1. Investors
  2. Choose your investments
  3. Understand risk

Understand risk

Risk isn’t bad; it’s a normal part of investing. It’s the chance you take that you won’t get the return you expected on your investment, or that you might lose some or all of the money you invested. Risk can also improve your chances of getting a good return. Having a clear understanding of your own goals and attitude to risk will help you work out how much risk to take. 

7 general investment risks

  1. Interest rate risk: when interest rates rise after you lock in your money, meaning you don't earn as much on your money as you would have if you'd invested at the higher rate.
  2. Liquidity risk: there might not be buyers interested in your investment when you want to sell.
  3. Credit risk: the organisation may not be able to repay its debts, and you might lose your money.
  4. Economic risk: the economy may or may not be doing well, which could affect the value of your investment.
  5. Industry risk: risks affecting a particular industry, like shortages of raw materials or changes in consumer preferences.
  6. Currency risk: your investment is affected by changes in the value of the New Zealand dollar.
  7. Inflation risk: your investment doesn't earn enough to keep up with inflation.

Why risk isn’t bad

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:

  • you’ve accepted too much or too little for your savings objective; and/or
  • you’re not being paid enough in return to compensate you for the risk you’ve accepted. 

How risk affects your investment

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.

How to check the likely risk of an investment

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.

risk indicator 

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.

Don't put all your eggs in one basket

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.

Learn more about:

What New Zealanders think about risk

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: