When it comes to investing, one of the most important – and often overlooked – factors is your attitude towards risk. Investment risk is not just about market volatility or potential losses; it’s about how you react when markets rise and fall.
Understanding your personal tolerance for risk is essential to building an investment strategy you can stick with over the long term, particularly when it comes to superannuation and long-term wealth creation.
Everyone has a different comfort level with risk. Some people can remain calm during market downturns, while others feel anxious and tempted to make changes at the worst possible time. Neither response is “right” or “wrong” – but mismatching your investments to your risk tolerance can lead to poor decisions, unnecessary stress, and lower long-term returns.
This is where determining your risk attitude becomes critical.
The Top 5 Questions to Ask Yourself About Investment Risk
- How would I feel if my investments fell by 10–20% in a short period?
Market declines are inevitable. The key question is whether you could remain invested or would feel compelled to sell. Emotional reactions during downturns often lock in losses and undermine long-term outcomes. - What is my time horizon?
If your goal is decades away, such as retirement through superannuation, you generally have more capacity to ride out market fluctuations. Shorter-term goals may require a more conservative approach to protect capital. - Do I rely on this money for income now, or is it for future growth?
Investments that need to generate stable income today often require lower volatility. Growth-focused investments, while more volatile, are typically better suited for long-term objectives. - Have I experienced market downturns before, and how did I respond?
Your past behaviour is often the best indicator of your true risk tolerance. If previous volatility caused significant stress or prompted reactive decisions, this should inform how your portfolio is structured today. - Am I comfortable not knowing what the market will do next year?
Investing involves uncertainty. If uncertainty causes sleepless nights, your portfolio may be taking on more risk than you’re comfortable with – regardless of potential returns.
The “Sleep Test”: A Simple Measure of Risk Alignment
A useful way to assess your investment strategy is the “sleep test.” Simply ask yourself: Do I sleep well at night knowing how my superannuation or investments are invested?
If market headlines cause anxiety, or if you constantly check balances and worry about downturns, it may be a sign that your investments are not aligned with your risk tolerance. While some level of volatility is unavoidable, a well-structured portfolio should provide confidence, not constant stress.
Passing the sleep test doesn’t mean avoiding risk altogether. It means holding the right amount of risk for you – enough to achieve your goals, but not so much that it undermines your peace of mind or leads to poor decision-making.
Why Advice from a Financial Adviser Matters
A financial adviser plays a crucial role in helping you determine your true attitude towards risk – not just what you think it is, but how it aligns with your goals, timeframes, and personal circumstances. Advisers use structured risk profiling, scenario analysis, and experience to translate abstract risk concepts into practical investment strategies.
More importantly, a financial adviser provides guidance during periods of market volatility, helping you stay focused on long-term objectives rather than short-term noise. This behavioural coaching can be just as valuable as the investment strategy itself.
In the context of superannuation, where decisions made today can significantly impact your future lifestyle, getting the risk balance right is essential. Professional advice helps ensure your investments are aligned with both your financial goals and your ability to stay invested through market cycles.
Ultimately, successful investing isn’t about chasing the highest returns – it’s about creating a strategy you can live with, stick to, and sleep soundly knowing it’s working toward your future.
If this article has inspired you to think about your unique situation and, more importantly, what you and your family are going through right now, please get in touch with your advice professional.
This information does not consider any person’s objectives, financial situation, or needs. Before making a decision, you should consider whether it is appropriate in light of your particular objectives, financial situation, or needs.
(Feedsy Exclusive)
