At Virtuous Wealth, we often hear from clients who are concerned about investment risk. While it’s natural to want to protect your wealth, being too conservative can actually put your long-term financial goals at risk. Let’s explore why finding the right balance between risk and return is crucial for your investment success.
Understanding Risk and Return: A Simple Framework
Think about investing in property – you get returns in two ways:
- Regular income (rent from tenants)
- Capital growth (increase in property value)
The same applies to shares – you receive:
- Income through dividends
- Potential capital growth over time
While safer investments like term deposits and bonds provide predictable income, they offer limited growth potential. This predictability comes at a cost – typically lower returns, especially in today’s low-interest environment.
The Risk of Being Too Safe
Here’s a fascinating real-world example that illustrates this principle:
Meet the Thompson Twins – A Tale of Two Investors John and Robert Thompson started their careers on the same day, with identical annual super contributions of $6,000. However, they took different approaches to investing:
John (The Conservative Investor):
- Chose a low-risk strategy
- Earned 6% annual return after inflation
- Accumulated $668,609 after 35 years
Robert (The Growth Investor):
- Accepted more market volatility
- Earned 8% annual return after inflation
- Accumulated $1,033,900 after 35 years
The Power of 2% That seemingly small 2% difference in returns led to Robert having over $365,000 more at retirement. Even more striking: Robert could afford to draw an annual pension of $88,000 compared to John’s $46,000 – nearly double the retirement income – while both funds lasted 35 years.
What This Means for Your Portfolio
Risk in investing isn’t just about the possibility of losing money – it’s about uncertainty. While growth assets like shares and property may experience more short-term value fluctuations, they historically offer better long-term returns than defensive assets like cash and bonds.
Finding Your Balance
The key is finding the right mix of:
- Growth assets (shares, property) for long-term wealth building
- Defensive assets (cash, bonds) for stability and income
Your optimal balance depends on several factors:
- Your investment timeframe
- Income needs
- Risk tolerance
- Overall financial goals
Making Smart Risk Decisions
Consider these principles when evaluating investment risk:
- Longer investment timeframes can help smooth out market volatility
- Diversification across different asset classes can help manage risk
- Regular review and rebalancing keeps your strategy on track
- Your risk profile may change over time as your circumstances change
A Word of Caution: While Robert’s growth strategy proved more rewarding, it’s crucial to understand that higher returns come with increased short-term volatility. The key is being comfortable with your chosen strategy and sticking to it through market cycles.
Taking the Next Step
At Virtuous Wealth, we help investors find their optimal balance between growth and security. Our experienced advisers will:
- Assess your risk tolerance
- Understand your goals
- Design a portfolio that aligns with both
- Regularly review and adjust your strategy as needed
Ready to Review Your Investment Strategy?
Don’t let overly conservative investing hold you back from achieving your financial goals. Contact us today for a complimentary portfolio review where we can discuss finding the right balance for your situation.
Remember: The biggest risk might not be taking enough risk to reach your goals.
Call us at (02) 4086 4724 or schedule your consultation online to start the conversation about optimizing your investment strategy.
*All calculations and investment returns mentioned are after fees, tax and inflation. Past performance is not indicative of future returns.
