Almost every type of investment carries some level of risk. Generally speaking, the greater the risk, the higher the potential returns.
Your super is usually made up of different kinds of investments (called asset classes) and they all have different levels of risk:
The most common asset classes are:
- Shares (also known as equities). Shares give you part ownership of an Australian or international company and earn dividends through capital growth. Shares are generally considered a higher-risk asset because they’re susceptible to market fluctuations, but they can also provide higher returns over the long term.
- Property securities. Property securities are common in super portfolios. Rather than investing in direct property, property securities invest in commercial, retail and industrial property holdings via the share market. They’re considered a higher-risk asset with high potential returns over the long term.
- Fixed interest. The most common types of fixed interest investments are bonds. They’re issued by governments and large corporations when they want to raise money – for example, to fund a government or business initiative. They typically pay regular interest over a fixed term – anywhere between one and thirty years. Bonds are considered low risk, low return investments.
- Cash. This can include money held in short and medium-term investments that earn interest, such as term deposits, bank bills and treasury notes. Their value is impacted by changes to the interest rate. These types of investments are considered very low risk because their returns are generally low but stable.
The higher your allocation to riskier investments, such as shares and property securities, the more likely it is that you’ll experience market volatility – and this will be reflected in your super balance. You’ll also have the potential to receive higher returns over the long term.
On the other hand, if your super portfolio has a higher allocation to low-risk investments, like cash and fixed interest, you’ll probably experience less market volatility and therefore less fluctuations in your super balance. However, you’ll most likely receive lower returns over the long term.
Everyone is different and you need to decide how much risk you’re willing to accept in your super. This might change through-out your lifetime. For example, you might find that you’re less comfortable with risk as you approach retirement, because you have less time for your super to recover from short-term fluctuations.