As your super is invested in financial markets you are exposed to investment risk.

Investment risk is the degree to which asset values fluctuate, that is, go up and down in value over time.  You should not consider investment return without considering the investment risk. Generally, the higher the potential return, the higher the risk.  In order to pursue higher investment returns you may have to be willing to take on additional investment risk.  However, taking higher risks doesn’t necessarily guarantee higher returns.  While shares and property might provide higher long-term returns than fixed interest securities and cash, they also expose you to higher levels of risk, particularly in the short-term when the value of shares and property can go either up or down significantly.

In financial terms there is also a risk of not having enough assets to provide you with the lifestyle you desire in retirement.  Therefore if you try to avoid investment risk altogether you may be required to save more for your retirement and you may miss out on the chance of your money earning more.  In fact, your investment may not even keep pace with inflation.

Your tolerance to investment risk is an important factor to consider before making your investment choice.  Everyone has a different tolerance to investment risk and you need to be comfortable with the level of risk associated with the investment option or options you choose.

Consider your investment timeframe

If you do not intend to access your money for a long time, you may be willing to accept the ups and downs in value that are associated with a higher risk option.  The longer your investment time frame, the more time you have to ride out the ups and downs.  If you have a short time frame then stability in the value of your investment may be more important to you.

Diversification may help reduce risk

Diversification limits the risk taken by spreading money across a number of different investments.  It means not having to rely on the performance of any one investment – so if one falls in value, another may perform well to make up for the decline in value.  The fund’s investment options utilise diversification by investing in a range of asset classes, across different geographical regions, then within asset classes across a range of industries and companies, and the fund employs a mix of investment managers with different approaches to investing.

Compound interest

Compounding means earning interest on interest.  Consider the impact compounding has on larger amounts and how it is possible to take advantage of compounding by contributing more on a regular basis.

$500,000

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     0        5         10       15      20       25       30       35      40

                                                Years

The above graph illustrates the effect of compound interest on a one-off investment of $10,000 where earnings continue to be reinvested.

Inflation

How much your investment grows in real terms depends on the inflation rate.