Property Investment
6 min read
Author: Louis Fraysse
Louis is a registered financial adviser with an MBA from Massey University.
Reviewed by: Ben King
Ben has 14 years of experience as a mortgage advisor and background as an investment adviser.
When people talk about risk in investing, it often sounds vague and fluffy.
You’ll hear things like, “I’m a conservative investor” or “I just don’t like taking risks.”
But what does that actually mean? And more importantly – how do you know if you’re taking too much risk… or not enough?
Because here’s the truth: risk isn’t just something you feel. It’s something you can measure, manage, and use to your advantage.
In this article, you’ll learn the three types of risk every investor needs to understand – and how each one shapes the decisions you make with your money.
Risk tolerance is what most people think about when they say they’re “low risk” or “conservative.”
It’s your emotional reaction to risk.
Can you sleep at night if your investment drops 15% in value? Or will you panic and sell?
Investments, especially growth assets like shares or property, go up and down in the short term. Us financial advisers call those ups and downs volatity.
An aggressive managed fund will have more volatility than a defensive one – but it also tends to offer higher long-term returns.
If you’re comfortable with those ups and downs, then you have a higher tolerance for risk.
If those fluctuations stress you out, then you have a lower tolerance for risk.
But remember, while your tolerance tells you what you’re comfortable with, it doesn’t tell you how much risk you should take. We’ll get to that shortly.
Your risk capacity tells you if you can withstand a loss (or a bad year). And that’s from a money perspective.
So if things go pear-shaped (e.g. you lose your job), do you have a buffer? Or would you need to sell your shares and properties early?
Let’s walk through another example. Let’s say you're investing in a property.
If interest rates rise or your tenant moves out, can you cover the mortgage for a few months? If yes, you’ve got more capacity to handle those risks.
If not, your risk capacity is lower.
This matters. You might have a high tolerance for risk. But if your capacity is low … then should you really be taking that risk?
Many people overestimate how much risk they can afford to take, just because they feel confident. That can lead to disaster.
On the other hand, some people aren’t comfortable with taking risks, but they really could handle them.
How do you find the right balance? You’ll find that out below.
Risk need is the third type of risk. And it often gets overlooked.
Risk need is about your financial goals. If you want to retire in 15 years with a $1 million nest egg, what return do you need to get there?
If you don’t have much money to invest (and can’t afford to invest more), you might need a higher return. Higher returns often come with higher risks.
So if you need a bigger return, your risk need is higher. So if you want to grow your wealth, you often have a higher need for risk.
Sure, you might want to take low risk.
But if you don’t have enough money saved or enough time on your side, you may need to take more risk to have any shot at reaching your goal.
It’s confronting, but it’s crucial.
But what if it’s the other way around? What if you’ve already built some wealth? Again, you might have a high tolerance for risk. But your need for a high return (and therefore high risk) might be lower.
| Risk Type | What it tells you |
|---|---|
| Tolerance | The risk you feel comfortable with |
| Capacity | The risk you can afford to take |
| Need | The risk you need to take to hit your goals |
Let’s go through a few examples to see how these three types of risk come together.
A friend of mine wants to become a property developer.
The dream? Build big, take risks, and make millions.
The problem? He’s starting with next to nothing – no cash, no real savings.
To get going, he plans to take on serious debt. That means complex loan structures, steep interest rates, high fees – the works. In short, he’s going all in.
This friend has a high risk tolerance – he’s not afraid of big ups and downs.
He also has a high-risk need. He wants to make a lot of money. He wants a high return. And that means taking more risk makes sense.
So you might think: “Great, this is exactly the sort of person who should take a lot of risk.”
But here's the catch: can he handle those big risks? The truth is that his risk capacity is low.
If a project runs over budget or takes longer than expected (which is common in development), he doesn’t have the buffer to survive it.
So while his gut says “go for it. Take big risks.” The reality is that he should take a little less risk than he would usually want to (given his tolerance).
This is the classic case where risk tolerance can be misleading.
Just because you’re willing to take risk doesn’t mean you can afford to. He wants to take a 5-out-of-5 risk, but realistically, he shouldn’t.
Now, let’s look at the opposite scenario.
Imagine a 50-year-old couple. They both earn around $80–90k. Their kids are just about to leave home.
Their house is nearly fully paid-off. Their mortgage is low. And they want to retire in 15 years (at 65), living on $80k per year.
They’re conservative by nature. They don’t like risk. They have a low risk tolerance.
Investing makes them nervous because they’ve never done it before. But here’s the twist: their risk capacity is reasonable.
Their expenses are low, the mortgage is manageable, they have some savings. And with the kids gone, they’ll have more spare cash.
So they can afford to handle a few bumps in the road – say, an unexpected repair or a short rental vacancy.
If they only consider their risk tolerance, they might not take any risk at all.
But they should challenge themselves on that.
Because they can handle some of those ups and downs. I’m not saying that they should take massive risks. But they should ask themselves: “should we take a little more risk than we usually would?”
But there’s one more factor at play. Their risk need. And it’s high.
If they keep investing how they are, they probably won’t have enough wealth to hit their retirement target.
If they only invest in low-risk, low-return assets (like defensive funds), they’d need to save over $1,000 a week. That’s based on our modelling at Opes Partners.
That’s probably not realistic.
So, even though their instinct is to play it safe, they should consider taking on more risk than they would initially think.
The conversation around investment risk is often 1-dimensional. “How much risk do you like?”
But investors should look at it through all 3-dimensions:
When you think about all 3, you can decide how much risk you really should be taking.
You might have a high tolerance for risk. But if you already have built wealth, you might not need to take on more risk.
So if you just listen to your risk tolerance … you might take on more risk than you really need to or ‘should’.
But, what if you have a low tolerance, but can handle risks and need to take some to reach your goals? Then you might consider taking a but more risk than you naturally would.
Louis is a registered financial adviser with an MBA from Massey University.
Louis is a registered financial adviser with an MBA from Massey University. He's also a property investor and a father. So he understand firsthand what it's like to balance family, investments, and long-term financial goals. Louis is based in Auckland.
