User Content
This page contains content which is restricted to registered users of The Retirement Platform. Please login below:
Disclaimer

IMPORTANT: Please note that the content provided in this guide is of a general nature. It is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance. Feel free to get in touch if you have any questions, comments or concerns.

Welcome

The reality is, not all risks are created equal or need to be avoided altogether. Some risks have the potential to throw us off course or slow us down. But sometimes, as long as we’re comfortable with it, we can afford to take on some level of risk to unlock a potential opportunity.

Investing is no different: all types of investment entail some level of risk, in exchange for relatively higher potential returns over the medium to long term. And while some investing risks are outside your control, many others can be minimised with an appropriate strategy.

We hope this guide will answer some of your questions. If you are still unclear:  we’re here to help you answer any queries you may have. Please don’t hesitate to contact us, and in the meantime, enjoy the read.

Elements of investment risk

Just like returns, risk is part of investing, and it refers to the likelihood of losing money. Whether it’s KiwiSaver or other investment vehicles (like bonds, term deposits, shares, managed funds etc.), all investments carry some degree of risk. It’s the nature of investing, after all: you don’t get the highs without some lows. The higher the risk you can afford and are comfortable to take, the greater the likelihood of higher returns in the long run.

So, how is risk determined? There are certain key factors to consider – here’s a summary to get you started.

Volatility

The first thing to note is that investment markets go up and down all the time, either slightly or sharply. It’s their nature, and it’s impossible to predict when the next ‘boom’ or downturn will happen, or where it will come from.

In simple terms, market volatility is the relative rate at which the market goes up and down. And the same concept applies to individual funds or investments: for example, KiwiSaver funds are characterised by five levels of risk (defensive, conservative, balanced, growth, aggressive), depending on their likely volatility.

Defensive funds are the least volatile: they’re the ‘safest’ in terms of risk, but they’re also the most likely to deliver lower long-term returns. Aggressive funds sit on the opposite end of the risk spectrum: they’re the most likely to experience significant drops in value, but also the most likely to deliver higher returns in the long run.

Time

Time is another key component of the investment picture. Generally speaking, the longer your money stays invested, the more you can benefit from the power of compounding returns (earning returns on interest or other types of returns such as dividends). And there’s another reason why time is important: the longer you have before you need the money, the greater the opportunity to recover from any dips.

In investment jargon, this is called your investment ‘time horizon’ (how far your investment goals are, for example your retirement), and it’s a crucial factor when determining your risk profile. We will come back to this shortly.

Diversification

You may have heard the adage “Don’t put all your eggs in one basket”, when it comes to investing. In technical terms, this is called ‘diversification’. A diversified investment portfolio is one where money is allocated across many different investments (including variations in investment types, industries, companies countries and more each with its own characteristics and levels of risk.

This strategy allows you to balance your financial goals with your risk profile. By spreading out the risk across your portfolio, you can protect your investments better against volatility, and participate in the growth of investments that are doing well.

Cost

If risk is inseparable from return in the investment world, so is cost. The reality is, every dollar counts when investing and creating wealth for retirement, so it’s important to know what investment fees you’re paying.

Fees vary widely across investment products and asset classes, including KiwiSaver funds. And while high fees are not indicative of performance, just as much as low fees are not the only factor that goes into the investment decision, it’s something to consider nonetheless.

You

Finally, you – the investor – are another key element of your investment risk assessment. As humans, we’re emotional beings. And while investing based on emotions is never a recommended approach, it’s also nearly impossible to completely remove emotions from any decisions.

But by understanding your emotions, and what level of risk you feel comfortable to take on with your investments, you can choose options that align with who you are as well as your long-term goals. In the next section, we’ll delve a little deeper into your risk profile and what determines it.

Your risk profile

Identifying your risk profile is a key step in your investment plan, whether you’re looking at building a diversified portfolio or KiwiSaver is the only investment tool you currently have in place.

