Risk and return
21 January 2020
There are various types of risk associated with investing in a super fund. All investments are subject to varying risks and generally all investments change in value over time.
Risks to Consider
The significant risks that relate to investing in BUSSQ are:
- Market risk
- Individual investment risk
- Interest rate risk
- Currency risk
- Liquidity risk
- Derivatives risk
- Regulatory risk, and
- Timing risk
The effect of these risks is reduced by diversification, that is, by investing you super in a wide range of different types of investments, such as those in which BUSSQ invests.
Other risks that may have an impact when investing in BUSSQ include:
- Taxation risk, and
- Insurance risk.
Because each of BUSSQ’s investment options has a different investment mix, the risks of investing in each option is different.
Things to consider
Understand investment risk
Because your super is invested in financial markets, you are exposed to investment risk. Investment risk is the degree to which returns go up and down in value over time. You cannot consider return without risk and generally, the higher the potential return, the higher the risk.
In order to achieve higher returns, you must be willing to take on more risk. While shares, property and fixed interest securities might offer higher long-term returns than cash, they also expose you to higher levels of risk, particularly in the short term. In financial terms, there is also a risk of not having enough assets or money to provide you with the lifestyle you desire in retirement. Therefore, if you try to avoid risk altogether you may in fact not save enough to provide you with the lifestyle you want in retirement. In fact, it may not even keep pace with inflation.
Think about your investment time-frame
Your investment time frame is the period between the day you begin to invest and the day you will need to use your super to live on in retirement. This period becomes very important when choosing your investment option or mix of options. Remember, your investment time frame may not necessarily end at retirement. After retirement, at say age 60, the average person can expect to live at least another 20 years. So even if you only have a short time until you retire you should consider the investment option or mix of options that will best meet your particular needs well into retirement.
If you don’t intend to access your money for a long time, you may be willing to accept the ups and downs in values that are associated with a higher risk option or mix of options. This could maximise your expected return over the long term. 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.
Understand your tolerance to Risk
Your tolerance to risk is an important factor to consider before making your investment choice. Everyone has a different tolerance to risk and you need to be comfortable with the level of risk that is associated with the investment option or mix of options you choose. You don’t have to make investment decisions on your own, BUSSQ and Skylight Financial Solutions can help you understand your risk tolerance.
Diversification helps reduce Risk
Because you cannot tell how each asset class will perform over a future period, diversifying or spreading your investments across a range of asset classes has the potential, over time, to smooth out the ups and downs associated with the returns on your investment. The risk/return profile of each of BUSSQ’s investment options is determined by how much is allocated to growth assets relative to defensive assets. The greater the proportion of growth assets, the riskier the investment becomes, but similarly, the greater the potential return over the longer term.
A standard risk measure for investment options has been developed for super funds to make it easier for you to compare investments options (both within and across super funds). The numeric measure is based on ‘how likely will there be negative annual returns over a 20 year period’.
There are seven risk bands and they are as follows:
|Risk band||Risk level||
Estimated number of negative annual returns
over any 20 year period
|1||Very low||Less than 0.5|
|2||Low||0.5 to less than 1|
|3||Low to medium||1 to less than 2|
|4||Medium||2 to less than 3|
|5||Medium to high||3 to less than 4|
|6||High||4 to less than 6|
|7||Very high||6 or greater|
The Standard Risk Measure is based on industry guidance to allow you to compare investment options that are expected to deliver a similar number of negative annual returns over any 20 year period. The Standard Risk Measure is not a complete assessment of all forms of investment risk, for instance it does not include details of what the size of a negative return could be or the potential for a positive return to be less than you may require to meet your objectives. Further, it does not take into account the impact of administration fees and tax on the likelihood of a negative return.
You should still ensure you are comfortable with the risks and potential losses associated with your chosen investment option(s). The use of the Standard Risk Measure is endorsed and strongly recommended by the Australian Prudential Regulatory Authority (APRA), Australian Securities and Investments Commission (ASIC), Association of Superannuation Funds of Australia (ASFA) and the Financial Services Council (FSC) for all Australian super funds.
If you have any questions or would like further information, please contact one of our Superannuation Experts.
For expert advice call us 1800 692 877 and speak to 1800 SKYLIGHT (1800 759 544) and speak to a Skylight Specialist. There’s no extra cost to member.