Managing risk
Risk: More than just timeframes.
Yesterday, we covered the relationship between risk and timeframes, but there’s more to it than that. A growing debate (behind whether avocado on toast is the barrier to home ownership), is whether ‘property’ should be our national investment strategy. So let’s talk about what makes different investments more or less risky.
01 | 05
That was kind of a trick question
The stats suggest that the share markets are the best option for growing your money over the log term, but the best place to put your money is where YOU are comfortable.
Remember: It’s not all or nothing, you can decide how much you want to split up your investments so you feel comfortable with the risks and happy with your returns.
02 | 05
It’s about timeframes
The further away retirement is, the less short term fluctuations matter. You have time to ride them out for the possibility of higher returns in the long run (as long as you're comfortable with the ride!). That’s why most KiwiSaver providers offer Conservative, Balanced and Growth funds.
Fun fact: If you're in KiwiSaver, you're most likely already investing indirectly in the share markets. Not so scary after all, huh?
Conservative, Balanced and Growth are all just words for ‘risk’
We’ve learned that ‘risk’ in investing generally refers to fluctuations over time, and that higher risk means the potential for higher returns. Because the word risk alone doesn't tell us much (and can inspire fear!), providers use more detailed explanations to describe their funds.
On Tablet & Mobile, scroll to see full table content below.
03 | 05
There’s no such thing as low risk, high return
We’ve all seen enough property shows to know that buying the worst house on the best street is a wiser investment decision than the reverse. There is a small chance that in the next 3-5 years, the worst street will become a very popular place to live and you’d make a significant gain in value … but by buying the best house on it, you’re taking a pretty big risk you won’t make your money back in the short or medium term. In 10 years, the situation could look quite different.
KiwiSaver works the same. For example, most Conservative KiwiSaver funds invest a small percentage of their money in the share markets (to reduce the risk your money will decrease in value in the shorter term), while Growth and Aggressive funds invest up to 100% in shares (investors take on risk for the potential of higher returns in the long run).
Why does this matter when talking shares? People often talk about the different risk levels between investment options (aka the property vs shares debate), but even within the types of investments on offer, there are different levels of risk.
04 | 05
Think of the share markets like a department store – there are a lot of options
We’ll dive into all the different options on another day, but the thing you need to know now is the share markets allow you to invest in everything from individual companies through to funds that invest in virtually everything you can imagine.
Jargon alert! Funds
Funds listed on the share markets operate similarly to KiwiSaver schemes. When you invest in a fund, your money is pooled with other investors’, then the fund invests it in a whole range of things. Funds that are listed on the share markets are called ‘ETFs’, or Exchange-traded funds (because they are ‘listed’ on an ‘exchange’). We’ll go into more detail about these later.
You control your risk level
What does this mean for you? It means the share market isn’t one big high risk investment option, it’s a marketplace of investment options, all of which have different risks and potential returns. There are even investment options that act very similarly to a savings account, where investors get a fixed return.
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Investing puts your money to work for you
If you have a job, you know how hard you work to earn money. With investing, your money can earn you more money. That’s a big deal. Obviously, most investments don’t go up all the time, we’ll talk more about dealing with fluctuations later in the course.
Investing is empowering
For most investors, growing their wealth isn’t about getting rich quick, or buying private jets or flash cars, it’s creating financial security and choice over the life they want to lead.
Remember, don’t start by throwing your life savings into the share markets. You can take a very small amount of money out of your savings account and add to it over time.