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Understanding the returns of conservative options

While it’s easy to think a lower return means an investment option has underperformed, that’s not necessarily the case for conservative options.

What are conservative options, what do they invest in and what does that mean for the financial returns they deliver to investors? Below, the CFS Investments team explores some of the characteristics of conservative options and explains what it really means to be invested in one.

First, what is a ‘conservative’ option?

A conservative investment option gets its name from the kind of investments it has and the type of strategy that’s employed for managing those investments – that is, conservative with lower risk. The primary aim of conservative investment options is to provide stable returns for – rather than seeking strong growth of – an investor’s money.
For this reason, conservative options tend to be favoured more by investors who are in or approaching retirement as their capacity or timeframe for working to recover financial losses through investing is more limited compared to investors who have decades to retirement.

What investments are in conservative options?

One of the things that makes an option conservative is how much exposure it has to lower-risk versus higher-risk investments. Conservative options tend to have more exposure to lower-risk defensive investments like cash and bonds –generally between 70%–80% of the option. The remaining 20%–30% of the option may include exposure to higher-risk investments like shares. Why? Defensive investments with lower risk can offer some stability and tend to experience less volatility than growth investment options. However, by diversifying its investments to include some higher-risk investments, a conservative option can increase its ability to generate returns and potentially capitalise on market movements by being exposed to other areas of investment markets.

Understanding risk and return

When it comes to investing, there is a link between risk and return – that is, the higher the risk, the higher the potential return. In the context of conservative investment options, this means that with lower-risk defensive investments like cash and bonds, a conservative investment option is likely to deliver lower returns over time than a growth investment option which has higher-risk investments.

How to tell if an option has underperformed

It’s important to understand that lower returns don’t necessarily point to poor performance –particularly when it comes to conservative options. That’s because the nature of conservative options is to help maintain investors’ money by investing it in lower-risk investments (which generate lower returns). To understand how an option has performed, it can help to consider:

  • the option’s investment objectives, which are usually outlined in the relevant Product Disclosure Statement (or PDS)
  • keeping up to date with investment communications (like quarterly updates) to understand how the option has performed over a given period and whether it has met its objectives
  • speaking to a financial adviser, who can use their knowledge and tools to analyse different investment options, and help investors determine whether an option is right for them
  • looking at the option’s performance over a longer period – generally over three and five-year timeframes. Remember: investing can be for the long term. Financial markets fluctuate on a regular basis, causing the value of investments to rise and fall and rise again – sometimes within short timeframes. By looking beyond short-term market movements, investors can get a more reliable picture of how an investment option has weathered those changes and performed over time. Note that past performance is no indicator of future performance.

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Colonial First State has been helping Australians with their superannuation, investment and retirement needs for more than three decades. During this time, the Investments team has drawn from more than 300 years’ combined experience to help our customers achieve their individual retirement goals – no matter the state of markets. Read the team’s timely market updates and other helpful resources on investing to stay up to date on the latest market developments.

Disclaimer

Information on this webpage is provided by Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 (AIL) and Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL). It may include general advice but does not consider your individual objectives, financial situation, needs or tax circumstances. You can find the Target Market Determinations (TMD) for our financial products at www.cfs.com.au/tmd, which include a description of who a financial product might suit. You should read the Financial Services Guide (FSG) available online for information about our services. This information is based on current requirements and laws as at the date of publication.

Tax considerations are general and based on present tax laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.

AIL and CFSIL are not registered tax (financial) advisers under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise under a tax law.