Every investment carries a level of risk. There are different types of investment risk that can affect returns from your super. Understanding what they are can help you decide the level of risk that’s right for you.
Investment risk is the chance that the return of an investment is different from what’s expected.
All investments carry risk. The level of risk depends largely on the type of investments (we call these asset classes) you’re invested in.
Generally, investments with potentially high long-term returns, like shares, carry more risk. This is because they can go up and down in value significantly in the short term.
Investments which are more likely to deliver lower returns are considered lower risk. They are typically more stable in the short term. But they usually don’t produce high long-term returns either.
You can control some of your risk depending on the types of investments you choose.
How long your money will be invested for is important when it comes to investment risk. If you're still a long way off retirement, you're investing for the longer term. During that time, the market will hit rocky patches. Having a longer investment timeline means you can ride out short-term market falls.
If you’re closer to retirement, you might choose more conservative investments. This can help to cushion your super balance from large market falls.
All investments carry some risk. And you need to take some risk to grow your super balance over time.
When you combine different investments to create a portfolio you typically reduce risk. This is because not all investments go up (or down) at the same time. Sometimes, when one investment goes down, another goes up. This means returns from your portfolio overall could be more stable.
Combining investments in this way is called diversification.
There are a number of different types of investment risk. They relate to the short, medium, and long term.
Investment risk will impact you differently depending on your investment timeline. Your investment timeline is the amount of time you have until you retire and access your super.
Although it may seem daunting, risk is a necessary part of investing. In fact, you can use risk to your advantage when it comes to investments. But whatever you do, it’s important to make sure the level of risk you take on is right for you.
How comfortable you are with taking risk will likely influence the way you invest. Your attitude to risk might also change as you approach different stages of life.