Level: Intermediate

Why your investment timeframe matters

The investment timeframe refers to how long you intend to have your money (or super) invested before you need to access it. When deciding how to invest your super, it’s important to consider your investment timeframe before making any decisions.

Determining your own investment timeframe

While for most people, super is a long-term investment, everyone’s situation is different and that may not be the case for you. Your personal circumstances will influence how long you plan to invest your super (or your investment timeframe), for example:

  • if you’ve just started working, it may be forty years before you have access to your super;
  • if you’ve already retired, maybe you plan to spend most of your super to pay off the remainder of your mortgage next month; or
  • maybe your investment timeframe is somewhere in between.

Keep in mind, just because you’ve retired, that doesn’t necessarily mean your investment timeframe is short. It depends on when you plan to spend each dollar. After all, you might be retired for 30 years (or perhaps even longer!).

Time and volatility

Ever noticed large swings in the value of your super investments? If your super balance tends to change dramatically and unexpectedly over a short period of time, it’s considered to be volatile. These swings in your balance are usually in response to changes in market conditions. High volatility can be a symptom of high-risk investments.

Typically, investments tend to be more volatile over short timeframes, so taking more risk over a short timeframe magnifies this volatility.

If you’re younger and have a longer investment timeframe, some volatility in your investments isn’t necessarily a bad thing. This is because you generally have more time to recover from any losses.

Now let’s say you plan to start spending your retirement savings in 6 months’ time. If you have a short investment timeframe, investing your super in volatile assets may not suit you as you’ll likely want to prevent major losses.

Investment returns – the relationship between time and volatility

To illustrate the general principle that investments held for a longer timeframe tend to be less volatile, let's examine a range of Rest investment options. The options we have shown below are across a range of risk levels from low to high risk, which are based on the Standard Risk Measure1:

Rest investment option Risk Band Risk Label
Cash 1 Very Low
Capital Stable 4 Medium
Balanced 5 Medium to High
Core 6 High
Australian Shares 7 Very High
Rest investment option Cash
Risk Band 1
Risk Label Very Low
Rest investment option Capital Stable
Risk Band 4
Risk Label Medium
Rest investment option Balanced
Risk Band 5
Risk Label Medium to High
Rest investment option Core
Risk Band 6
Risk Label High
Rest investment option Australian Shares
Risk Band 7
Risk Label Very High

You can learn more about risk and return in your super investments here.

The graph below shows the different rolling returns of these investment options across a range of timeframes and demonstrates the relationship between timeframe and volatility.

Range of returns over time to 30 June 2023

Source: Rest 30 June 2023. Ranges shown in the graph consist of returns over the indicated return timeframes (1 year, 5 year or 10 year), calculated at the end of each month over the period from 30 June 2018 to 30 June 2023. Past performance is not a reliable indicator of future performance.

Looking at the graph, you’ll notice:

  • Shorter investment timeframes display a greater range of return outcomes, particularly for riskier options (such as Core Strategy or Australian Shares). Had you invested in the Australian Shares option for only 1 year, your super balance could have gone down significantly (as much -15%!), or you may have made a lot of money (as much as +37%!) depending on when you timed your investment.

  • As the investment timeframe increases, the potential outcomes become less variable.

  • Generally, shorter investment timeframes exhibit higher volatility and risk. This relationship becomes even more pronounced with riskier investments. That’s why it’s important to carefully consider your investment timeframe before determining the level of risk you're willing to take on.

How do I know what the appropriate investment timeframe is?

Because of the relationship between time and risk, we have a ‘minimum suggested timeframe’ for each of our investment options. For our diversified options, these minimum suggested timeframes align to the investment objective for each of the options and you can also quickly check these in the Rest Investment Guide.

Take the Balanced option for example, it has a minimum suggested timeframe of at least 6 years – this timeframe is aligned to its objective. Which is, ‘to achieve a return over CPI (inflation) + 2% pa over the medium term (rolling 6-year periods)’.

So, when the investment team make decisions for the Balanced option, they are aiming to grow your super balance in line with that objective over a 6-year period. That’s going to change the way the team invests. If they are investing for a year, they are more likely to invest in cash and fixed interest style investments which tend to be more defensive in nature. If they are investing over a longer timeframe such as 12 years, they are more likely to invest in growth assets like shares.

Consider your situation

When making decisions about how to invest your super, you shouldn't forget these suggested minimum timeframes. It’s important to consider how those suggested minimum timeframes align with how long you intend to invest.

Time though is only one of many factors to consider though when investing. Everyone’s situation and tolerance for risk is different. So, if you are at all unsure which investment option is appropriate, you may wish to seek professional financial advice.


Rest Advice when you need it

Choosing how you invest your super could make a difference to how much money you have in retirement. To help you make the right choice, use our Investment Choice Solution tool to see what kind of investor you are.

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