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 categorised as 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.
This means 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.
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: Investments also includes more information about understanding and managing risk.
When it comes to investing your hard-earned money, it never hurts to have a plan in place. Read more about how you can develop an investing plan. (Source: ASIC MoneySmart)