The relationship between risk & return
Generally, growth assets like shares and property will provide greater returns over the longer term than defensive assets like fixed interest and cash. The trade-off is the higher short-term risk of loss associated with achieving these higher returns. So, with investments that canrise or fall in value, there is the risk of the value of your investment falling over some periods of time. But if you choose investments to avoid this possibility, you could face another risk.
Choosing overly conservative investments could mean your long-term returns don’t keep pace with inflation and the purchasing power of your money actually goes backwards. Or, you could find your returns underperform other investments meaning you have missed the opportunity to make more from your investment.
The key to successful investing is to find a comfortable balance of risk and return to suit your particular long- and short-term needs.
Some of the key risks to be aware of are explained below.
| Type of risk | How it can affect the value of your super |
|---|---|
Volatility |
Volatility, or the short-term fluctuations in the value of your investment, is the risk most commonly considered. Volatile investments tend to rise or fall over the short term. If you know that over the long term the value should rise, short-term fluctuations in price may be of less concern. |
Inflation risk |
The risk of not earning enough on your investments to keep ahead of inflation. |
Currency risk |
The risk that the value of your investment will be affected by changing currency exchange rates. |
Interest rate risk |
The risk that, if interest rates rise or fall, the value of your investment will change. |
Legislative risk |
The risk that governments may change legislation, which in turn may affect your investment. |
Market risk |
The risk that the market as a whole declines, not just a specific asset security, leading to a change in the value of your investment. |
Security specific risk |
The risk that a specific investment declines sharply in value, for example through bankruptcy of a company. |
Economic and political risk |
The risk that when countries and regions are shaken by political change, economic crisis or war, the value of your investment can be affected. |
Opportunity risk |
The risk of missing out on an opportunity to invest in assets with greater potential for growth, by tying your money up in other investments. |
Learn more about diversification and how it can manage risk
