First Question
I have my super invested in a prudent alternative. I have seen that "growing" and "balanced" options yield significantly higher returns. However, I dislike taking chances and am afraid of losing money. Do I need to move into these funds?
There is some risk associated with all investments, but it is crucial to define "risk."
Risk in a standard superannuation fund does not equate to "losing all your money," while it might in different contexts and investment types.
Diversified investment alternatives are dispersed among many asset classes (shares, real estate, bonds, cash, and other alternative style assets) inside a standard (industrial or retail) super fund.
And they are dispersed once more inside each of those sorts. For instance, it would be across shares worldwide, such as Apple, Google, and so on in the US, and BHP, CBA, and so on in Australia.
Therefore, there is very little chance that you will lose all of your money on these investments.
Assessing risk
How confident you are about the returns on your investments and the possibility of short-term declines in your investment amount are two ways to gauge your level of "risk" while making major investments.
Generally, the projected return increases with the number of fluctuations in your balance, or volatility.
Higher returns are possible with riskier options, such as a "growth fund." Your final retirement balance will be higher as a result.
They are more susceptible to market fluctuations, though, which means you might not be able to shield your savings from transient declines in value. As a result, some people become panicked and turn to cash or extremely conservative solutions.
Because you are switching at the wrong moment, this is the worst possible outcome.
The adage "buy low, sell high" is popular, although most people act in the other way. When prices are low (cheap), people sell in a panic when markets have collapsed or are dropping.
What to pay attention to
Every investment option involves a trade-off between return and risk, or the possibility that your balance will fluctuate in value.
Unless you intend to withdraw money within the next several years, you should concentrate on the long-term return.
Growth options often perform better over ten or more years, but there will be many market fluctuations in between.
A conservative option yields a stable return over time, although these returns are typically quite small. Options that are balanced fall somewhere in the middle.
The above chart was recently made available by the Australian Stock Exchange (ASX).
I adore it. It traces the performance of the top 500 firms listed on the ASX and illustrates the return of the all ordinaries over a period of 120 years. As you can see, even though there have been several instances of negative returns, positive returns have happened more than 82% of the time and have frequently been fairly large.
Thus, if at all possible, try to concentrate on the long term.
For the majority of people, the best course of action is to educate oneself (ideally by reading articles like this one) before selecting an investment strategy they can live with.
You can also ask your super fund for advice, as many of them offer free advise on investing choices.
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