How risky is your high risk super investment?

I had a great chat with a client recently about her view on risk and her superannuation.

As part of the financial advice process, we will ask clients how they feel about investing.

Specifically we will ask questions like, “what would you do if your investment went down 15%?”, “low long do you intend to invest?” and other detailed questions to get a better idea of their views.

This client was conservative across the board.

She didn’t want to invest for a long time, she had no tolerance for her money going backwards in value and noted she was willing to have minimum returns as a result.

When I asked her about super, she said she was conservative and wanted to stay that way.

Yet when I looked at her superannuation, I noted that she had moved her super to high growth (high risk) years ago and had been happily riding the ups and downs of the investment world.

So what gives?

Understanding Risk

The process of asking someone ‘how much risk do you want?’ is deeply flawed.

The obvious answer to that question is clearly ‘none’ but all investments come with risk.

If your super is with a major super fund in one of their default options (i.e. you haven’t picked some fringe investment or small-time super fund), your superannuation likely isn’t as risky as it first appears.

Most of these types of investments are incredibly well diversified and the idea that your money will go to zero is almost non-existent (excluding major fraud).

In this circumstance the risk is that the investment will go up and down in the short-term whilst going up in the long-term.

Whilst nobody likes when their super goes down, provided you don’t move it or pull it out, you really aren’t disadvantaged if you wait for the market to come back.

My client was comfortable with this risk as she had plenty of time until retirement and could climb the ups and downs.

What she wasn’t comfortable with (and rightly so), was putting her superannuation into some sort of investment where there was a chance it would drop in value (and stay down in value) or anything that could put her retirement at risk.

Managing Risk

The first step in understanding your risk tolerance for your superannuation is understanding what are the risks you are taking?

Obviously you want to try and avoid high risk investments where there is a chance of absolute failure. Whilst this may be a path to getting rich quick, they can more commonly be a path to getting poor quick.

But a well-diversified portfolio that has a risk of going backwards in value over short-time periods during your investment journey, this may be a risk you are willing to take.

Particularly when you compare it with the greater risk of not having enough money in retirement if you aren’t willing to take a little risk.

So before you decide that you are a ‘conservative’ investor and change your super option, maybe take a few steps to understand what the risk are and whether you, like my client, could tolerate them.