How Do You Balance Risk When Saving And Investing?

Making money through investment follows a simple rule: the bigger the potential risk, the greater the potential reward. How do you strike a balance between growing your long-term savings quickly and not losing everything?

Pretty much anyone who works in Australia is forced into one form of long-term investment strategy: putting money into superannuation. If you’re working full-time, your employer must pay 9% of your salary into a nominated super fund. You can top up this amount, but can’t access those funds until you retire, save in some tightly-defined extreme circumstances. Superannuation is highly regulated, so while it’s not guaranteed to rise all the time, over a long period it should provide you with a solid asset base for retirement.

Many Australians also make a long-term investment in purchasing their own home. According to the ABS, 70% of the population own (or are paying off) their own property, a figure that’s been stable for several decades. The family home is often not counted as an asset when assessing eligibility for benefits, and negative gearing rules also mean that buying a second home as an investment is a popular option (though there’s a balancing act there; if everyone wants to buy, rental demand will reduce). That’s not necessarily the approach everywhere else; in many US and European cities, renting throughout your life is not unusual. Provided you can insure your property, it still seems to be a relatively low-risk tactic.

Beyond that, the range of options grows significantly. Investing in the share market become a more common activity in Australia across the 1990s and 2000s, in part because of the privatisation of many government bodies. As Telstra shareholders can tell you, there’s no performance guarantees associated with share ownership though. If you look at more complex investment options such as CFDs, the risks grow even more dramatically. But then, as the global financial crisis demonstrated, even simply leaving money in the bank isn’t an entirely risk-free activity, though bank collapses weren’t a notable feature in the Australian market.

I imagine there’s a wide range of savings options used by Lifehacker readers, and I’m curious to know what strategies you adopt; apart from anything else, it’s useful information when planning topics for future Loaded columns. So let’s hit the polls:

As ever, we’d welcome hearing your best strategies for long-term saving and investment in the comments.

Lifehacker’s weekly Loaded column looks at better ways to manage (and stop worrying about) your money.

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