High Risk vs High Growth Investments

One thing I’ve noticed having worked in the investment world a long time is the convenient rebrand that seems to have occurred from ‘High Risk’ to ‘High Growth’ when it comes to super fund investments.

Even though pretty much all super and investment funds now refer to their investments as ‘High Growth’, the ‘High Risk’ name still sticks around and is associated with these investments.

So let’s talk about risk.

What is risk?

Putting aside the concern this blog will look like a year 10 essay, I actually looked up the definition of risk.

“a situation involving exposure to danger” (reference: I googled it)

I think this is how most people think about risk. Risk is dangerous, risk is to be avoided and in a financial sense, it means you could lose all your money.

But that isn’t how risk is described in an investment sense.

Risk of volatility

There is almost a zero percent chance that your standard super fund, “High Risk” investment will go to nil.

Outside of large-scale corporate crime or some sort of apocalypse situation, it really isn’t possible.

Why? Because if your super fund is doing a good job, they are well diversified.

A high risk superannuation investment usually is invested across hundreds to thousands of companies across many countries and many different industries. It may also be invested in various buildings, infrastructure projects and corporate bonds.

Basically, it’s so well diversified that all of these things can’t go out of business at the same time (except for in the apocalypse mentioned above).

So what are we talking about when it comes risk? Usually we are referring to volatility.

What is volatility

Volatility basically means that your investments will go up and down in value in the short-term.

Generally, the higher the risk, the more volatility you tend to experience.

But volatility isn’t necessarily a bad thing.

When you’re young, whether your super is going up and down in the short-term isn’t really a big deal. As long as over the long-term, it’s growing.

In addition, when the share market drops, because you’re still investing, you get the opportunity to buy the same shares at a discounted price.

Where volatility starts to be a major issue is when you’re looking to retire.

Volatility and retirement

Markets tend to work in cycles. They have good years and they have bad years. If you have a bad year, usually all you need to do is keep the faith, keep investing, and wait for the good years to come back.

But when you’re about to retire (or you are retired), you can’t just stop drawing on your investment as you need to fund your lifestyle.

This is why as you age and get closer to retirement, it’s important to consider how much risk you have in your portfolio and start to make changes to ensure you’re not caught off guard.

How do we address this for our clients?

For our clients, as they approach retirement, we start doing some modelling and planning.

We identify how much money they need, where we are approximately at in the cycle and make decisions accordingly.

Whilst we may move some of their money to lower risk investments, it’s important we don’t overdo this as they are likely going to be retired a long time.

If you want to ensure you are getting the most out of your investments, then please reach out. We don’t have a crystal ball and can’t tell you exactly what is going to happen in the market, but we can set you up with best practices.