Responsible investing is starting to hit the mainstream with lots of new products being launched. We think that’s great news because one of our core beliefs is that a new economic model is needed. Global capital simply cannot continue to be driven by self-interest if we’re going to preserve our planet for future generations.
Unfortunately, most of our competitors in the financial services industry still treat responsible investment like an afterthought. They tend to offer their customers a ‘one-size-fits-all’ product that may not be suitable for their investment appetite.
At Australian Ethical we take a different approach. We have eight superannuation options and eight managed funds and every single product is 100% aligned with our Ethical Charter. That means that whether you want to invest in fixed interest, smaller companies or international shares you can be confident your money is being invested in sustainable companies that are doing the right thing by the planet.
What’s your risk tolerance?
Every investment decision you make should be carefully weighed against your individual tolerance for risk. A general principle in the investment world is that there is a trade-off between risk and reward. That means if you want high returns you have to be prepared to accept a high level of risk. On the other hand, assets that deliver very low returns generally come with a very low level of risk. Australian shares are a good example of a high-risk investment and cash is typically thought of as a low-risk investment.
There are many other factors to consider when you think about your risk tolerance. You might be a naturally risk-averse person, for example – or perhaps skydiving is your idea of a good time! An easy way to test your risk tolerance for a specific investment, recommended by ASIC, is to ask yourself a simple question: ‘If my investment dropped by 20% overnight, would I be tempted to sell it?’ If the answer is yes, you’re probably on the lower end of the scale when it comes to risk tolerance. That means high-risk investments are unlikely to be right for you because you could pull out at the worst possible time and compound your losses.
One of the most important factors to consider when thinking about risk tolerance is how long you plan to hold an investment. The longer you hold an investment, the less you will be affected by short-term volatility in its price. On the other hand, if you need access to the funds in the short term a big drop in your investment’s value could be devastating. That’s why the conventional wisdom in financial services is that young people tend to have a higher tolerance for risk than older people – particularly when it comes to long-term investments like superannuation that you can’t access until you retire. However, conventional wisdom should be treated with caution and there will always be exceptions to the rule. For example, with rising life expectancies it might make sense for a 65-year-old to hold some higher risk investments.
Australian Ethical Super offers eight investment options: Defensive, Conservative, Balanced (pension), Balanced (accumulation), Growth, Advocacy, International Shares and Australian Shares. The precise mix of options available depends on whether you are saving for retirement or taking a pension. In terms of risk, the options range from very low (Defensive) to very high (Advocacy, International Shares and Australian Shares).
When you join Australian Ethical Super as a pre-retiree and you don’t make a choice about your investment options you’ll be placed in the Balanced (accumulation) option by default. This option has a recommended minimum investment timeframe of five years and a ‘medium to high’ level of risk. If that matches up with your risk tolerance, that’s great. If not, it’s good to know there are other equally ethical investment options available to you.
As well as our super options, we also offer eight managed funds though Australian Ethical Investment. Of these, the Income Fund and the Fixed Interest Fund are most likely to be attractive to defensive investors who have a short investment timeframe and are seeking to conserve capital to ensure a stable income. The Balanced Fund is most likely to be attractive to neutral investors who have a medium-term investment timeframe and want lower volatility with some growth and income. Growth investors with a longer-term investment timeframe who are willing to accept a higher level of risk may be interested in the Diversified Shares Fund, the Advocacy Fund, the International Shares Fund, the Australian Shares Fund and the Emerging Companies Fund.
For more information about our performance and returns, you can check out our managed funds at australianethical.com.au/managed-funds/performance-and-returns and our super investment options at australianethical.com.au/super/performance-and-returns.
This article originally appeared in Good Money issue 13. You can read the entire magazine here.
This information is of a general nature and is not intended to provide you with financial advice or take into account your personal objectives, financial situation or needs. Before acting on the information, consider its appropriateness to your circumstances and read the financial services guide (FSG) and relevant product disclosure statement (PDS) available at australianethical.com.au.