How do I select a suitable investment portfolio?

Selecting an appropriate investment portfolio to invest your superannuation in is an important factor in planning for your retirement.
Understanding some basics may assist you to make the right decision to achieve long term financial security.

Investing principles: time

The length of time you are planning to invest in a portfolio may affect your investment decision.

If you are about to retire or redeem your retirement accumulation, you should think about investing in a way that involves minimising volatility. That is, making sure there is little chance of the value of your investment fluctuating downwards over the remaining time of your investment by choosing an appropriate portfolio.

If your superannuation investment is for the longer term, you can generally afford to include a component which may have greater risk with the objective of achieving higher investment returns.

Investment principles: risk vs return

A trade-off exists between risk (the degree of security and volatility provided by the portfolio's assets) and the investment return from the portfolios you choose.

Lower risk generally means lower long-term returns.

Higher risk generally means potentially higher returns in the longer term, but greater risk of volatility and negative return, that is greater risk of short-term negative returns.

Investment principles: effect of inflation

If the expected portfolio return is lower than the inflation rate, the real value of your investment will be eroded.

The amount of a portfolio's return above inflation is called the real rate of return. Any investment providing a rate of return above the inflation rate is generally thought to be working well for you as it is maintaining its buying power.

Investment principles: diversification

The returns from all investment markets are cyclical and reflect changing economic conditions, and in particular, the outlook for inflation and consumer confidence.

Investing in a portfolio that is exposed to assets in a variety of investment markets (sectors) may help to reduce the overall risk associated with your investment.