Balancing risk and return for your investments (VIDEO)

  • 27.Mar.2018
  • Richard Murphy,  XTB

XTB CEO Richard Murphy looks at balancing risk and return in your investments

There is always a trade-off between risk and return

The more return you receive on an investment will inevitably mean the more risk you incur. There is no such thing as a high return low risk investment. Bonds are low risk low return investments. Equities are high risk and can sometimes be high return, but not always.

If you line up all the types of available investments in terms of a risk return profile you get a risk reward spectrum with government bonds at the bottom end and term deposits next to them.

Corporate bonds are the next cab off the rank in terms of low risk low return. Moving up the spectrum you get equities, hybrids and even further up the scale, warrants, options, CFDs and other derivative type investments. Products which are potentially very high risk but potentially very high return. It is really important to think about where on the spectrum you want to be positioned. You do not want to have all your eggs in one basket.

Risk vs Return

Defensive assets tend to be very low volatility whereas growth assets tend to be much higher volatility. Over the last 20 years the average volatility of equities has been around 15 – 16% p.a.

Fixed rate bonds, on the other hand, have had an annualised volatility of around 2 – 3% and floating rate bonds around 0.5%. Equity hybrid securities are in the middle at around 7%. So in a balanced portfolio you should have a mixture of more volatile growth assets and less volatile defensive assets.

Comparing risks and volatility of different asset classes

View on YouTube

The information in this article is general in nature. It should not be the sole source of information. It does not take into account the investment objectives or circumstances of any particular investor. You should consider, with or without advice from a professional adviser, whether an investment is appropriate to your circumstances. Australian Corporate Bond Company Limited is the Securities Manager of XTBs and will earn fees in connection with an investment in XTBs.


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