Understanding investment risks
Understanding investment risks
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All investing involves risk, and it’s important you understand what the risks are within your chosen investment option.
“Risk” refers to the change in value of your investments away from expectations, and each investment option has a different risk profile.
Generally, the higher the return expectation, the higher the risk within that investment option.
This is because options like High Growth are invested in more volatile assets, like shares and property. On the converse the Balanced option, for example, is invested in more stable assets like bonds and cash, therefore it carries a lower risk.
The value of investments is influenced by many factors, such as economic and market conditions, government policy, interest rates, currency movements, inflation and the performance of the fund managers engaged by Funds SA.
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Inflation risks
Inflation may exceed the return you receive on your investment.
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Market risks
Economic, technological, political or legal conditions may affect the value of investments. Market sentiment may also alter the value.
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Manager performance risks
The risk that individual investment managers underperform.
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Interest rate risksChanges in interest rates may also affect investment returns positively or negatively.
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Foreign currency risks
For overseas investment there is a risk that the value of other currencies may change in relation to the Australian dollar and reduce the value of the investment.
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Derivatives risk
Derivatives are financial contracts used in the management of investments whose value depends on the value of specific underlying investments. Their value can fluctuate, sometimes away from the expected value, and they are also subject to counterparty risk.
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Counterparty riskCounterparty risk is the risk that an organisation contracted to provide an investment service is not able to do so. This may result in loss of value.
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Underlying investment risk
The value of each option’s underlying investments can rise and fall. Some of the most common influences on underlying investments include:
- Australian shares: Individual shares are affected by factors affecting the share market generally and also by the profits and expected profits of individual companies.
- International shares: There are similar risks as for Australian shares. Additionally, they are affected by political factors and the currency exchange rate of the country where the shares are held.
- Property: Economic factors such as inflation and unemployment will affect the return on property as well as the location and quality of the property itself.
- Diversified fixed interest investments: Changes in interest rates, as well as the risk of loan repayment default, will result in a change in value of this investment.
Performance and risk are closely linked when talking about investments. Generally, the investment options that offer the highest long term performance may also carry the highest level of short term risk, and vice versa.
Other risks specific to super investments include changes to super or taxation laws, which may affect the accessibility or value of your investment.
