Understanding risk and return

Understanding the relationship between risk and return and how it’s affected by time is probably one of the most important aspects of investing your super or pension.

Risk and return plays a big role in how much super you’ll have when you retire or how much pension income you can draw. So, understanding how they work—and your attitude to risk—can help you make investment decisions that best meet your financial needs and goals.

Investment risk and return

Risk

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 risk. However, the level of risk varies depending on the type of investment.

Generally, investments considered to carry higher levels of risk are those that have the potential to deliver you higher investment returns, like growth assets. Similarly, investments with the potential to deliver you lower investment returns, like defensive assets, generally carry lower risk levels.

Risk can come from a range of sources depending on the type of investments you hold. For example, changes in investment markets, economies, and social and political environments, can affect different investments in different ways and cause them to go up or down in value.

The most common types of risk associated with investing include financial losses, liquidity and changes to inflation, interest rates or currency prices, as well as other investment-specific risks.

Return

Investment returns are the amount you may earn or lose on your investment. The amount is usually expressed as a percentage per year.

As risk and return are fundamentally linked, the greater an investment’s potential to achieve higher returns, the greater the risk associated with it.

How time affects risk and return

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 tends to give you the greatest opportunity to maximise your potential to achieve superior long-term returns.

Long-term investing

When investing your super, you’re generally investing for the long term. This means short-term fluctuations in the value of your investments may not necessarily have a big impact on your balance over time depending on your investment time frame.

Your risk profile

Before you invest your retirement savings, you need to understand your risk profile. In other words, you need to decide how comfortable you are with risk and how much risk you’re prepared to take to achieve the returns you want.

For example, would you be comfortable if the value of your investments went up and down over the short term? Or, would you prefer more consistent returns over time? Understanding how different asset classes work can help you decide which investment options suit your risk profile and financial goals.

However, you still need to think about your appetite for risk and the amount of time you expect to invest your super. Generally, the longer your investment horizon, the lower the impact that risk or any market volatility may have on your final super balance and the more time you have to ride out the variability of returns in the short term. On the other hand, if you expect to make high returns, you’ll need to accept high levels of risk.

Learn more about investing for the long term.

Get in touch

If you would like more information about investment risk and return, contact us.

For help with choosing the right investment option for you, contact UniSuper Advice to speak to a financial adviser.