Content provided by Defence Housing Australia
No investment is completely risk-free, which is why diversification is the name of the game.
The choices you make around superannuation investments can have a big impact on the size of your nest egg.
After all, superannuation is one of the biggest investments you’ll make in your lifetime. All working Australians contribute to its success, too: the country’s super assets totalled $2.9 trillion at the end of the September 2019 quarter, up 7.1 per cent on the previous year.
But while investing can be a daunting prospect, there are ways to mitigate your risks to ensure your retirement savings provide the lifestyle you want. A crucial element in growing your self-managed superannuation fund (SMSF) is making sure you diversify your investments, thus reducing your overall risk.
Spreading the love
Choosing a suitable investment strategy for your super will determine how much money you retire with, so it’s essential that you choose the right strategy.
Diversification helps you ride out the ups and downs of financial markets by spreading your money across various asset classes. This approach leaves you less exposed to economic fluctuations, so if one business or sector you’ve invested in isn’t performing well, you won’t lose all your money.
Also, bear in mind the volatile nature of ‘high risk, high growth’ options can be offset by more conservative investment options that yield a lower return. You should try to diversify across asset classes, industry sectors and geographic regions.
What’s the risk?
A key part of the decision-making process is understanding the level of risk involved with a particular investment and whether the potential returns justify the risk.
How much risk you’re willing to take on will depend on a number of factors, including your:
- current age
- expected timeframe to retirement
- expected level of income at retirement
- other sources of investments outside of super
- risk-tolerance levels
How can I diversify?
The key to creating a diversified portfolio is to invest in a range of asset classes, such as investing in bonds, property and shares – while also leaving some of your super savings in the fund so you can enjoy the wonders of compound interest down the track.
You can diversify your investments in the following ways:
- Invest in different markets; Different markets peak at various times, so it will reduce your exposure to a single market.
- Invest in different industries: Different industries grow at different rates, so having a spread of investments in a range of industries will help protect you from any market crashes.
- It’s all about timing: Selling and buying investments before a big drop, or sell before the price peaks. It pays to speak with your financial adviser about the best time to buy and sell.
Whatever investment you opt for, remember that investing can be a risky business. You’ll need to educate yourself before dipping your toe in the waters.
It’s also worth reminding yourself that all investments take time to mature. A long-term investment is considered to be around 10 years, which will offer a higher chance of maximising your return.
On the other hand, a short-term investment is a stock you expect to hold for three years or less before selling and converting to cash.
It’s often a long-term process that requires patience. Make sure you go into any investment with your eyes wide open and remember that you shouldn’t expect to make big returns overnight.