Understanding the basics of Investing
Understanding the basics of investing
We know that everyone has different retirement goals and preferences. That’s why we offer you a range of investment choices for your super.
Making your investment choice
Consider factors such as:
• How much do I want to have for my retirement?
• What other personal savings or investments do I have apart from super?
• How much time do I have to save before I retire?
• How do I feel about taking risks?
• What are my views on how certain investments might perform over time?
You can use our Risk profiler to help you answer the above questions. To help build your understanding about investments so you can decide what choices are best for you, we explain these key concepts below: asset classes, the risk vs return trade-off, and compounding.
Getting to know asset classes
An asset class is a type of investment, like equities, property, bonds or cash. Each type has different characteristics. At a basic level, there are “higher-risk” and “lower-risk” asset classes – but of course there are also those in between.
The investment options we offer invest in one or a mixture of asset classes.
Higher-risk asset classesAssets such as equities (i.e. stocks or shares) and certain types of property are generally considered high-risk investments, as their values tend to move up and down more than other asset classes over the short term. However, they’re also expected to produce higher returns over the long term.
If you have a longer period to invest your super, higher-risk asset classes are generally considered to be more suitable. This is because your investments have more time to weather the ups and downs of the markets. These types of investments can also provide better inflation adjusted outcomes, due to their capital growth characteristics.
These assets generate returns mainly from how they “grow” in value – this is known as capital gain. They can also earn some income, for example, dividends (for equities) and rent (for property).
Lower-risk asset classesAssets such as Government Bonds, term deposits and cash are considered lower-risk investments as their values tend to be more stable over the short term. However, they are also expected to produce lower returns over the long term. Although bonds and fixed interest investments can have some capital gains and losses, they tend to produce returns from the income (or interest) they earn, which generally also means they won’t keep pace with inflation.
Generally, the lower the investment risk of an asset class, the lower its potential for returns over the long term.
That said, lower risk investments may not always be the right choice. Although assets like bonds and cash may appear safer, you will be missing out on the opportunity to receive higher returns, particularly if you are investing for a long time and are more able to weather the ups and downs in the meanwhile.
The Risk vs Return trade-off
How do you feel about risk?What does risk mean to you? Is it the value of your super savings falling? Or could it be your savings not keeping up with the cost of living (inflation), or perhaps your money running out in retirement? Risk can be all those things.
When it comes to investing, risk and return are closely linked. Based on historical returns, the more you are prepared to see out the ups and downs of investing in growth assets – that is, the more short-term risk you are prepared to take – the higher the return you can expect in the long term.
Depending on your circumstances and attitude, you may not be able to take as much investment risk and may decide that protecting your account balance is as (or more) important than growing it. Below are some different types of risk to be aware of. How might they affect your investment choices based on your personal attitude to risk.
Risk can come in different forms, including:
- The risk of a negative return in any one year;
- The risk of not having enough money to live on in retirement;
- The risk of your savings not keeping up with inflation; and
- The risk of being too cautious with your investments and missing out on returns if different choices were made.
Spreading your riskJust as it’s not ideal to have all your eggs in one basket, you might want to spread your risk with your investments. So, if you choose an investment option that has a mix of asset classes, you are spreading your risk of loss. For example, if one asset class performs poorly, the loss could be offset (partly or fully) by gains from another asset class that performs well. This is known as diversification. Most of our investment options are diversified.
Volatility is the amount of ‘ups and downs’ an investment has within a period of time. History shows that economies typically move in cycles of ‘boom and bust’. Most recently, we saw this in 2007 with the global financial crisis and again with the shutdowns caused by COVID-19.
Some asset classes, particularly shares, are more volatile because they can move up and down a lot in a short period of time. Others, like cash and fixed interest, are slower to change. This means that if your super is invested in an option with a higher proportion of shares, a fall in share markets will tend to lead to a drop in your super returns.
Learn more about the options
Each investment option has different risk/return characteristics, and you can learn about them in the Product Disclosure Statement and Investment Guide for the scheme you belong to. For example, Triple S members can refer to the Triple S Investment Guide.
Making an investment choice is a very individual decision, so it helps to understand each option’s asset mix, the returns it aims to achieve and its risk ratings, including the risk of negative returns. Remember, you can also use the Risk profiler calculator to guide you.
The schemes administered by Super SA are exempt public sector schemes and therefore we are not required to hold an Australian Financial Services licence to provide advice on our products.The information given in this presentation by Super SA is of a general nature only and has been prepared without taking into account your individual objectives, financial situation or needs.Super SA strongly recommends that you refer to the relevant Product Disclosure Statement (PDS) and seek independent financial advice before making any financial decisions.
If you intend to invest in the Super SA Income Stream or Flexible Rollover Product, please refer to the relevant PDS for details of your cooling off rights.
This document is current at 1 January 2021.