The difference between an actual financial loss and a loss on paper, also known as an unrealised loss
The share market can be a highly volatile place with wide-ranging annual, quarterly, even daily swings. Although this volatility can present significant investment risk, when correctly harnessed it can also generate solid returns for shrewd investors. Even when markets are choppy, crash or surge, there can be opportunity.
Share markets move in three directions: up, down, or sideways, with sideways meaning a share is staying pretty steady within a certain range of prices.
As your super may be invested within the Australian and/or International share markets, you may have experienced a fall in your super balance.
Don’t panic if your investments go down in value. You won’t actually lose any money until you sell them off.
The goal of any investor is to make money, so whenever you see that one of your investments is down, it’s natural to get a little anxious. But before you panic, remember that there’s a big difference between an actual financial loss and a loss on paper.
Also known as an unrealised loss, a loss on paper occurs when the value of an asset or security drops below its original price but the investment is not yet sold. A realised capital loss, on the other hand, occurs when an investor sells an asset for a lower price than they initially paid for it. Understanding this distinction can help you sleep better at night!
While all investments come with a degree of risk, the stock market in particular is known for its tendency to fluctuate. You may buy a share and then see it drop in value the very next day, but the important thing to keep in mind about shares (and other investments) is that you only lose money when you actually sell your investments at a loss.
For example, if you buy 100 shares of a particular investment for $50 a share ($5,000) and the price drops to $40 a share ($4,000), you haven’t actually yet lost any money. Rather, the market value of your shares has simply declined. If you were to sell those shares at the current market price of $40, then you’d lose $1,000. But unless you sell those shares, the only loss you’ll experience is an unrealised loss, or a loss on paper. And while it may be disheartening to stare at your account statement and see that number go down, you should know that if you’re patient and level-headed enough to ride out price fluctuations, then your investments may rebound.
To take better control of your superannuation investments, speak to the super experts at Superannuation Advice Australia today.