Risk and return
Every day we see news about sharemarkets and their movements. They rise and fall. When investing in super there will always be some element of risk involved, such as the possibility of losing some of your money. There is also the risk that your investment won’t keep up with inflation.
Here are some types of investment risks and how they could affect your super investment.
Negative earning rates
In the short term, your account balance may go backwards with negative earning rates. Over the long term though, your account balance should increase with investment returns. Remember, super is an investment that spans over 40 years of working life, and beyond.
There is a possibility you won’t earn enough to keep the balance of your account ahead of inflation. This reduces the balance of your account in ‘real’ terms.
Your account balance could be affected by changes in currency exchange rates if the fund does not invest on a hedged basis.
If interest rates rise or fall, your account balance could be affected.
Governments might change or introduce new legislation. This could affect your account balance, access to super or its tax treatment in a positive or negative way.
The entire market could decline at the same time - not just one or two types of asset classes. This could affect your account balance.
One specific investment, such as shares in a particular company, could experience a major drop in value. This risk is reduced through diversification of investments.
If countries and regions experience political change, economic crisis or war, there is a risk your account balance may be affected.
By making one investment, you could be missing out on another investment with better opportunities for growth.
By avoiding investments that do not meet socially responsible criteria, you could miss out on higher investment returns, and/or increase risk. This is because socially responsible criteria limit the pool of investments an investment manager can select from. What's more, the additional costs associated with socially responsible investing can be significant.