Understanding your
investment risk profile

Risk & return

Understanding the relationship between risk and potential reward is the cornerstone of investing.

One of the central investment concepts is the positive relationship between the level of risk of an investment and its expected level of return — the higher the risk, the higher the expected return. Although most investors prefer low risk, the risk/return trade-offThe principle that higher potential returns come with higher risk. Investors must decide how much uncertainty they are willing to accept in exchange for greater reward. can limit the potential for higher returns.

Investment volatility

Volatility describes how much an investment's value moves up and down over time.

VolatilityA measure of how much an investment's returns vary over time. High volatility means larger swings — both up and down — in the value of your investment. is the difference between the returns you expect to receive and the returns you actually receive. A common measure is standard deviationA statistical measure showing how spread out returns are around the average. A higher standard deviation means returns vary more widely — indicating greater risk., which shows variation from the average expected return.

Diversification

Spreading investments across different asset types can reduce risk without necessarily sacrificing return.

DiversificationThe practice of spreading investments across different asset classes, sectors, or geographies to reduce the impact of any single investment performing poorly. works by selecting a mix of different investments — types of assets, fund managers with complementary styles, and markets. When one asset class falls, others may hold steady or rise, smoothing out overall returns.

The importance of time frames

Time is one of the most powerful tools available to an investor.

Annual returns from growth assets can fluctuate significantly. However, over the longer term, the expected range of returns narrows considerably. Select a portfolio below to see how the expected range narrows the longer you stay invested.

Gearing — what is it?

Gearing means using borrowed money — or a structure that behaves like borrowed money — to increase your exposure to an investment.

Most people invest expecting that markets will rise over time. Historically, that's been true — but growth can be slow, uneven, and sometimes painfully volatile. Gearing is built on a simple idea: what if we could turn the volume up on market returns?

Instead of owning $1 of shares, a geared investment might give you exposure to $1.50 or even $2.00 worth of shares for every $1 you put in. That extra exposure is borrowed — inside the investment, by the fund, or separately against an asset like your home.

Internally geared funds

An internally geared fund borrows money on behalf of its investors to increase market exposure — without you needing to manage a loan personally.

With a standard investment, every dollar you put in buys one dollar of market exposure. With an internally geared fund, the fund itself borrows additional capital — so your $1 might control $1.50 or $2.00 of assets. The borrowing happens inside the structure, invisibly to you.

This has an important advantage over other forms of gearing: because you don't personally hold the debt, you cannot receive a margin callA demand from a lender to top up your account when the value of your security falls below a threshold. Margin calls can force you to sell at the worst possible time.. The fund manages its own borrowing — falling markets result in a lower unit price, not a demand for more cash from you.

Internally geared funds also carry costs that don't always appear in the headline fee — borrowing costs are built into the fund's structure and reduce net returns. These are in addition to the management fee.

Bigger ups, bigger downs — and the maths in between

With a 1.5× geared fund, a 10% market gain becomes roughly a 15% gain. A 10% market fall becomes roughly a 15% fall. But losses are asymmetric — they always require a proportionally larger recovery:

Interactive: see gearing in action

Adjust the sliders to see how a geared investment compares to an ungeared one across two market moves.

Return simulator

Move 1: +10% Move 2: -9% Gearing: 1.5×

Ungeared (1.0×)

+0.9%

$100,000 → $100,900

Geared (1.5×)

+0.9%

$100,000 → $100,900

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Spend less time managing the details — and more time enjoying what you’ve built. At Cruz, we help you plan, protect, and grow your wealth with confidence and care.

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