What are 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.

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.

Growth investments

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.

The following table shows the effect of inflation on $1.00 when the average annual inflation rate is bewteen 3% to 5%.

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.