The Basic Prinicples
The risk / return relationship
The relationship between risk and return is fundamental to investing. Generally, risk and return go hand in hand - the higher the risk, the greater the potential return.
Attitudes toward risk vary widely. For some it's about getting the right balance between risk and return, for others it is all a matter of getting the highest return possible.
Investing mostly in low-risk investments may seem like a safe bet, but it will generally result in lower returns over the long term. Investing mostly in high-risk investments is likely to produce higher returns over time, but can also generate substantial negative returns from time to time.
When choosing an investment strategy it is important you adopt a strategy that you are comfortable with given your personal tolerance for risk.
The investment timeframe
Your investment timeframe is another important element in making a decision about your investment strategy.
Your age and how long you have until you will need your super, will likely influence your investment strategy decision.
If you don't need your super straight away, you have more time to ride out the highs and lows of a higher risk investment strategy. If you will need your super in the near future, you may not want to take any short-term risks and prefer a lower risk investment strategy.
The importance of diversification
Diversification helps to minimise investment risk. This involves spreading your investment across different asset classes to reduce your dependence on the performance of a single asset class.
Knowing the difference between growth and defensive assets
Growth assets are higher-risk investments with the potential for higher returns over time. Growth assets are assets that generally achieve capital growth or capital gain through generating increased profits or asset value.
Shares, property and private equity are regarded as growth assets.
Defensive assets are lower-risk investments with the likelihood of lower returns over time. Defensive assets are assets that generally earn interest for the money invested. Fixed interest, inflation-linked bonds, many hedge funds and cash are regarded as defensive assets.
The commitment - it's time in the market that counts
Investment success usually results from setting a long-term plan and sticking to it. Market conditions and emotional responses should not play a major part in your decision.
Staying "in the market" is critical to long-term investment returns. After all, you can't benefit from market returns if you are not in the market. It may be tempting to exit the market during times of volatility or to move your money to less volatile investments such as cash, but there is a high risk that you could potentially miss the best performing months or even the market's recovery, which could actually put you in a worse financial position in the long-term.