank is brought down
                                                                                                                                                    by activities of rogue trader,
                                                                                                                                                                                                 Euro launched –
                                                                                                                                                                                                 1 January 1999
                                 $90,000                                                                                  24 September 1993         Nick Leeson – February 1995

                                 $80,000                            Fall of the                        Superannuation                      SIS Legislation              Coalition ends
                                                                    Berlin Wall –                      Guarantee introduced –              introduced –                 13 year Labor rule –
                                 $70,000                            9 November 1989                    1 July 1992                         1 July 1994                  2 March 1996

                                 $60,000          World share market                                   Dissolution of USSR –
                                                  crash (“Black Monday”)                               12 December 1991
                                 $50,000          19 October 1987
                                                                                                                                                                                                                                                                                    Centro Properties Group
                                 $40,000                                Tiananmen                                                                                                                                                                                                   slashes earnings forecast
                                                                        Square –                                                                                                                                                                                                    – 13 December 2007
                                 $30,000                                4 June 1989
                                                                                                                                                                                                                                                                                    Global Credit Crunch
                                 $20,000                                                                                                                                                                                                                                            begins – 10 August 2007

                                 $10,000                                                                                                                                                                                                                                  China's stock market
                                                                                                                                                                                                                                                                          fall – 27 February 2007
                                      $0
                                       DEC. ’85

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                                                                                                                                                                                                                                          Source: St.George Investment Solutions
                                                                                                                                                     You can minimise the risk to your portfolio of
                                      Graph 2: Investing for the long-term                                                                           fluctuating returns by:
                                      reduces risk                                                                                                   • investing in quality investments
                                      There hasn’t been a single negative five-year                                                                  • investing for the long term
                                      return since 1986
                                                                                                                                                     • diversifying your investments.
                                              60
                                                                          All Ordinaries Accumulation Index 1 yr (%)                                 Graph 2 shows how investing over a longer timeframe
                                              50
                                              40
                                                                          All Ordinaries Accumulation Index 5 yr rolling (%)                         reduces risk. The Australian share market has had a
                                              30                                                                                                     number of negative single-year returns since 1986.
                                              20                                                                                                     However, the graph shows that keeping your
                               % pa




                                              10                                                                                                     investment for five or more years substantially
                                               0
                                             -10
                                                                                                                                                     reduces the risk of negative returns – there hasn’t
                                             -20                                                                                                     been a single negative five-year return in this period.
                                                                         Source: St George Investment Solutions and Bloomberg
                                             -30                                                                                                     The third way to minimise risk is to diversify
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                                                                                                                                                     your investments.
                                                                                                                                                     Graph 3 shows how a diversified portfolio smooths
                                                                                                                                                     your return. The line is the return you would have
                                                                                                                                                     received had you invested in a basket of all the asset
                                                                                                                                                     classes rather than any particular one. You can
                                      Graph 3: Diversification can smooth
                                                                                                                                                     see that the highs and lows have been smoothed
                                      your investment return                                                                                         out along the way, providing you with a more
                                      Annual asset class performance                                                                                 consistent return.
                                              40
                                              30                                                                                                     Not achieving your goals
                                              20
                                              10
                                                                                                                                                     This risk occurs when you don’t use investments which
                                                                                                                                                     will generate a sufficient return to meet your financial
                               % pa




                                               0
                                             -10                        Australian Equity               International Equity
                                                                                                                                                     goals. It typically occurs when you decide to ‘play it
                                             -20                        Australian Fixed Interest       Listed Property                              safe’ by investing in cash and term deposits to ensure
                                             -30
                                                                        Cash                            Average                                      that you don’t lose capital.
                                                                                        Source: St.George Investment Solutions
                                             -40
                                                   2000   2001   2002   2003     2004        2005        2006        2007
                                                                                                                                                     However, this can sometimes lead to a worse fate
                                                                                                                                                     – not having enough money to achieve your goals.
                                                                                                                                                     Graph 4 shows the difference in the long-term returns
                                                                                                                                                     of investing in term deposits compared with industrial
                                                                                                                                                     shares. The income and capital value generated
                                      Graph 4: Return on investment                                                                                  from the share portfolio outperforms that of the
                                      of $100,000                                                                                                    term deposits.
                                      Invested from January 1986 to December 2007
                                             25,000                                                               600,000
                                                                                                                  550,000
                                                                                                                                                     Things you should consider
                                                                                                                  500,000
                                             20,000
                                                                                                                  450,000                            This publication provides an overview or summary
                                                                                                                                 Capital Value ($)




                                                                                                                  400,000                            only and it shouldn’t be considered a comprehensive
                                Income ($)




                                             15,000                                                               350,000
                                                                                                                  300,000                            statement on any matter or relied upon as such. This
                                             10,000                                                               250,000
                                                                                                                  200,000                            publication doesn’t take into account your personal
                                                                                                                  150,000                            objectives, financial situation or needs. It’s important
                                              5,000                                                               100,000
                                                                                                                  50,000                             for you to consider these matters before making any
                                                   0                                                              0
                                                                                                                                                     financial decision.
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                                                                                       Source: St.George Investment Solutions
                                                                                                                                                     Speak to your financial adviser. They will help you
                                                                                                                                                     work out what level of risk you’re comfortable with and
                                                                                                                                                     recommend investments that will bring you closer to
                                                                                                                                                     your goals. Your financial adviser can give you a copy
                                                                                                                                                     of the relevant Product Disclosure Statement for any
                                                                                                                                                     financial product you are considering and you should
                                                                                                                                                     read this document carefully before making any
                                                                                                                                                     investment decision.
                                                                                                                                                                                                                CKGINR10308




IMPoRTANT INFoRMATIoN
This information was prepared by Securitor Financial Group Ltd ABN 48 009 189 495
AFSL 240687. The information in this publication is current as at 1 March 2008.

								
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