Negative returns: the dark side of investments

People invest because they expect to make money. However, nobody can guarantee what will happen in the future. With the important exceptions of cash and 'capital guaranteed' investments, negative returns are always a risk that you have to reckon with.

By negative returns, we mean a net annual capital loss after taking into account any income you received. The capital loss might be small or large, and certainly need not mean the loss of all your capital.

How big a risk could you face?

FIDO asked our licensed actuaries for advice about the probability of negative returns for:

the most common types of investment strategies offered by major super funds and managed investments
the major asset classes.

Here's what our actuaries told us.

Investment strategies		A negative annual return is not expected more frequently than
Growth Invests 70–80% in shares or property		Once in every 6 years
Balanced (Invests 60–70% in shares or property, the rest in fixed interest and cash)		Once in every 7 years
Capital Stable (Invests 60–70% in fixed interest and cash, although some invested in shares or property)		Once in every 10 years
Capital Guaranteed (Guarantees your capital and accumulated earnings cannot be reduced by losses on investments)		Negligible risk
Asset classes		A negative annual return is not expected more frequently than
Shares		Once in every 4 years
Property		Once in every 6 years
Fixed interest		Once in every 8 years
Cash		Negligible risk

The expected frequency of negative returns is a reasonable estimate of what's probable. It's not a guarantee. Taking shares as an example, expecting negative returns no more than once in every 4 years is really the same as a 25% chance of a negative return occurring in any one year. In some cases there may be consecutive years of negative returns (as occurred in the 2002 and 2003 financial years), but over the long term negative returns for shares would be expected no more than once every 4 years.

Do you need to do anything?

In a great many cases, you may not need to do anything. You know the risks, and you know to expect negative returns every so often. It won't be pleasant, but you don't need to panic.

Risk and future returns are linked

Investment strategies and assets expected to produce higher overall returns generally bring a higher risk of negative returns. On the other hand, reducing the risk of negative returns by choosing lower risk strategies or lower risk assets can be expected to produce lower overall returns.

For example, if you're saving up for retirement through your super fund, you're quite likely to be investing in a 'growth' strategy. Although you may experience negative returns, over the long term it's reasonable to expect positive returns that will more than compensate you for that risk. (Even if you're retired, you may still need growth assets like shares and property to maintain your living standards for the rest of your life.)

If you've chosen a very conservative investment strategy, you may decide that you could afford to take a little more risk, if that's necessary to meet your future needs.

To see how different investment strategies could affect your super, use our superannuation calculator. We also have other calculators to help with investment planning.

FIDO Website: Printed 07/31/2010