How much risk are you taking with your Superannuation?
By Matt Ireland, Evolution Financial Planning team
You may be aware of the investments you hold within your super fund, but are you aware of the risks you may be taking? Each type of investment carries a number risks that can impact your returns and your ability to retire on your own terms.
It is important to understand that all investments carry risk, whether you are buying shares in BHP or investing in a 6 month term deposit with your local bank. The amount of risk you are willing to take determines the rate of return you are likely to receive, with higher levels of risk generally relating to higher returns. Not all investments are created equal so it is vitally important to ensure that your money is being invested appropriately and that the risks you are taking are justified by the returns being generated.
To illustrate the relationship between risk and return, let’s expand on the BHP and term deposit example. When you purchase shares in a company like BHP you take on many of the risks that this business faces. These may include increasing competition, a breakdown of equipment or changes to laws and legislation. The BHP share price can be heavily influenced by these types of events which leads investors to seek greater compensation for bearing these risks in their own portfolios. This compensation comes in the form of dividend payments and an increasing share price.
Cash based investments like term deposits are not without their risks either. When you purchase a term deposit, you lock away a portion of your money for a set period of time and in return you receive a guaranteed rate of interest. This rate is typically higher than the rate offered by savings accounts as you are taking the risk that you will not be able to access your money until the full term has expired. Additionally, when you lock in an interest rate for the duration of the deposit, you are unable to change that rate even if the bank raises their interest rates the next day. These risks are relatively minor when compared to the business risks faced by a large company such as BHP. As such, you can expect to receive a higher rate of return on a BHP share over the long term than you can from a term deposit as you are taking on a greater number of risks.
So how much risk should I be taking with my super?
There is no “one-size-fits-all” rule that can determine how much risk you will be comfortable with. You need to ask yourself a number of important questions that will help you define your individual needs, starting with:
· What is the value of your current super savings?
· How many years will you continue to work before retirement?
· What kind of lifestyle would you like to have in retirement?
Answering these questions will give you an idea of the amount of money you will be able to save leading up to retirement and how much you can spend once retired. From here, you can determine if you need to take a greater number of risks in order to meet your savings goals, or if you can lower your exposure to risk knowing that you can comfortably retire with what you have.
Taking extra risks with your investments can mean that your money is more susceptible to market downturns and negative news. However, it can also help you achieve a more comfortable retirement than if you were hiding your money under the pillow. It is important to discuss the implications of risk with a professional so that you can make a plan for the future that is tailored to your individual needs.
If you would like to know more about the risks of investing and how to use your super fund to build for retirement, get in touch with us at Evolution so we can point you in the right direction. For an obligation free meeting call us on (02) 4903 1111.