Super for young people part 3

  1. Invest for the long term – be a bit RISKY

 You are investing for your retirement. You cannot access the money until you turn 60.

You have until then to grow your super balance.

After 60 (when you retire) you want to keep the money (you are less concerned with growing it). So AFTER then you might invest in assets that are safer.

Risk and return are two of the big factors with investments.

The higher the return you receive may be due to the risk of the investment.

Higher risk doesn’t always mean a higher return though.

The safest asset is cash – you probably get 4-7% a year every year and never lose money.

Shares are riskier – you could lose 20% or more or gain 20% or more in a year.

Note that a few percentages over many years makes a HUGE difference. For example 5.5% vs 7.5% might mean the difference between Cubans or rolling tobacco (not that I smoke).

Historically, shares have outperformed cash. While cash is more consistent, the sharemarket often bounces back from its losses *(though historic returns don’t equal future returns).

Example 1: Shares could go down by 30% next year, and then up 15% the next year.

Example 2: Shares stay the same next year, then up 15% the next year.

You would actually have a higher value in the 1st example. This is because of Dollar Cost Averaging. This means that buying every month (as you would with your super) means that when the shares go down in value – you buy more because they are cheaper. So when they go up in value – you are better off.

See my article on Percentages & Dollar Cost Averaging to understand this a bit better.

So you should consider investing in a large proportion in riskier assets (such as shares) rather than less riskier assets like cash.

Note that this recommendation to be A BIT RISKY is only for super (where you are likely in for a number of years). Investing cash outside super – you would need to consider whether you are willing to lose the money and how long you have to invest.

 For example- I bought and sold shares when I was 18. I sold my shares when I planned to buy a house. I kept my money in cash (even though I didn’t end up buying for a few years) because I didn’t want to lose money on shares and have to sell at the wrong time (to purchase the house).

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