Everyone has different goals for their life and as a result there is no ‘one size fits all’ investment strategy. Getting the investment mix right will vary from person to person. Many people are wary of higher-risk investments, but sometimes a little bit of risk is necessary to ensure your investments outperform inflation over time. Ideally, your investment portfolio should include a balance of defensive, or conservative, and growth investments that suit your goals and risk profile.

Growth investments include property, Australian shares and international shares. While growth investments involve more risk in the short term, you can reduce this risk by investing over an appropriate timeframe and diversifying your investments.

Despite short-term fluctuations, the returns provided by growth investments over the medium to long term are potentially higher than those of traditionally conservative investments, such as cash and fixed interest.

The risks of conservative investing

All investments involve some level of risk. Even if you choose cash, the least risky investment, there is still a risk of inflation eroding the value of your capital or falling interest rates reducing the level of your return.

Conservative investments include options like a simple high-interest savings account, a term deposit where the interest rate and investment period are fixed, or a superannuation savings account where every dollar is guaranteed by the Commonwealth Bank of Australia.

It can be tempting, particularly for retirees who are worried about maintaining the security of their capital over a long period, to use conservative investments exclusively. However, unless you include a proportion of growth investments in your portfolio, you could find that five or 10 years down the track you are struggling to make your income stretch as far as it once did.

For example, even a low 3% p.a. inflation rate will cut the value of a dollar in half over 25 years. This is why it’s important to consider investing your medium-to long-term savings in investments that can grow the value of your capital. This is especially important when it comes to your retirement savings, which you accumulate over time and which will have to last for at least 20 years once you stop working.

Effect of inflation on $1.00

Average annual inflation rate

Years 3% 4% 5% 0 $1.00 $1.00 $1.00 5 $0.86 $0.82 $0.78 15 $0.54 $0.55 $0.48 25 $0.48 $0.38 $0.30

This table is for illustrative purposes only.

The power of growth investments over time

Including a proportion of growth investments in your portfolio can dramatically boost your investment balance over time, making it easier to achieve your financial goals. It’s important to speak to a professional before investing, and we can help make sure you have a plan in place that suits your goals. If you’d like advice on investing, you can book an appointment online to organise your complimentary, no-obligation consultation with a Commonwealth Financial Planner and start planning for a better life today.

 

• Important information
  The information contained on this web page is of a factual nature only and is not intended to constitute financial product advice. It has been prepared by Commonwealth Financial Planning Limited without considering your individual objectives, financial situation or needs. You should consider its appropriateness in light of your circumstances and consider seeking professional advice relevant to your individual needs before making a decision based on this information. Commonwealth Financial Planners are Representatives or Authorised Representatives of Commonwealth Financial Planning Limited ABN 65 003 900 169, AFSL 231139, a wholly owned but non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124.