Generally speaking, growth assets are higher risk and higher reward investments. Defensive assets are lower-risk lower-reward.
However, everyone has a different interpretation of ‘risk’ and ‘reward’. Most academic literature says ‘risk’ is volatility.
Risky Versus Defensive Assets / Investments
|Risky Assets||Defensive Assets|
|Australian shares||Australian fixed income (e.g. bonds)|
|International shares||International fixed income (e.g. bonds)|
|Cryptocurrencies||Cash management trusts|
|Property||Government guaranteed deposits|
|Infrastructure||Government bonds (from a developed country)|
|Most other ‘alternative’ strategies|
|Real assets (e.g. office buildings or farms)|
|Hybrid notes / Convertible notes|
Does More Risk = More Reward?
That depends on how you define risk. If you ask me, volatility isn’t risk.
The random ups and downs (volatility) of an investment’s price is only a concern if you’re investing for the short term (e.g. less than 3 years) or if you rely on your investments for income (e.g. dividends).
But you wouldn’t sell out if the price of your house fluctuated by 1%, 2% or 3% each day, week or month… would you?
To me, a business person and long-term investor (3+ years), risk should be defined as “losing your entire investment”. But, obviously, everyone is different and your tolerance and willingness to take on risky investments will depend on many things, such as your:
- Time horizon
- Financial position (e.g. do you have a stable job and cash put aside for emergencies?)
- Understanding of investments (take one of our free investing video courses)
Your risk profile should not be based on:
- What your parents or brother-in-law tell you is right (unless you do your research and agree)
- Purely what you read online (oh, wait…)
- What someone else is doing
- The investment potential, with no consideration of the risks
How does this relate to Superannuation?
Inside your Super account, you have investment options. In the video below, Owen explains these options as well as the things to look at, including:
- Bad performance
- Asset allocation (‘how to read the pie charts’)
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