If you like to have a day out at the races very occasionally, the chances are that the horse you select for your bet is likely to be a guess at best. Or maybe you like the name of the horse, or colours of the jockey. The chances of that horse being the winner is risky. If there are 20 horses in the race the risk and return is most likely to be a one in 20 chance of winning. However, there are people who reduce their risk and increase their return by studying both the horses and the jockey’s form. Over time the punter will build a knowledge base that will increase their chance of selecting the winning horse. In fact, some people are so good they make a living from betting. However, it is not a path that I would recommend.
The same applies to investors who want to reduce their risk and increase their investment return. For example, if you want to invest in the share market, you may educate yourself by reading books about the share market. These are books relating to share market investing that have been reviewed by Good Financial Reads:
- The Ulysses Contract: How to never worry about the share market again
- The Best 50 Trading Tips of All Time
- Stocks on the Move
- Favourite Share Trading Books by authors Darry Guppy, Alan Hull & Colin Nicholson
- Trading Secrets
Over time, you build a knowledge base that allows you to decrease the risk and increase the return from your portfolio of shares. Another way of decreasing the risk is to diversify your investments, which has been discussed in a previous article.
If you are not a person who wants to spend time and worry over what shares to buy and sell, you can leave it to the experts by purchasing a managed fund or ETF. Nerd Wallet has an excellent article, What is an ETF? Meaning, How They Work.
Money Smart provides excellent advice on Choosing a Managed Fund.
While your work may be reduced by choosing to investment through a managed entity, there will be fees that will reduce your net investment return. The types of fees you incur may include:
- Establishment fee
- Contribution fee
- Management fee
- Performance fee
- Adviser fee
The combined cost can be substantial and something the investor should research before select a specific managed fund or ETF. Generally, an Indexed fund is likely to have less fees because the management company only has to maintain the selected index. For example, you may choose to invest in the ASX.AU 200 or the ASX.AU 100 there the investment will be either the top 200 or 100 shares. There are also indexed funds for bonds, property and commodities such as gold.
Over the last thirty years, the Australian Share Market has had an average investment return (including capital increase and dividends) of 9.2%. In the years 2021-22 the investment return was a negative 7.4%, but the following year the investment return was 14.8%. While averages are a good indicator for the long term investor, those that choose short term investments may be unfortunate enough to choose a time periods, where that investment class is underperforming. For this reason, it is often suggested that to reduce the risk of the investment, you should invest long term.
When considering Risk and Return, you first need to calculate your Return on Investment (ROI). The basic formula is:
ROI(%) = current investment value – initial investment value x 100% / initial investment value
The problem is that your investments will be a collection of assets, each having a different ROI and different ROIs over different time periods.
For the average investor, a risk-free investment is considered the return on a 90-day bank bill or the cash rate. The current (August 2025) cash rate is 3.85% (Inflation Rate of 2.1%). If you have equipped yourself with a sound understanding of how to invest, it is generally accepted that returns of 5% – to 10% are reasonable, depending on the types of investments chosen. Higher returns of 11%-15% are reasonable but also come with a higher risk.
Some investors think that if they simply keep their money in a bank account, there is no risk of loosing the capital. But on the other hand, the return on investment is likely to be less than inflation and thus, the investment is losing money. For more information, read the article, How inflation impacts on investments.
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To find out more, please watch this short video Risk and Return.
Warren Buffett has been considered one of the most successful investors or our time. To discover how he manages Risk and Return, read the Financial Mappers article Lessons from Warren Buffett for Effective Financial Planning.
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