Understanding risk
Australian and international shares form a very important part of a well-diversified portfolio. The percentage of your portfolio that you invest in shares will depend on your investment timeframe and your tolerance to the volatility of the sharemarket.
Shares have historically demonstrated greater volatility and can be considered to have higher investment risk than other asset classes such as mortgages, fixed interest securities or cash. As such, shares are ideally suited to investors with a minimum investment timeframe of five years. For such investors, short-term volatility isn’t important.
What is important is that:
- shares tend to regain any short-term lost performance and generally outperform all other asset classes over the long term
- shares can provide long-term capital growth
- shares can provide a strong and growing income stream.
By not investing in growth assets such as shares, you face the greater risk of earning less than inflation or not effectively diversifying your assets.
Risk profile
Your risk profile is determined by your investment time horizon, your expectations for returns and how much risk (volatility) you can tolerate. Once you identify your risk profile, you can select the type of investments that suit you.
