The Fundamental Trade-Off ⚖️
In the world of investing, risk and return are two sides of the same coin. The relationship is simple: to achieve a higher potential return, you must be willing to accept a higher level of risk. There is no such thing as a high-return, low-risk investment. Understanding this trade-off is the key to choosing an investment strategy that you can stick with.
This information is for educational purposes and is not personal financial advice.
What is "Return"?
Return is the money you make (or lose) on an investment. It’s typically expressed as a percentage of the amount you invested. For your super, returns come from two sources:
- Capital Growth: The value of the assets (like shares or property) increases.
- Income: The assets pay you an income, such as dividends from shares or rent from property.
Your super fund’s "performance" is a measure of its investment return after fees and taxes.
What is "Risk"?
Risk is the chance that an investment’s actual return will be different from what you expected. In superannuation, it usually refers to the possibility of your account balance falling in value. This is often called volatility.
- Low-Risk Investments (e.g., Cash): Your balance will grow slowly and steadily, but it’s unlikely to fall in value.
- High-Risk Investments (e.g., Shares): Your balance can grow much faster, but it will also experience significant ups and downs. A market crash could see its value drop by 20% or more in a short period.
The risk isn't that you'll lose all your money, but that you might be forced to sell or withdraw your money during a downturn, locking in your losses. This is why high-risk strategies are generally considered more appropriate for people with a long time horizon—they have time to recover from any market dips.
Finding the Right Balance
Choosing an investment option is about finding a balance of risk and return that you are comfortable with.
- If the thought of your super balance dropping by 15% in a year makes you anxious, a High Growth option may not be suitable for you.
- If you have 30 years until you retire, a very Conservative option might not generate the growth you need to fund your retirement adequately.
Thinking about your time horizon (how long until you retire) and your risk tolerance (how you feel about market volatility) can help you understand which investment strategy might be a good fit.