In short, your risk profile is the level of risk you are prepared or able to take on in relation to your investments. To understand your risk profile, you need to consider how the different elements of investment risk interact with one another. And as we’ll see, with your goal in mind, there are two dimensions to risk profiling: your risk tolerance and your risk capacity.

Risk tolerance

We’ve briefly touched on risk tolerance before in this guide. This is the component of your risk profile that relates to you, as an investor: your emotions, your personality, how you feel about the prospect of losing money in the short term.

Some investors have a low risk tolerance and worry with every fluctuation in their balances: this can prompt them to make costly impulsive decisions. A recent example of this was the 2020 global market downturn as an initial response to the Covid-19 pandemic, when many KiwiSaver members saw their balance drop and, as a result, decided to switch to lower-risk funds, crystallising their losses and essentially missing out on the subsequent recovery.

As we said, it’s not always possible to remove emotions from the equation; just like it’s not possible to ‘time the market’. So, to avoid impulsive decisions, it’s important to select investments (e.g., a KiwiSaver fund) that align with your risk tolerance. Then keep sight of the long-term: depending on when you will need access to your investment funds, you may only need to check in with your investments/KiwiSaver once a year, just to stay on top of it.

Risk capacity

Unlike risk tolerance, which is the amount of risk you are willing to take (your psychological-based sense of risk), your risk capacity is the risk that your investments are able to take on without significant risk of crytallising losses. And one of the determining factors of risk capacity is time horizon.

When investing, it’s great to have time on your side, and that’s why the earlier you start investing the better: thanks to the power of compounding growth, even a small amount invested early can balloon to big gains in the long run. At the same time, having a longer time horizon also means that you might be able to withstand a higher level of risk, and temporary declines in your balance.

This is what your risk capacity is all about: choosing the maximum level of risk that you can afford to take, based on your goals and time horizon. Too high-risk, and your funds may not be secure enough for your goals. Too low-risk, and you might miss out on a growth opportunity.

Managing risk

Managing investment risk can be complex, especially during periods of heightened market volatility. But there are effective ways to do so, with your goals and risk profile in mind. Starting with…

Seeking advice

As financial advisers, we know that one size doesn’t fit all, and we put our expertise and knowledge of the market to work, to ensure that your Kiwisaver and investment decisions are well-informed and purpose-fit for you.

Time horizon, risk profile, diversification – these are just some of the important things to think about. And having an expert in your corner can help you navigate this changing landscape with confidence. What’s more, over time you can use us as a sounding board, whenever you need to review your progress and adjust your long-term plan.

Planning

Without a plan, it’s easy to lose your sense of direction and go off track. Planning for your retirement goals is like having a roadmap: you know where you’re starting from, and you know where you’d like to get. And even though there might be some detours along the way, you can take steps to correct your course.

The key thing is to start. Over time, your risk profile may change, and your investment time horizon will progressively reduce.

Knowledge

Building your investment knowledge is also a long-term investment. It may take time and dedication, but it can help in achieving your financial goals.

There are many ways to do so, from keeping up to date with the markets, through to reading commentary and listening to podcasts: the world wide web is an endless source of information. However, it’s not always easy to distinguish reputable, trustworthy sources from questionable ones. You can start perusing the articles and guides here on The Retirement Platform – we’re building an ever-growing library of content – helpful information to inform your journey.

Signal vs noise

And finally, a few words about ‘signal vs noise’. You may have heard this expression before. In simple terms – Signals are elements that you need to pay attention to – these could be changes in your personal situation or investment plans.

Noise on the other hand, is the day to day (and month to month) chatter that goes on in the markets. This is stuff over which you have no control and the markets will do what the markets do.

We’re here to help

There’s a lot to think about – and we’re here to help you make sense of it all. From knowing where you’re at and understanding where you’d like to be, through to creating and periodically reassessing your action plan.

Welcome

Welcome

The reality is, not all risks are created equal or need to be avoided altogether. Some risks have the potential to throw us off course or slow us down. But sometimes, as long as we’re comfortable with it, we can afford to take on some level of risk to unlock a potential opportunity.

