August 2007

Risk versus reward

Welcome to the August edition of the Ord Minnett column for Babes in Business. We've covered a number of topics over the past few months and this month, we step it up a little to talk about an often quoted phrase, 'risk versus reward' or more correctly termed in financial markets as 'risk versus return'.

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We manage risks in all aspects of our life on a daily basis. These may be as trivial as deciding to leave the house without an extra jacket in this cold spell that we're having, to something as complex as deciding to undergo a medical procedure that has a small chance of major complications. In all cases, we seek a benefit while exposing ourselves to an adverse outcome. We therefore take on risk.

Investment risk is no different. We invest our capital seeking returns, with the risk that those returns may not materialise or the value of our investments may fall. It is important to note that sensible investors manage risk and do not avoid investment risk. It is universally accepted by experienced investors that to gain higher potential returns, one must take on a certain level of investment risk. This is the well known risk/return trade-off.

The risk/return trade-off simply recognises that as you attempt to gain higher potential returns, you must inevitably accept greater potential risk. Sadly, far too many investors have forgotten this lesson and sought higher returns while ignoring the investment risk they were undertaking, often with painful consequences. We do not need to avoid investment risk, but rather seek to sensibly manage investment risk to ensure we are adequately rewarded with higher returns for the investment risks we are undertaking.

The main way that we can manage investment risk is through construction of a carefully diversified investment portfolio. In the most simplistic case, diversification can be thought of as not having all your eggs in one basket, however diversification usually means much more than that. Sensible diversification reduces risk because when one or more of your investments deliver lower returns, other investments will be performing more strongly to offset those lower returns. The overall result is a portfolio which provides a more stable growth profile.

To conclude, we do not need to fear or avoid investment risk, however know how to measure and allocate our assets accordingly through diversification. At Ord Minnett, diversification involves thorough research, analysis and the use of the latest tools, techniques and investment theory to arrive at the best allocation of a client's wealth. Achieving stated investment goals, while managing risk in a way that suits the individual is the outcome we are after.

If you're interested in investing in the sharemarket, or looking for a review of your portfolio, please do not hesitate to contact me at Ord Minnett. Ord Minnett is a leading wealth management group, incorporating full-service stockbroking, financial planning, funds management, corporate finance and portfolio services. With a history spanning nearly 150 years, Ord Minnett is one of the best known names in the Australian financial services industry.

Wise investing ...

Please note: All information concerning investment advice is general information only and does not constitute personal advice.

Please note: All information concerning investment advice is general information only and does not constitute personal advice.

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Anne Williamson Ord Minnett Limited p 07 3214 5540 m 0412 292 641 e awilliamson@ords.com.au w www.ords.com.au