Assessing Your Risk Tolerance

You might have heard a lot about "risk tolerance" when it comes to KiwiSaver. But what does it actually mean? Simply put, risk tolerance is how much risk you're willing to take with your investments. In KiwiSaver terms, this often comes down to how much fluctuation you can handle in your fund’s value. We’ve put together a guide to help you understand your own personal risk tolerance.

What Is Risk Tolerance?

Risk tolerance is all about how comfortable you are with potential ups and downs in your investment. Higher-risk funds can swing significantly in value, while lower-risk funds tend to be steadier. Generally, higher risk can mean higher returns, but there are no guarantees. So, understanding your investment timeframe is crucial to ensure the risk you take aligns with how long you plan to invest.

Factors That Influence Your Risk Tolerance

• Investment Time Frame: This is how long you plan to invest before you need the money. A long-term timeframe is usually 10+ years, while short-term is 3 years or less.

• Age and Stage of Life: Your age plays a big role. Younger investors often have a longer timeframe and can accept more risk because they have time to recover from potential losses. Keep in mind, you can use your KiwiSaver funds for a first home purchase which may shorten your investment timeframe.

• Emotions: Be honest about how you feel about risk. If you’re not comfortable with the idea of a 15% drop in your KiwiSaver balance, a high-risk fund might not be right for you. Remember, your feelings are important but should be considered alongside your investment timeframe an stage of life.

Types of Risks Your KiwiSaver Faces

• Market Risk: The chance of losing money due to market changes, like the impact of the COVID-19 pandemic on trade.

• Inflation Risk: The risk that inflation will reduce the purchasing power of your investment. Your KiwiSaver balance needs to grow faster than inflation to maintain its value over time.

• Longevity Risk: The risk of outliving your savings. To avoid this, make sure you’re regularly saving for retirement and reviewing your KiwiSaver investment.

• “She’ll be Right” Risk: This is the Kiwi attitude of thinking everything will turn out fine, even if we don’t give it the attention it needs. After reviewing thousands of KiwiSaver funds, we can confirm it won’t be right… Our experience shows that actively managing your KiwiSaver is key to having a large balance at retirement.

Matching Risk Tolerance with KiwiSaver Fund Types

Did you know KiwiSaver funds have been tailored to match the investors’ risk profile? Here’s a quick guide:

• Conservative Funds: Best for low-risk tolerance. Focuses on preserving your capital with minimal fluctuations.

• Balanced Funds: For moderate risk tolerance and a medium investment timeframe. Provides a balanced approach to grow your money steadily.

• Growth Funds: Suitable for higher risk tolerance and a longer investment horizon. Expect more ups and downs, but with the potential for greater returns.

• Aggressive Funds: For very high-risk tolerance. These funds can experience significant short-term fluctuations for potentially high long-term gains.

Adjusting Your Risk Tolerance Over Time

Your risk tolerance and investment needs change throughout your life, so it doesn’t pay to just “set and forget”. Here are key times to reassess:

• Buying Your First Home: If you’re using your KiwiSaver for a home purchase or have recently done so, it’s a good idea to review your investment strategy.

• Approaching Retirement: If you plan to start using your KiwiSaver in less than 10 years, it’s crucial to reassess. Consider how you’ll use your funds—whether slowly over many years or all at once—as this will affect how you should structure your risk tolerance.

• Regular Reviews: Make it a habit to regularly check and adjust your risk tolerance and KiwiSaver fund choice to ensure they still fit your needs as your life changes.

How We Can Help

At MoneyGuide, we’re here to make sure your KiwiSaver investment is set up perfectly for your goals - whether it’s for retirement or buying your first home. We offer this service free of charge and work with top KiwiSaver providers to get you the best results.

If you want help improving your KiwiSaver investment, just complete the short form below and we’ll get it sorted - free of charge!