Investing is no different: all types of investment entail some level of risk, in exchange for relatively higher potential returns over the medium to long term. And while some investing risks are outside your control, many others can be minimised with an appropriate strategy.

We hope this guide will answer some of your questions. If you are still unclear:  we’re here to help you answer any queries you may have. Please don’t hesitate to contact us, and in the meantime, enjoy the read.

 

Elements of risk

Elements of investment risk

Just like returns, risk is part of investing, and it refers to the likelihood of losing money. Whether it’s KiwiSaver or other investment vehicles (like bonds, term deposits, shares, managed funds etc.), all investments carry some degree of risk. It’s the nature of investing, after all: you don’t get the highs without some lows. The higher the risk you can afford and are comfortable to take, the greater the likelihood of higher returns in the long run.

So, how is risk determined? There are certain key factors to consider – here’s a summary to get you started.

Volatility

The first thing to note is that investment markets go up and down all the time, either slightly or sharply. It’s their nature, and it’s impossible to predict when the next ‘boom’ or downturn will happen, or where it will come from.
In simple terms, market volatility is the relative rate at which the market goes up and down. And the same concept applies to individual funds or investments: for example, KiwiSaver funds are characterised by five levels of risk (defensive, conservative, balanced, growth, aggressive), depending on their likely volatility.
Defensive funds are the least volatile: they’re the ‘safest’ in terms of risk, but they’re also the most likely to deliver lower long-term returns. Aggressive funds sit on the opposite end of the risk spectrum: they’re the most likely to experience significant drops in value, but also the most likely to deliver higher returns in the long run.

Time

Time is another key component of the investment picture. Generally speaking, the longer your money stays invested, the more you can benefit from the power of compounding returns (earning returns on interest or other types of returns such as dividends). And there’s another reason why time is important: the longer you have before you need the money, the greater the opportunity to recover from any dips.

In investment jargon, this is called your investment ‘time horizon’ (how far your investment goals are, for example your retirement), and it’s a crucial factor when determining your risk profile. We will come back to this shortly.

Diversification

You may have heard the adage “Don’t put all your eggs in one basket”, when it comes to investing. In technical terms, this is called ‘diversification’. A diversified investment portfolio is one where money is allocated across many different investments (including variations in investment types, industries, companies countries and more each with its own characteristics and levels of risk.

This strategy allows you to balance your financial goals with your risk profile. By spreading out the risk across your portfolio, you can protect your investments better against volatility, and participate in the growth of investments that are doing well.

Cost

If risk is inseparable from return in the investment world, so is cost. The reality is, every dollar counts when investing and creating wealth for retirement, so it’s important to know what investment fees you’re paying.

Fees vary widely across investment products and asset classes, including KiwiSaver funds. And while high fees are not indicative of performance, just as much as low fees are not the only factor that goes into the investment decision, it’s something to consider nonetheless.

You

Finally, you – the investor – are another key element of your investment risk assessment. As humans, we’re emotional beings. And while investing based on emotions is never a recommended approach, it’s also nearly impossible to completely remove emotions from any decisions.

But by understanding your emotions, and what level of risk you feel comfortable to take on with your investments, you can choose options that align with who you are as well as your long-term goals. In the next section, we’ll delve a little deeper into your risk profile and what determines it.

 

Your risk profile

Your risk profile

Identifying your risk profile is a key step in your investment plan, whether you’re looking at building a diversified portfolio or KiwiSaver is the only investment tool you currently have in place.

In short, your risk profile is the level of risk you are prepared or able to take on in relation to your investments. To understand your risk profile, you need to consider how the different elements of investment risk interact with one another. And as we’ll see, with your goal in mind, there are two dimensions to risk profiling: your risk tolerance and your risk capacity.

Risk tolerance

We’ve briefly touched on risk tolerance before in this guide. This is the component of your risk profile that relates to you, as an investor: your emotions, your personality, how you feel about the prospect of losing money in the short term.

