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Super and investing – what is your risk profile?

Finance Superannuation

25 August 2020 5 min read

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.

mature couple on a roller coaster

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

Know your risk tolerance

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.

Risk and return

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:

Fluctuates in value
Achieves a return that is negative
Produces returns that are less than expected over a particular timeframe
Underperforms against an index or benchmark.

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.

What’s your risk profile?

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:

What does the term ‘risk’ mean for you — danger, uncertainty or opportunity?
What is your investment priority? Is capital protection or capital growth more important to you?
Would market volatility keep you awake at night?
Are you willing to accept short-term losses in the interest of possible future gains?
Do you prefer to play it safe? Or are you comfortable with a level of uncertainty?

Super risk profiles in action

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

Conservative: Low risk. A conservative investor primarily seeks to minimise risk and loss of their accumulated wealth. This investor is comfortable accepting lower returns for a higher degree of stability.
Balanced: Medium risk. A balanced investor seeks to reduce risks and enhance returns equally. This investor is willing to accept modest risks to seek higher long-term returns.
Growth: High risk. A growth investor values higher long-term returns and is willing to accept considerable risk. This investor is comfortable and willing to endure short-term fluctuations and/or losses in exchange for the potential of higher long-term returns.
High Growth/Aggressive: Very high risk. An aggressive investor values maximising returns and is willing to accept substantial risk. This investor may endure extensive volatility and significant losses in the hope of maximising long-term returns.