1. Investors
  2. Deciding how to invest
  3. Understanding risk

Understanding risk

Risk isn’t bad; it’s a normal part of investing. It’s the chance you take you won’t get the return you expected, 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.

How to check the likely risk of an investment

Read the risk section of the Product Disclosure Statement (PDS)

Most investments have a PDS explaining the general and specific risks of a financial product. This might include risks related to the industry a company is in, or the markets it operates in. See types of risk.

The PDS also:

  • provides information about who is managing the investment,
  • explains how the product is structured, and
  • gives information about how you can get your money back.

To learn more, see Product Disclosure Statements.

Check the risk indicator

All managed funds (including KiwiSaver funds) must include a risk indicator in their PDS. Risk indicators are a standardised measure of how likely the fund’s value will go up and down over time (volatility). You can use the risk indicator to compare different funds.

Generally, if a fund invests in a high proportion of shares and property, the risk indicator will get higher when markets are more volatile. Funds with a higher proportion of cash and bonds generally have a lower risk indicator.

risk indicatorCheck the credit rating

Some investments (such as bonds) have a credit rating. They help you understand how likely it is that interest will be paid on time and you’ll get your money back when your investment reaches the end of its term.

Ratings are issued by independent agencies such as Standard & Poor’s, Moody’s and Fitch. These agencies have different credit rating systems and are just one factor you need to take into account.

See credit ratings.

Do your own research

Remember a PDS is a sales document. Check what you’re reading through conversations with financial advisers and friends, your own online research, and reading business publications.

If there is no PDS this is a warning sign an investment may be high risk. See our avoid scams page for details of how to check your investment is legitimate.

Types of risk

All investments have different levels of investment risk. Property and shares are generally higher risk than bonds and cash for example.

Higher risk investments have a lot more ups and downs so you’d expect your returns to rise and fall more frequently, and in larger amounts. It’s hard to predict how they’ll perform, but if you’re investing for at least 10 years you should end up with a larger amount than if you’d taken less risk.

Lower risk investments have fewer ups and downs over time. But if you invest in lower risk products it’s possible your money won’t grow as fast as inflation. This means your money could be worth less when you eventually spend it.

As well as volatility, general investment risks include:

  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.

You may also see specific investment risks described in a PDS. These are risks that are of particular significance to the investment provider or to that particular investment as compared to other providers or similar products.

How to manage risk

Taking on risk is what you’re getting paid for, through investment returns. When you take on more risk, you should get paid more in return.

Risk is only bad if:

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

Understanding your investing goals, your attitudes to risk, and then protecting yourself by having more than one type of investment can all help you manage risk.