There is generally a close relationship between the level of investment risk and the potential level of growth or investment returns over the long term.
Investment risk is generally thought about in terms of the likelihood that the value of an asset will decrease, or in the case of returns for an investment option, that they will be negative. As a general rule of thumb, the higher the potential for an asset to increase in value, the higher the level of investment risk.
What this means is that asset classes or investment options that aim for higher returns in the long term are generally more likely to change in value, potentially in a negative way, more frequently in the short term.
But investment timeframe can also be a factor in the risk/return relationship – the longer you hold an investment, the more likely it is the effect of short-term rises and falls in value are smoothed out over longer periods of time.
When you consider the features of different investment options, you’ll generally see this relationship in the option’s investment objective, risk level, suggested investment timeframe and asset class allocation.
Investing across a range of asset classes, also known as diversification, or investing in diversified (pre-mixed) investment options may reduce your overall risk exposure.
As with any investment product, your super account is subject to certain risks. Each of our investment options has a different investment objective, asset mix and investment fee, and therefore may be subject to varying risks. Some of the significant investment risks include:
Find out more about some of the ways to manage investment risk.
The Reference Guide: Invest your account also includes more information about understanding and managing risk.
In this short video, financial educator and commentator Nicole Pedersen-McKinnon talks about the importance of understanding risk and return with investments. (Source: ASIC MoneySmart)
Use this online tool to test your knowledge of the various aspects of investment, such as risk, return, diversification and product styles. (Source: ASIC MoneySmart)