Level: Basic
Risk and return in your super investments
Risk and return are two key concepts to consider when investing. Generally speaking, with more risk comes the potential for more reward (or greater returns) and the potential for greater losses. Your super is no different – it’s an investment and so it’s important to understand the risks involved when making decisions about how to invest your super.
A quick explanation of risk and return
In general terms, when we talk about risk with your super, it is about the potential for a negative outcome. This can mean either:
- Your investment delivers a negative return. That is, you lose some or all of the money invested in your super; or
- Your investment delivers a return that is different to what you expected.
When we refer to ‘return’ this includes any income from your investments as well as any increase (or decrease) in the value of your investment. Your super balance grows when returns are positive while negative returns will mean your super balance goes down.
While risk can be minimised, it cannot be completely eliminated. That’s why it’s important to understand risk and what it means for you, so that you can be in the best position to choose the right investment option(s) for your super.
So why take risk at all?
It’s important to remember that when it comes to investing, all investments involve risk and risk isn’t all bad. Generally, the riskier an investment is, the higher the potential return – this is called the risk return trade-off. So, if you want a higher return, the trade-off is that you generally have to take on more risk.
But while we all want our investments to generate the highest return possible, each of us has a limit as to how much risk we are comfortable taking on.
For most, their risk tolerance is related to how long they are planning to have their money invested before they need to access it, what’s called the ‘investment timeframe’. Typically, the longer your investment timeframe, the greater your risk tolerance. That’s because you will generally have more time on your side to ride out the ups and downs of the market cycle.
Not everyone has an appetite for a high level of risk though and even if you have a long investment timeframe, you may not be comfortable taking on increased risk for other reasons. The level of risk you choose to take is a personal decision and depends on your individual circumstances, objectives, and how much risk you are comfortable with.
A Rest member indicates to us their risk level through their investment option decision. It’s then the job of the Rest Investments team to maximise the return for that level of risk.
Lower versus higher risk investments
All assets have different risk and return characteristics. Assets with high potential returns over the long term (such as shares), generally are also more likely to deliver a negative return – particularly in the short-term. While lower risk assets like cash or bonds, will have returns that tend to fluctuate less from year to year but tend to produce lower long-term returns.
The same is true for each Rest investment option. The level of risk is different for each investment option and depends on the underlying mix of assets held in that option. For example, you can lower your risk by investing in an option with a higher allocation to defensive (lower risk) assets such as cash and fixed interest. In contrast, selecting an investment option with a higher allocation to growth (higher risk) assets such as shares will increase your risk but also your potential long-term return.
Defensive versus growth assets
Defensive assets
• aim to protect the value of your investment
• lower risk, so chances of a negative return are less
• returns are usually lower, so may not keep pace with the cost of living
• Rest's defensive assets include Cash and Debt
Growth assets
• aim to increase the value of your investment
• have historically produced higher investment returns
• increased risk of negative returns over the short term
• Rest's growth assets include Australian Shares and Overseas Shares (including Private Equity).
Property, Infrastructure and Alternatives are considered mid-risk, and are split between growth and defensive.
How do I know the risk level of an investment option?
One way to assess the level of risk of an investment option is to refer to the ‘Standard Risk Measure’ (SRM). Every investment option is assigned an SRM which provides a guide to assist with comparing investment options. The SRM is an industry-standard risk measure which sorts each investment option into a risk label, ranging from ‘Very Low’ (1) to ‘Very High’ (7).
The superannuation industry has an agreed way of calculating the risk label which estimates how many times there may be a negative return over any 20-year timeframe. For example, an investment option with a “Medium” SRM label is expected to have a negative return two to three years over any 20-year period.
Seven Standard Risk Measure Categories
| 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 |
Selecting an investment option
When markets are doing well, it is easy to fixate on investments with the highest returns. Often, it’s only when markets are not doing well that people start to consider risk.
The best time to start thinking about how much risk you want to take with your super is now. You can seek advice should you need help, but ultimately the decision is yours. Once you decide, you can indicate your desired risk level by selecting an investment option that best meets your individual circumstances, goals and risk tolerance.
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.
