RISK TOLERANCE DETERMINES RETURN

Get in touch

admin@grahamfin.com.au

Building a low-risk income portfolio, it’s easy to get caught up with the returns while ignoring risk. My advice

would be to spend your time understanding the risks and choose your return based on how much risk you are comfortable with.

Over the years we have seen countless failures in products marketed as “low-risk” (property developer Westpoint Corporation, debenture issuer Australian Capital Reserve, etc). The mums and dads who invested in such assets were looking for safe, low-risk investments with regular income; however, what they got were high-risk, complicated products that had a high chance of failure.

Had they understood the risks, they would almost certainly not have invested. Fortunately, the basics of understanding risk are relatively simple and it all starts with something called the “risk-free” rate. This

is the rate of a return you can get with zero risk. The most widely accepted rate used is the 10-year bond rate and in Australia that currently sits at a paltry 2.4% a year.

Unfortunately for low-risk income investors, the risk-free rate is about as low as it has ever been. And if you think Australia’s 2.4%pa is low, spare a thought for investors in Japan (-0.007%pa in mid-February) and Switzerland

(-0.35%pa), where investors are paying these countries to hold their money!

The next thing to understand is risk premium – the return above the risk-free rate that compensates you for the extra risk. Typically the higher the return, the riskier the investment is. I have broken my recommendation into

two sections: lower-risk income assets and higher-risk growth assets.

Read Full Story

< Older Post Newer Post >