Risk isn’t ‘bad’. Taking on risk is what you’re getting paid for, in the form of the return. If you take on more risk you should get paid more in return. That’s the only reason why you would take on more risk. It improves your chances of getting the return necessary to achieve your goal.
Risk is only bad, if:
Lower risk investments, like cash and bonds, have fewer ups and downs over time so you can expect the investment to perform in a similar way in the future.
If you invest in lower risk investments it’s possible your money won’t grow as fast as inflation, which means your money could be worth less when you eventually spend it.
Higher risk investments, like shares and property, have a lot more ups and downs. You’d expect your returns to drop much more frequently, and in larger amounts and it’s hard to predict how they’ll perform. However, if you’re investing for a long period of time (at least 10 years) you should end up with a larger amount than if you’d taken low, or no, risk.
Use the risk indicator and credit rating as an initial assessment of risk – Managed funds, like KiwiSaver, have to show a risk indicator to show how volatile a fund is (how likely it is to go up and down in value). The indicator makes it easier to compare funds.
Because it’s only measuring volatility risk, it’s possible for quite different funds to have similar risk ratings when markets are relatively stable. It’s a good idea to check how the fund is invested. If it invests in a high proportion of shares and property, it’s likely the risk indicator will get higher when markets are more volatile.
If you’re investing in bonds (or other fixed interest investments), credit ratings help you understand how likely it is you’ll get your money back at maturity, and that interest will be paid on time. Ratings are issued by independent agencies such as Standard & Poor’s, Moody’s and Fitch.
You need to be aware that these agencies have different credit rating systems, and they’re only one factor you need to take into account. Learn more about credit ratings.
Read the risk section of the product disclosure statement (PDS) – Most investments are required to provide a PDS. This will explain the general risks of investing as well as the ‘specific risks’ of investing in a particular product. If there’s no PDS, make sure you read all other material available to you before you invest.
|TIP: If you don’t fully understand the risks described, speak to a financial adviser before you invest. We work closely with financial providers to ensure that risk information is meaningful and accessible to investors. If you don’t think this is happening, we’d be grateful for your feedback.|
Find out how the investment is structured – The way an investment is structured can make it riskier. For example, capital notes are bonds that can convert into shares so they're riskier than normal bonds. If you don’t understand how a product works, don’t invest before speaking to a financial adviser.
Check the investment isn’t a scam – This is the risk you’ve been deliberately misled and may hand your money over to someone who has no intention to pay it back. See our avoid scams page for details of how to check your investment is legitimate.
Investments can fail, regardless of your research. If you only have one investment, there’s a risk you won’t achieve your goal. You can protect yourself against this by making more than one investment, and making more than one type of investment. This is called diversification – not putting all of your eggs in one basket.
Different investments have different risks, so respond differently when things happen in markets or the broader economy. This reduces the chances of you losing all of your money – because some investments go up in the same conditions that cause others to go down.
Most KiwiSaver schemes offer funds which are already diversified, such as balanced or growth funds, because they’re invested in cash, shares and property. This is just one type of diversification.
We asked a range of older New Zealanders what level of investment risk they’re comfortable with. This is what they said:
And here’s their thoughts on what types of investment are low risk: