Investment risk is the possibility you may lose money on your investments or that your investments may not keep pace with inflation.
All investments carry some level of risk, but the level varies depending on the type of investment.
Generally, there’s a higher level of risk for investments with the potential to deliver higher investment returns, such as growth assets. Similarly, there’s generally a lower level of risk for investments with the potential to deliver lower investment returns, such as defensive assets.
Common risks associated with investing
Changes in investment markets, economies, and social and political environments affect different investments in different ways and can cause them to rise or fall in value.
Your investment could decline in value.
Some investments (such as property) take longer to buy or sell.
Changes to inflation, interest rates or currency prices
This can affect all investments: shares, property, infrastructure, fixed interest and cash.
Investment returns are what you could earn or lose on your investment. The amount is usually expressed as a percentage per year, for example 5% per annum.
Investment options that aim for high returns will have higher risk, so their actual returns may be more volatile in the short term. But over the long term they’re more likely to achieve higher returns.
More conservative investment options are less risky in the short term, but over the long term their returns are lower.
The higher the level of risk associated with an investment, the longer you’ll generally need to keep that investment to:
- reduce the impact of that volatility
- increase the chance of benefitting from the investment’s potentially higher returns.
For example, the value of shares tends to fluctuate in the short term – they often go up and down over a week, month or year. However, this value fluctuation usually diminishes greatly over five to seven years and longer.
Investing for the long term
Time plays an important role when it comes to investing. As a general rule, it’s your time in the market, not your timing of the market, that gives you the greatest chance of good long-term returns.
Some people try to time markets by predicting when they’ll go up or down and then changing their investments at short notice. This strategy may not deliver good returns over the long term.
Risks with short-term investing
Market movements can be unpredictable
It’s difficult to accurately predict short-term market movements. Investment markets are influenced by a range of factors, such as interest rates, inflation, exchange rates and the economic outlook.
Getting the timing right is tricky
If you change your investments in response to market movements, you’re often responding after the event. By switching an investment option that’s declining in value into an option that‘s reaching its peak, you’re more likely to lose money.
Boost your super with compound interest
Your super is made up of money invested over your working lifetime that will need to sustain you for decades in your retirement. Fortunately, the longer you invest your super, the more time you’ve got to take advantage of compounding.
Compounding is investment returns earned on your investment returns.
It happens when you reinvest your positive investment returns (reinvestment happens automatically with super) instead of withdrawing and spending them (which you can generally do with other, non-super investments). Your savings accumulate faster, all the while increasing your potential to earn more returns on your growing savings pool.
So, the younger you are when you start saving for your retirement, the more time you’ll have to benefit from compounding before you retire.
An example: Sue and Ewen
|Starts investing at age||25||
|Invests until age||60||60|
|Investment timeframe||35 years||20 years|
| Investment per year
||$2,000 per year||$5,000 per year|
|Total additional amount invested||$70,000||$100,000|
|Investment value at age 60||$372,204||$247,115|
For the purpose of this illustration, the modelling assumes an investment return of 8% p.a. No allowance has been made for taxation or investment fees and charges. Lower investment returns and/or periods of market volatility, and the factoring in of taxation or investment fees and charges would affect the analysis and could change the comparison. Both contributions ($2,000 each year and $5,000 each year) are assumed to be after-tax contributions. This example is for illustrative purposes only and does not relate to any of UniSuper’s investment options. Figures are nominal values and have not been adjusted to reflect the likely impact of future inflation.
Sue invested less, but ended up with more
Sue invested $2,000 each year (less than $40 a week). Ewen invested $5,000 each year.
Even though Sue invested less money in total than Ewen, Sue has $125,000 more than Ewen.
Why? Sue had more time. Sue's 15-year head start meant that her money had more time to benefit from compound interest.
Understand the impact of inflation
The Consumer Price Index (CPI) measures the cost of living in Australia. Inflation is a term used to describe a rise in the cost of living.
Over the time your super is invested, the cost of living will generally rise. While $1 might have bought you a litre of milk 15 years ago, due to inflation you’ll need more than $3 to buy exactly the same thing today.
Real return = investment return − CPI
Given you want your investments to grow in value over time, it’s important to ensure their growth rate outpaces growth in CPI. Otherwise, while the dollar amount of your balance may increase over the years, the actual buying power of your investment might not.
So, when we talk about the ‘real return’ from an investment, we’re talking about the return over and above inflation. As a minimum, you want your returns to keep pace with inflation. Ideally, to make real gains from your investment, the returns need to outpace inflation.
Our investment options aim to outperform CPI by a specific percentage (or more) each year. Exceptions to this are the Cash, Australian Bond and Australian Equity Income options, which target different types of objectives.