'Cash versus shares': What’s Kathryn's biggest financial risk?

"No, I don't like risk, I don't invest, I just have cash," is what Tank Stream Labs Community Manager Kathryn Lawn told me this week.

The casual coffee hall chat here at the Livewire office in Barangaroo got me thinking. What's the bigger risk, earning 4% on a risk-free savings account? Or, not investing in shares to avoid capital losses? 

First, some calculations to see different returns at various interest rates over a 10-year savings period. Then, let's think about risk, volatility, uncertainty, and luck in life or investing. 

What are they really? And how does thinking about them correctly optimise anyone's financial returns over a lifetime. 

Compound returns at 4%, 8%, and 12% over 10 years

Starting with a $5,000 deposit a 4% annual return over 10 years adding $300 a month in savings will give you $50,623 in total. 

Starting with a $5,000 deposit a 8% annual return over 10 years adding $300 a month in savings will give you $62,950 in total. 

Starting with a $5,000 deposit a 12% annual return over 10 years adding $300 a month in savings will give you $78,705 in total. 

What is risk?

From an identical initial investment and savings rate, we can see that earning 8% or 12% gives you a far higher return than 4% from a savings account. 

Turns out, the biggest risk is the fear of losing capital and excluding yourself from these returns.

Especially, as earning 8% or 12% annual returns over the long term is not unrealistic. Share markets like the S&P/ASX 200 or US Nasdaq Index regularly deliver them. 

They offer higher rates precisely because they carry the risk of capital losses, so investors demand greater returns in compensation.  

Here's some ways to think about risk. In roulette you can measure risk. There are 18 black and 18 red numbers for 36 in total, plus a 0 that is neither colour for 37 numbers. The 0 puts the odds in the house's favour if you only ever bet on black or red. 

For any player it's possible to map out the exact mathematical risk of winning or losing wherever they gamble on each roll of the ball. The 0 means the longer you play, the more mathematically likely you're to lose money. 

Now let's keep the 37 numbers, but make 18 red, 19 black, and remove the 0. 

This time you only bet on black on every roll of the ball. The maths means the more you roll the more likely you'll eventually turn a profit. 

The risk is in your favour, although in either example, if you used all your money to only bet on one colour, once, you could lose all your money. 

The same principles apply to buying a share market fund that tracks an index. Sure, you can lose money over one month, one year, or more, if you're unlucky. 

However, the more you put time on your side over a period of say or 3, 5, or 10 years, the more likely you're to turn a profit at an historical average return of say 8%. This is because time puts the risk on your side. 

Share prices follow profit growth, plus inflation related to increased money supply, over the long term.

Humans are actually hard wired to manage risk on a daily basis. For example, driving a car or going swimming is taking a risk. 

In a financial scenario, if you have $5,000 in savings almost everyone, instinctively, knows it doesn't make sense to buy 5,000 Lotto tickets for $1 each to try and win a $10 million jackpot.

The risk of losing virtually all your money is high and can even be mathematically worked out.

So a roulette game, lotto ticket, or opportunity to buy into a share market fund all risk capital losses, but at different levels, depending on your timeframe. 

Moreover, the longer the timeframe the lower risk in the share market and the more likely you're to optimise your financial returns over a lifetime. This is another reason it's great to be young.

What is uncertainty?

There's also the Keynesian concept of uncertainty, or an unknown unknown changing the future of share market returns. It's a risk that you cannot manage or assign probabilistic outcomes to as with the Lotto.

Every share market investor must accept some uncertainty as it's possible shares fall for the next 10 years, although the minimal risk of this means it's not sensible to avoid the share market on a risk-adjusted basis over the long-term. 

How to think about volatility

Many people's reluctance to invest in shares is also because they fear the way shares rise and fall in value everyday - in a phenomenon known as volatility.  

In maths, volatility is a measure of standard deviation from a mean over a given period of time and whether it should be equated with risk is a divisive topic. 

Especially, within the bitcoin community for example. 

Everyone knows bitcoin is volatile. But it's also the best-performing asset class of decent size and liquidity for the past decade. This shows volatility and risk are correlated either in terms of higher losses or profits. If you don't like volatility it's best to buy an index tracking fund as they are less volatile than individual stocks. 

Volatility is also more a measure of uncertainty than risk, or a future that cannot be assigned probabilities as with bitcoin's price direction. 

How to think about luck and investing

Luck in investing is related to timing, due to uncertainty.  As luck is inherent in the timing of whether you get positive or negative returns over the short-term in an index tracking fund.

For example, the principle of frequency distribution means if you toss a coin a 1,000 times, there's only around a 1 in 40, or 2.5%, chance it lands on heads and tails 500 times each. 

This means good or bad luck in investing, or life, is inherent and nearly inevitable. 

It will affect everyone as an investor or human in daily life. What's more important is how you react to luck as an investor, by not selling at the wrong time for example. 

More generally people that shrug bad luck in life off as inherent, will be more successful than those that dwell on it. 

Inflation, risk and saving for a house

Finally, it's worth noting many young people will save and invest as they want a deposit to buy a home. 

Notably, Australia's key inflation measure the consumer price index (CPI) data does not include price rises in residential property as in input, although these rises are often stronger than the latest CPI that was reported at 2.1% for the June 2025 quarter. 

Compare the latest "inflation data" to CoreLogic data that shows the median Australian house price grew at 6.4% over the 30 years to 2025. 

If you included property price growth as a significant input weighting into CPI inflation data it would be way higher than 2.1% or other numbers it's reported as. 

Including house price growth is not an unreasonable thing to do either given a home is likely to be by far an individual's largest lifetime expense. In fact it makes a lot of sense as an adjustment when you're thinking about the risk of holding cash versus shares after adjusting for true asset price inflation. 

It also emphasises how avoiding risk to accept too low a rate of return is not a great strategy if it hurts your true buying power. 

Still, please note the above is not necessarily conventional financial advice, or what you might be taught on a finance course or elsewhere in the media. So, everybody must make their own financial decisions. I'd also like to thank Kathryn for agreeing to shine a light on her self-confessed uncertainty around shares and personal finance. This uncertainty is not unusual in Australia today. 

Do you have an opinion on cash versus shares, or how to manage risk? Feel free to comment below. Thanks.