When most people hear the word risk, they immediately think about the share market falling.
While investment markets certainly experience ups and downs, market volatility is only one type of financial risk. In reality, there are several different risks that can affect your financial future, and understanding them is an important part of making informed financial decisions.
At Apex Financial Services Group, we regularly help individuals, families, current ADF members, and veterans understand the risks they face and how those risks fit into a long-term financial strategy. Rather than trying to eliminate risk altogether, successful financial planning focuses on managing risk in a way that aligns with your personal goals, timeframe, and circumstances.
Let’s look at three of the most common types of financial risk.
1. Investment Risk
Investment risk refers to the possibility that the value of your investments may rise or fall over time.
Financial markets naturally fluctuate due to many different factors, including:
- Interest rate changes
- Inflation
- Economic conditions
- Company performance
- Political events
- Global conflicts
- Investor confidence
These movements are completely normal. Whether you invest in shares, managed funds, ETFs, property or superannuation, periods of growth and decline are expected.
For many investors, short-term market falls can feel uncomfortable. However, history has consistently shown that markets have recovered from recessions, financial crises, pandemics and other major events over the long term.
This is why investment decisions should always be made with your investment timeframe in mind rather than focusing on day-to-day market movements.
Risk and Return Go Together
One important concept to understand is that higher potential returns generally come with higher levels of risk.
For example:
| Investment | Typical Risk | Potential Return |
|---|---|---|
| Cash | Low | Low |
| Term Deposits | Low | Low |
| Bonds | Low to Medium | Moderate |
| Property | Medium | Moderate to High |
| Australian & International Shares | Medium to High | Higher over long periods |
Choosing the right mix of investments depends on your financial goals, income needs, time horizon and tolerance for risk.
2. Inflation Risk
Inflation is often called the “silent wealth killer.”
Inflation risk refers to the possibility that your money loses purchasing power over time because the cost of goods and services continues to increase.
For example, if inflation averages 3% per year but your savings only earn 1%, your money is effectively going backwards in real terms.
Although your account balance may appear to be growing, it may actually buy less in the future than it can today.
Why Inflation Matters
Consider everyday expenses:
- Groceries
- Fuel
- Electricity
- Insurance
- Healthcare
- Housing
These costs rarely stay the same over long periods.
This is particularly important for retirees and those planning for retirement, as income needs to continue supporting their lifestyle for decades.
One reason many long-term investors include growth assets in their portfolios is because they have historically provided returns above inflation over extended periods.
3. Behavioural Risk
Behavioural risk is arguably one of the biggest threats to long-term investment success.
Unlike investment risk or inflation risk, behavioural risk comes from our own decisions.
Human emotions can strongly influence financial choices, especially during periods of uncertainty.
Common behavioural mistakes include:
- Selling investments after markets have fallen
- Trying to predict market highs and lows
- Investing because everyone else is
- Chasing the latest investment trend
- Constantly changing investment strategies
- Letting fear or excitement drive financial decisions
These reactions are natural, but they can significantly reduce long-term investment returns.
Why Emotions Can Be Expensive
Imagine an investor who sells their investments during a market downturn because they’re worried losses will continue.
If markets recover shortly afterwards, they may miss much of the rebound. In many cases, the biggest losses don’t come from the market itself, they come from making emotional decisions at the wrong time.
Remaining invested through periods of volatility has historically produced better long-term outcomes than attempting to time the market.
Understanding Your Personal Risk Tolerance
Every person’s attitude towards risk is different.
Factors that influence your risk tolerance include:
- Your age
- Your financial goals
- Your investment timeframe
- Employment stability
- Family commitments
- Existing savings
- Previous investment experience
For example, someone saving for retirement over the next 30 years may be comfortable with more market volatility than someone who plans to retire within the next two years.
This is why there is no one-size-fits-all investment strategy.
Building a Balanced Financial Strategy
Good financial planning isn’t about avoiding risk altogether.
Instead, it’s about understanding which risks matter most and putting strategies in place to manage them.
This may include:
- Diversifying investments across different asset classes
- Maintaining an emergency cash reserve
- Investing with a long-term perspective
- Regularly reviewing your financial plan
- Avoiding emotional investment decisions
- Ensuring your investment strategy matches your goals
A diversified portfolio cannot eliminate risk completely, but it can help reduce the impact of any single investment performing poorly.
Why Professional Financial Advice Can Help
Making financial decisions can feel overwhelming, especially during periods of economic uncertainty.
Professional financial advice can help you:
- Understand the risks you face
- Develop an investment strategy suited to your goals
- Stay focused during periods of market volatility
- Build long-term wealth with confidence
- Make informed financial decisions rather than emotional ones
At Apex Financial Services Group, we work with individuals, families, serving Defence members and veterans to create personalised financial strategies designed around their unique circumstances and long-term objectives.
The Bottom Line
Risk is an unavoidable part of investing, but it doesn’t have to be something you fear.
Understanding investment risk, inflation risk, and behavioural risk can help you make better financial decisions and remain focused on what truly matters: achieving your long-term financial goals.
Rather than reacting to short-term market movements, successful investors understand that staying disciplined, diversified and focused on the bigger picture is often the key to long-term success.
If you’re unsure whether your current financial strategy matches your goals, seeking professional financial advice can provide clarity and confidence for the years ahead.
Frequently Asked Questions
What is financial risk?
Financial risk is the possibility that something may affect your financial position or prevent you from achieving your financial goals. It includes investment risk, inflation risk, behavioural risk, interest rate changes, and other economic factors.
What is investment risk?
Investment risk is the possibility that the value of your investments may increase or decrease over time due to market movements and economic conditions. While market volatility is normal, investing with a long-term perspective can help manage these fluctuations.
Why is inflation considered a financial risk?
Inflation reduces the purchasing power of your money over time. If your investments or savings don’t grow faster than inflation, your money may buy less in the future than it does today.
What is behavioural risk in investing?
Behavioural risk occurs when emotions influence financial decisions. Examples include panic selling during market downturns, chasing popular investments, or making impulsive financial choices based on fear or excitement.
Can financial risk be eliminated?
No. All investments involve some level of risk. The goal of financial planning is not to eliminate risk but to understand, manage and balance it according to your personal goals and circumstances.
Why is understanding financial risk important?
Understanding financial risk helps you make informed decisions, avoid emotional investing, protect your purchasing power and build a financial strategy that supports your long-term objectives.