When most people hear the word risk in investing, they often think of market crashes or losing money. But in reality, investment risk isn’t just one thing—it’s a mix of different risks, each with its own causes and impacts. Some of these risks can be reduced or avoided, while others are an unavoidable part of investing.
Understanding the different types of investment risk, and how to manage them, is a core part of how we help you protect and grow your wealth.
The many types of investment risk
Let’s break down the key types of investment risk and how they may affect your portfolio:
- Market Risk (Systematic Risk)
This is the risk that the entire market falls—like during a recession or financial crisis. It’s unavoidable but can be cushioned through diversification and strategic asset allocation. - Specific Risk (Unsystematic Risk)
The risk tied to an individual company, industry, or sector (e.g., a mining company underperforming). This can be mitigated through careful asset selection and management. Here we rely on selecting expert and experienced managers across multiple asset classes and strategies. - Concentration Risk
This occurs when too much of your portfolio is invested in a single company, sector, or asset class. For example, holding only Australian bank shares or property can expose you if those sectors struggle. Diversification is the best defense here. - Interest Rate Risk
Mostly impacts fixed income investments like bonds. When interest rates rise, bond prices usually fall. It can also affect sectors like property and infrastructure. - Inflation Risk
The risk that your investments don’t grow fast enough to keep up with the cost of living. Over time, this can erode purchasing power—especially in conservative, cash-heavy portfolios. - Liquidity Risk
This is the risk of not being able to access your money quickly or without a discount. Illiquid assets, like direct property or some unlisted investments, can carry this risk. - Currency Risk
Investing overseas adds the risk that exchange rate movements will reduce your returns. Depending on your strategy, this risk can be hedged or embraced. - Timing and Behavioural Risk
The risk of making poor decisions based on emotion—like selling during market downturns or chasing hot trends. These behaviours can do more harm than the market itself.
What are risk-adjusted returns?
Risk and return are two sides of the same coin. Generally, higher returns require taking on more risk. But the smartest investors aren’t just chasing the highest return—they’re looking for the best return for the level of risk taken.
This is known as the risk-adjusted return.
For example:
- Superfund A might advertise a return of 10% for last five years, while
- Superfund B advertises a return of 8%.
Superfund A is the better fund, right? Wrong! It is impossible to say which fund is the better investment without knowing how much risk each took to achieve its returns (e.g. asset allocation, manager selection, leverage, liquidity, volatility, income).
Depending on your goals and comfort level, Superfund B might actually be the better choice because, for instance, its portfolio is more diversified and less volatile.
How we help you manage risk
As your adviser, one of our most important jobs is helping you identify, understand, and manage investment risk. Here’s how we do that:
- Diversification to avoid concentration and reduce specific risk
- Rebalancing your portfolio to keep risk levels aligned with your goals
- Strategic asset allocation based on your time horizon and tolerance for volatility
- Downside protection strategies for certain market conditions
- Coaching and guidance to help you avoid emotional decisions that can derail your plan
Final thoughts
All investing involves risk, but risk doesn’t have to mean recklessness. With a diversified strategy, clear goals, and ongoing advice, risk becomes something we manage—not something we fear.
If you’d like to review your portfolio’s current risk exposure or discuss whether your investments are still right for your goals, let’s schedule a time to chat.
Campbell Korff
Managing Director
Korff Wealth