Risk and return
When investing in super there will always be some risk.
Options with higher proportions invested in return-seeking assets generally provide higher returns over the long term than those invested in more risk-controlling assets. In return for higher investment earnings though, you have a higher short-term risk of loss, as these investments regularly rise and fall in value.
But what happens if you invest too conservatively to avoid the risk of a short-term negative return? By reducing one type of risk too much, you’re increasing another risk – the risk your long-term returns won’t keep up with inflation, and in ‘real’ terms the value of your investment will go backwards.
You need to find a balance between risk and return to suit your own needs over the short term and long term. Then, select the LGsuper option that best meets those needs. The table below gives you an idea of the types of risks that could affect your super investment.
| Type of risk | How it can affect your account balance |
|---|---|
Negative earning rates |
In the short term, your account balance may go backwards with negative earning rates. Over the long term though, your account balance should increase with investment returns. |
| Inflation | There is a possibility you won’t earn enough to keep the balance of your account ahead of inflation. This reduces the balance of your account in ‘real’ terms. |
| Currency | Your account balance could be affected by changes in currency exchange rates if the fund does not invest on a hedged basis. |
| Interest rate | If interest rates rise or fall, your account balance could be affected. |
| Legislative | Governments might change or introduce new legislation. This could affect your account balance, access to super or its tax treatment in a positive or negative way. |
| Market | The entire market could decline at the same time - not just one or two types of asset classes. This could affect your account balance. |
| Security specific | One specific investment, such as shares in a particular company, could experience a major drop in value. This risk is reduced through diversification of investments. |
| Economic/political | If countries and regions experience political change, economic crisis or war, there is a risk your account balance may be affected. |
| Opportunity | By making one investment, you could be missing out on another investment with better opportunities for growth. |
| Socially responsible | By avoiding investments that do not meet socially responsible criteria, you could miss out on higher investment returns, and/or increase risk. This is because socially responsible criteria limits the pool of investments an investment manager can select from. What's more, the additional costs associated with socially responsible investing can be significant. |
