Does your risk profile determine your superannuation investment options?
Photo by Mikhail Nilov
When it comes to your Superannuation, how can you work out the best investment strategy for you?
In our previous blog, we outlined the steps to decide if you should pay more into your mortgage or more into super. One of these determining factors was 'risk profile'. Essentially this means, how much 'investment risk' you're comfortable with.
By mapping out your timeframe and investment goals, understanding your ability to withstand risk, and how well you can recover from financial crises such as COVID-19 and the GFC, will likely drive your decisions when choosing an investment strategy.
Within your superannuation, strategies comprising of both Defensive and Growth investments, commonly fall into one of five categories:
conservative (mostly defensive)
moderately conservative
balanced (even mix of defensive and growth)
moderately aggressive
aggressive (mostly growth)
So what are defensive investments? They include cash and fixed interest, have less volatility and therefore their return is potentially always lower than Growth Investments.
Growth investments include shares both in Australian and International, property and infrastructure. They have higher levels of volatility with potential for higher returns over the long term.
Take Linda and John, who while in their 30's and 40's, had a 'moderately aggressive' investment strategy to reach their longer-term investment goals. Despite some stockmarket highs and lows, they knew that access to their super was at least 20 years away and were prepared to tolerate a higher level of risk to achieve moderate to high returns in the long term.
Now in their late 50's, Linda and John's risk profile has become more ‘conservative’. They plan to retire in three to five years and have turned their focus to preserving their super balance. As a result, they have switched to a conservative super investment strategy as they are now more averse to market volatility.
Age however, does not define your risk profile. You could be 24 years old and content with a conservative portfolio, or a 68 year old who can still sleep at night with an aggressive portfolio!
Would you like to know your investment risk profile? AMP provide a nifty tool to help you work this out. Click below to find out which approach to investing could be right for you.
This will give you an indication of your appetite for risk, however for a full understanding of your investment style, at Sound Life we will work with you to complete a more comprehensive assessment.
It's a good idea to check in with your super fund each year to review your investment strategy.
At Sound Life, we remain cautious in our investment approach and consider well diversified, quality investments.
Please note that the information provided on our website is general in nature and does not constitute financial advice so before you make any changes or amendments to your existing circumstances, please talk to a financial planner or your accountant.