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Your investment portfolio can feel safe and still be risky
The term investment risk often brings to mind market falls, negative returns, or the prospect of losing money. While these are important considerations, they can distract from a more fundamental question:
What are you trying to achieve?
Imagine someone asked you what the best way to travel is. If you’re trying to give a serious answer, you immediately have to ask them a follow-up question: "Where are you trying to get to?" There is no universally correct answer, because the right mode of transport is both subjective and contextual. You may think a private jet is the best way to travel overseas, while another might consider that wasteful. And it would be absurd to suggest a plane for a trip to the local café. Even when the location is known, such as the local café, your answer needs to suit your audience. For most, you might recommend walking, but a car might be more suitable for someone with a disability.
Investing is no different
Yet many investors approach risk by starting with labels such as ‘conservative,’ ‘balanced’ or ‘growth.’ While these categories can be useful, they risk oversimplifying a more complex problem. Your investment strategy shouldn’t be determined solely by the type of investor you believe yourself to be. Instead, it should be guided by the outcomes you are trying to achieve.
Goal risk
Consider two individuals. One is planning to purchase a home in the next two years. The other is saving for retirement twenty years away. Even if both describe themselves as growth-oriented investors, it is unlikely the same investment strategy will be appropriate for both. The difference is not their personality. The difference is their objective.
This highlights a concept often overlooked in discussions about investing: goal risk.
While market risk focuses on how investments behave, goal risk focuses on whether your strategy is likely to get you where you're trying to go. In some circumstances, a portfolio that experiences very little volatility may actually be exposing an investor to significant goal risk.
For example, a retiree who holds all of their wealth in cash may feel protected from market fluctuations. However, if those funds fail to keep pace with inflation over a retirement that could last several decades, their purchasing power may steadily decline. While the portfolio appears safe, the likelihood of achieving the desired lifestyle may be compromised. This longevity risk is a common form of retirement planning risk.
Conversely, an investor saving for a property purchase in the near future may pursue higher returns through growth assets. If markets decline shortly before the funds are required, the strategy may jeopardise the objective despite the investor's willingness to accept investment risk.
In both situations, the key issue is not whether the portfolio is conservative or aggressive. It is whether the strategy is appropriately matched to the goal.
Of course, any strategy must also be one an investor can realistically stick with through changing market conditions. However, understanding the purpose of risk can also change how it is perceived. Most people are willing to endure a degree of discomfort when they believe it improves their chances of reaching an important goal. Investing is no different. While market volatility can be unsettling, investors often find it easier to remain committed to a strategy when they understand how that risk supports the outcome they are trying to achieve.
This is why risk tolerance, while important, is only one part of the investment equation. An effective strategy should also consider your timeframe, need to access funds, financial capacity to absorb losses, and the consequences of falling short of your goal. Two investors may have identical risk tolerances, yet require very different strategies because their circumstances and objectives differ.
Ultimately, investing is not about selecting the most aggressive strategy or avoiding risk altogether. It is about accepting risk where it is likely to be rewarded and avoiding risk that doesn’t contribute to achieving your objectives. This changes the question from, "How much risk can I tolerate?" to, "What level of risk gives me the greatest probability of achieving my goals?"
Viewed through that lens, risk becomes less about market movements and more about outcomes. After all, the purpose of an investment portfolio is not to achieve the highest return or avoid every setback. Its purpose is to help you achieve the things that matter most to you, whether that's retiring comfortably, supporting your family, funding a significant purchase, or leaving a legacy.
Rethinking your approach to investment risk
Before pigeonholing yourself as a conservative, balanced or growth investor, consider a more important question:
What am I trying to achieve, and does my current approach give me a realistic chance of getting there?
Investment success is not measured by how comfortable a strategy feels on any given day. It is measured by whether it ultimately helps you achieve the goals that matter to you. While many investors focus on the risks they can see, such as market volatility, the consequences of taking too little risk can be just as significant if it leaves important goals out of reach. A strategy that protects you from discomfort today may also prevent you from achieving what matters most tomorrow.
If you are unsure whether your current investment strategy is aligned with your goals, connect with your local RSM financial adviser to discuss a better approach.
