Risk Profiles & Investment Strategies

It is important to recognise that most investment risk is a function of different levels of exposure to the various asset classes (cash, fixed interest, shares, property and international investments).

The asset mix of your investment portfolio will have a profound effect on both the risk and return of your investment portfolio, with exposure to stable investments (cash & fixed interest securities) restricting the potential investment return. Alternatively, increasing exposure to growth investments will mean that your investment will be more volatile (the value of your investment will change). This relationship between risk and return is illustrated in the following diagram:

The Secure, Risk Averse Investor

The ‘Secure Investor’ values preservation of capital above all else.  With an emphasis on modest income and high levels of investment security, this investor would have a portfolio comprising only cash and fixed interest investments.

The Conservative Investor

The ‘Conservative Investor’ places emphasis on generating income being invested 80% in staple assets & 20% in growth assets to provide some protection against inflation. It is appropriate for investors who have some understanding of investment market behaviour and can afford to take only a small short-term risk that their capital might fall in value.

The Balanced Investor

The ‘Balanced Investor’ may hold 60% of their portfolio in cash and fixed interest investments, with the remaining 40% exposed to property investments, Australian and International shares.  This provides steady growth of capital and income over time and is appropriate for investors with some understanding of investment market behaviour, and prepared to accept some short-term risk to their capital in order to gain longer-term capital growth.

The Balanced Growth Investor

The ‘Balanced Growth Investor’ seeks to ensure long-term investment growth through a diversified investment portfolio with emphasis on growth assets such as property and shares.  A degree of security is offered through exposure to a broad range of asset classes, although short-term returns may be expected to be volatile.  Typically up to 60% of the portfolio may be invested in property and shares. It is appropriate for investors who are cautious about taking high levels of risk but feel comfortable with some short-term risk due to their general understanding of investment markets.

The Growth Investor

The ‘Growth Investor’ seeks strong long-term investment performance and is not concerned about short-term volatility.  The Growth Investor’s portfolio will consist primarily of Australian and International shares together with some exposure to property investments.  The Growth Investor will accept short-term losses (possibly up to 30%) in the short to medium term in their quest for higher long-term gains. Typically, it is appropriate for investors who understand investment markets and are happy to sacrifice short-term capital security in order to maximise long-term capital growth.

The Aggressive Investor

The ‘Aggressive Investor’ is prepared to accept the risk of significant losses in return for high gains. Generally focusing on share investments, the Aggressive Investor may utilise gearing or derivative strategies to maximise their returns. Being invested 100% in growth assets produces a minimal level of income, and results in a strong emphasis on maximising long-term capital growth. In extreme cases (such as a highly geared share portfolio in a market downturn) the Aggressive Investor faces the possibility of losing a significant amount of their capital.

Click here to download Understanding Investment Risk published by Macquarie Investment Management Limited and the Financial Planning Association.