When it comes to investing, two terms often heard but frequently misunderstood are risk and volatility. Understanding these concepts is essential, whether you’re investing through superannuation or outside of it. This knowledge can help retirees, young professionals, families, and high-income earners make more informed and confident decisions about their financial futures.
What Are Risk and Volatility?
Risk refers to the possibility of losing some—or all—of your investment. It is the potential for an investment to deviate from its expected returns, impacting your final financial outcome.
On the other hand, volatility measures the short-term ups and downs in the value of your investments. It’s about how much and how rapidly the price of an investment fluctuates over time. While risk focuses on the probability of losing capital, volatility might simply reflect temporary swings in the market.
Key Differences
- Risk = Long-term outcome uncertainty: Will I lose my principal investment?
- Volatility = Short-term price swings: How bumpy is the ride over the investment period?
Risk and Volatility in Superannuation and Outside Investments
Superannuation
Superannuation (or “super”) is designed as a long-term savings vehicle, heavily regulated to provide for retirement. Within super, risk is usually mitigated through diversification and professional fund management. Here’s a breakdown of how risk and volatility play out in super investments:
- Risk: Super funds often allocate money into diversified portfolios, reducing the chance of losing everything even if one asset or sector performs poorly. However, super funds are not entirely risk-free, as the level of risk depends on the chosen investment option (e.g., conservative, balanced, or high growth).
- Volatility: Super funds with high exposure to shares or property exhibit greater volatility but also offer higher long-term growth potential. Younger investors with decades before retirement can often afford higher volatility since they have more time to recover from market fluctuations.
Outside Investments
Investments outside super, like stocks, ETFs, or real estate, provide flexibility but come with unique considerations for risk and volatility:
- Risk: Investing outside super often puts decision-making solely in your hands. Without the regulatory framework of superannuation, risk levels vary significantly depending on the type of asset and personal financial management.
- Volatility: Direct investments in shares or cryptocurrencies, for example, may experience significant day-to-day or even hour-to-hour price swings. Managing these fluctuations is a skill—and mindset—many outside investors need to master.
Finding Your Risk Tolerance
Risk tolerance refers to how much uncertainty or financial loss you are comfortable with in pursuit of stronger investment returns. It’s not a one-size-fits-all metric, as it heavily depends on:
- Age: Younger people generally have higher risk tolerance since they have more time to recover from potential losses.
- Income: High-income earners might tolerate higher levels of volatility if their disposable income allows them to absorb short-term losses.
- Goals: If your primary goal is preservation of capital, you might choose lower-risk, lower-return investments. If your goal is aggressive growth, you might be more willing to weather higher volatility.
- Family Stage: Young families may prioritise stability and lower-risk investments, while empty-nesters or early retirees may look for growth options within a moderated risk profile.
Comparing Investment Options Inside and Outside Super
| Feature | Inside Superannuation | Outside Superannuation |
| Tax efficiency | Super offers lower tax rates on earnings. | Earnings are taxed at an individual’s marginal rate. |
| Access | Restricted until preservation age (e.g., retirement). | Accessible at any time, depending on liquidity of asset. |
| Risk control | Often managed by the fund’s frameworks. | Full control of asset choices and risk exposure. |
| Diversification | Built into super funds (e.g., shares, bonds, property). | Requires active investor effort to diversify effectively. |
| Costs | Competitive fees due to pooled investing. | Fees vary depending on investments (e.g., brokerage, property management). |
Strategies for Managing Risk and Volatility
- Diversify: Diversification is the golden rule of risk management. Spread your investments across different asset classes, industries, and geographies. For example, a well-diversified super portfolio might include Australian stocks, international shares, property, and fixed income. The same approach works outside super for a balanced personal investment portfolio
- Understand Your Time Horizon: Longer investment horizons provide the opportunity to ride out market fluctuations. For example, retirees in their drawdown phase may opt for fewer volatile investments compared to young professionals who can afford a riskier growth-focused strategy.
- Focus on Quality Investments: Whether inside or outside super, prioritise investments in high-quality assets with a strong track record. While exciting, new trends like cryptocurrency carry higher levels of risk due to their unregulated and volatile nature.
- Stick to Your Plan: Avoid making rash decisions based on short-term market noise. Volatility can create unnecessary stress for investors, but taking a long-term, measured approach is often the most rewarding.
- Consult a Financial Adviser: Tailored advice can help match your investment strategy to your unique life stage, goals, and financial circumstances. Advisers can also help you balance investments spanning both superannuation and external portfolios.
Final Thoughts
Risk and volatility are interrelated but distinct aspects of investing. By understanding each, investors—whether inside or outside super—can make smarter, more informed decisions tailored to their goals, life stage, and financial circumstances.
Whether you’re a young professional just starting your investment journey, a family balancing short- and long-term financial plans, or a retiree aiming to preserve wealth, the key is to align your strategy with your unique risk tolerance and objectives.
If you would like to improve your current investment strategies or are looking to start your investment journey, click here to organise a complimentary 20-minute phone call with an EPG Wealth adviser.