Why Understanding Risk is Key When Building A Portfolio

When building an investment portfolio, many investors understandably focus on returns. Achieving those returns, however, requires a deeper understanding of risk—an often-overlooked, yet essential, factor in successful long-term investing. 

More Than Just Numbers 

The annualised returns of an investment portfolio only tell part of the story. Every investment carries some degree of risk—whether it’s market volatility, inflation, or potential risk of capital loss.  

While high returns may look attractive, they do come with increased uncertainty and the potential for loss. The key to successful investing is to achieve the right balance between risk and return. 

Risk and Targeted Returns 

Targeting a specific return makes risk assessment even more critical. If your goal is a consistent income in retirement, you may be more sensitive to market downturns and drawn to a more conservative strategy, which has a higher allocation to more defensive assets. On the other hand, investors with limited need for cashflow and longer investment timeframes, may tolerate higher risk for the potential of greater returns over the long term. 

Understanding the risk required to achieve your desired return puts you in control, helping you avoid the stress that comes with market volatility and remain focused on long-term outcomes. 

A thoughtful discussion about risk can also bring reassurance during periods of market turbulence. When you are clear about the risk you are accepting to reach targeted returns, you will be less likely to react emotionally in volatile markets.  

This composure is often the difference between achieving your goals and making costly, impulsive decisions. 

Comparing Apples with Apples:
Superannuation Funds and Investment Portfolios 

When comparing superannuation funds or different investment portfolios, it is vital to look beyond performance figures alone. Two portfolios might deliver similar returns, but one could have taken on significantly more risk to achieve those results. Ultimately, as advisers, our primary objective is to maximise returns and minimise risk. This can be easier said than done, and is why we encourage investors to seek professional advice. 

The Takeaway 

A tailored portfolio that considers your objectives and tolerance for risk helps protect your wealth and ensures your investments serve your life—not the other way around. By taking the time to assess risk alongside returns, you’ll be empowered to make decisions with confidence and peace of mind. 

If you’d like to discuss your investment strategy or how risk management can support your goals, we’re here to help—feel free to contact us.