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Understanding how you feel about risk is important in choosing an investment strategy that works for you. It could mean a big difference to how much money you have when you retire.
With super, it's easy to set and forget. But super is one of your biggest assets, so you may want to be in control of how your money is invested.
Your personal circumstances and your risk tolerance may be key factors in determining your most suitable investment options. Knowing your super risk profile is wholly within your control and costs nothing. It may boost your retirement balance significantly.
Yet one in four Australians do not know their superannuation risk profile or whether their super is invested in a conservative, moderate, growth or aggressive option.1
Young women in particular are not engaged, with 45% stating they do not know their super risk profile.1
Your risk tolerance is how emotionally comfortable you are with taking financial risk. When it comes to investing, some people find themselves tossing and turning in bed, while others sleep easy.
Some people are very comfortable placing their money into higher risk investments (so they have the opportunity to generate a higher return), while others are more conservative and cannot stand the thought of losing money.
Knowing how you feel about risk can help you determine your risk profile.
Before you consider your attitude to risk, it’s important to consider the relationship between risk and return.
Risk can refer to several concepts, including the possibility that your investment:
Return refers to how much income or capital growth an investment has gained or lost during a period.
Higher-risk options generally have the potential for higher growth. The trade-off is that there's a higher risk of a negative return and they’re also likely to experience greater short-term fluctuations in value.
On the other hand, lower-risk options are less likely to see negative returns and major fluctuations in value. Typically, they also have potentially lower returns and growth over the long term.
The aim of a risk profile is to identify the level of risk you are willing to take, which then determines the best allocation of investment assets given your risk tolerance.
To help you determine your risk profile, consider the following:
Different risk profiles are usually matched to common combinations of the major asset classes.
The investment mixes are based on percentages allocated to ‘growth’ assets (broadly shares and property) relative to ‘defensive’ assets (broadly cash and fixed interest).
The four most common risk profiles are:2
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1. Media release, 5 April 2018, How to add thousands to your super in just 10 minutes, MLC Insights, www.mlc.com.au/personal/blog/2018/04/how_to_add_thousands
2. Superguide, 1 December 2019, Know your risk profile, www.superguide.com.au/boost-your-superannuation/investments-understand-risk-profile
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