What is risk? Risk is the chance of something going wrong, which in turn is defined by what you are trying to achieve i.e. your goals. If you have no goals, then you have no risk – nothing can go wrong because you are not trying to achieve anything. If I am age 50 and want to live to age 90, then smoking, drinking and eating poorly are risky behaviours because they increase the chance that I will die early and fail to meet my goal of reaching age 90. If, on the other hand, I really don’t care when I die, then these are not risky behaviours at all. If I am in good health now and only care about making it to age 51 then these are only moderately risky behaviours because it is unlikely they will cause me to die over the next 12 months. And so on….. Risk is always defined by your goals.

Let’s look at a simple investment scenario (assuming nil tax). If you have $10,000 now and your goal is to turn that into $20,000 in 10 years time, then anything that reduces your chance of achieving that goal is a risk. Well, to turn $10,000 into $20,000 over ten years requires an average return of 7.2% p.a. If we look at returns over all ten year periods (to month end) between 1980 and now, then the chance of falling short of our goal of $20,000 is almost 70% when invested in 3 month term deposits, but only 8% when invested in shares (diversified portfolio that broadly matches the ASX200). So which is riskier – shares or term deposits? In this scenario term deposits are much riskier. Even if we look at the worst result, the value of your $10,000 after 10 years invested in shares would have been a minimum of $15,400 and invested in 3 month term deposits would have been a minimum of $14,300. And that is before allowing for the tax benefits of franking credits on share dividends (and for some investors the benefits of capital gains tax versus tax on interest income).

Some other results over this period are shown below:

Investment $10,000 in:

Chance of falling short of goal of $20,000 Value of investment at end 10 years

Worst result

Average result

Best Result

3 Month Term Deposit





Diversified Shares 8% $15,400 $29,000


Currently, financial advisers and the broader investment community talk about risk in terms of the variability in yearly returns. On that basis, 3 month term deposits are less risky than shares, quite clearly. But if your goal is longer term than one year, then why use a one year return to measure risk? In the above scenario, 3 month term deposits are riskier on all measures – a much higher chance of failing to meet the goal, a lower worse result, a lower average result and a lower best result.

Of course, if you might need the money before the 10 years are up, then that could change things. But for many people, some or all of their superannuation funds are locked up for the long term, not just until retirement but to some extent afterwards as well. The only way to determine the risks when investing for your retirement is to properly model all of your assets, liabilities, cash flows and, of course, your goals. Modelling also needs to take into account the variability in returns for different types of investments and their correlations (how much they tend to move together).

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