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What is risk?
Each asset class has a different level of risk, return and volatility. The Plan's investment options invest in either a specific asset class or a combination of them.
There are different types of risk that can affect your investment at any one time, including:
- the risk that inflation may be higher than the return on your investment;
- market risk (eg economic, technological, political and legal factors);
- currency exchange risk (ie if the investment invests overseas); and
- the risk that an individual investment may fall in value.
Individual investments can fall in value for a number of reasons:
- if the investment holds shares in Australian and/or overseas companies, these shares can be affected by the performance of the company, market conditions (eg inflation and interest rates), political factors and fluctuating currency exchange rates;
- diversified fixed interest investments can be affected by interest rates (eg the risk of default on the repayment of a loan or the depreciation of capital); and
- property investments can be impacted by general economic factors, such as inflation, levels of employment, tenant quality and the location and quality of the property.
Risk, return and volatility
All investments involve some degree of risk and volatility. But generally speaking, the higher the potential return on an investment, the higher the potential risk and volatility. Similarly, investments offering lower returns, are generally lower in risk and volatility.
It's natural to want to obtain the highest possible return on your investment, but it's also important to appreciate the levels of risk and volatility associated with the different asset classes. You can see from the following graph that, while shares and property have traditionally provided the greatest potential for growth on your money, the level of risk and volatility that accompanies these asset classes is also the highest. The converse is true for fixed interest securities and cash.
The relationship between risk, return and volatility
