Low risk investments such as the cash in your savings account provide stable income in the form of interest payments. These types of investments are called defensive assets.
These assets are especially secure in Australia, where the government guarantees most bank deposits, you are very unlikely to lose your bank savings.
But because the risk of a loss is low, the returns on these kinds of assets are also low. These types of assets are useful if you have a short-term investment outlook or can't afford to suffer a loss.
Low risk in the short term, higher risk in the long term
Just because defensive assets are low risk, doesn't mean they are foolproof over the long term.
Australia has historically low interest rates, and interest is the way defensive assets create income. The risk with low interest rates is that inflation and increases in the cost of living will be greater than the interest rate income you earn. This can mean you end up losing money over the long term.
If you have a cash account has an interest rate of 1% and you have $100,000 invested for a year. Your account increased to $101,000. Sounds alright, doesn't it?
But the inflation is rate is 2%. This means your $100,000 needs to be $102,000 in a years’ time to have the same buying power.
In real terms this means your cash account has lost $1,000 and the value of your money might continue to fall behind the cost of living.
Playing the long-term game
In superannuation, which is a very long investment for most people, there is a risk that your defensive assets will lose money against inflation over the long term.
Want to know more?
General advice disclaimer
This is general information only and does not take into account your personal objectives, financial situation or needs. You should assess whether the information is appropriate for you having regard to your objectives, financial situation and needs and consider obtaining independent professional advice before making an investment decision. If information relates to a specific financial product you should obtain a copy of the product disclosure statement for that product and consider that statement before make a decision whether to acquire the product.