Some investors have a low risk tolerance and worry with every fluctuation in their balances: this can prompt them to make costly impulsive decisions. A recent example of this was the 2020 global market downturn as an initial response to the Covid-19 pandemic, when many KiwiSaver members saw their balance drop and, as a result, decided to switch to lower-risk funds, crystallising their losses and essentially missing out on the subsequent recovery.

As we said, it’s not always possible to remove emotions from the equation; just like it’s not possible to ‘time the market’. So, to avoid impulsive decisions, it’s important to select investments (e.g., a KiwiSaver fund) that align with your risk tolerance. Then keep sight of the long-term: depending on when you will need access to your investment funds, you may only need to check in with your investments/KiwiSaver once a year, just to stay on top of it.

Risk capacity

Unlike risk tolerance, which is the amount of risk you are willing to take (your psychological-based sense of risk), your risk capacity is the risk that your investments are able to take on without significant risk of crytallising losses. And one of the determining factors of risk capacity is time horizon.

When investing, it’s great to have time on your side, and that’s why the earlier you start investing the better: thanks to the power of compounding growth, even a small amount invested early can balloon to big gains in the long run. At the same time, having a longer time horizon also means that you might be able to withstand a higher level of risk, and temporary declines in your balance.

This is what your risk capacity is all about: choosing the maximum level of risk that you can afford to take, based on your goals and time horizon. Too high-risk, and your funds may not be secure enough for your goals. Too low-risk, and you might miss out on a growth opportunity.

Managing risk

Managing risk

Managing investment risk can be complex, especially during periods of heightened market volatility. But there are effective ways to do so, with your goals and risk profile in mind. Starting with…

Seeking advice

As financial advisers, we know that one size doesn’t fit all, and we put our expertise and knowledge of the market to work, to ensure that your Kiwisaver and investment decisions are well-informed and purpose-fit for you.

Time horizon, risk profile, diversification – these are just some of the important things to think about. And having an expert in your corner can help you navigate this changing landscape with confidence. What’s more, over time you can use us as a sounding board, whenever you need to review your progress and adjust your long-term plan.

Planning

Without a plan, it’s easy to lose your sense of direction and go off track. Planning for your retirement goals is like having a roadmap: you know where you’re starting from, and you know where you’d like to get. And even though there might be some detours along the way, you can take steps to correct your course.

The key thing is to start. Over time, your risk profile may change, and your investment time horizon will progressively reduce.

Knowledge

Building your investment knowledge is also a long-term investment. It may take time and dedication, but it can help in achieving your financial goals.

There are many ways to do so, from keeping up to date with the markets, through to reading commentary and listening to podcasts: the world wide web is an endless source of information. However, it’s not always easy to distinguish reputable, trustworthy sources from questionable ones. You can start perusing the articles and guides here on The Retirement Platform – we’re building an ever-growing library of content – helpful information to inform your journey.

Signal vs noise

And finally, a few words about ‘signal vs noise’. You may have heard this expression before. In simple terms – Signals are elements that you need to pay attention to – these could be changes in your personal situation or investment plans.

Noise on the other hand, is the day to day (and month to month) chatter that goes on in the markets. This is stuff over which you have no control and the markets will do what the markets do.

 

TIME FOR A RETIREMENT CHECK UP?

How much you’re contributing, your fund type, your risk appetite and capacity, and more: use our handy Quiz to take a good look at your KiwiSaver settings and goals.

Like to grow your retirement saving savvy? Read on…

Understanding risk, planning your savings, how retirement planning needs change through life, and much more. You name it, you’ll find a helpful read here.

Get the latest Future Focus Report

Like to stay informed about personal finance and retirement planning? Our Future Focus report is for you. - Click on image to download


The long view...

Q3 2023

A mixed bag for investors.

KiwiSaver After 65

Don't be in a hurry to cash out your KiwiSaver.

One Year vs. 30 years

Your time horizon is what matters.

Get the latest Future Focus Report

Like to stay informed about personal finance and retirement planning? Our Future Focus report is for you. - Click on image to download