Understanding Risk for Everyday Investors
Kristian James, Head of Distribution, spoke to InvestNow magazine to demystify the concept of risk and explain how Kiwi investors can manage risk when they invest.
This article was first published in InvestNow.
Q1: How should investors view their relationship with risk? Is all risk ‘bad’ and something to be minimised or is it something investors should embrace?
Managing risk is part of investing. Rather than being something to be ‘minimised’ versus ‘embraced’, we’d say it’s something to be well-managed.
This can be managed wisely through informed decisions, diversification and the right timeframe.
Growth funds will carry more ‘risk’ than conservative funds, but when you’re investing over the long term, and most Kiwis are when it comes to retirement, the risk from the ups and downs of the market is minimised, and the returns could have the greatest potential.
Time is your best friend here – you can ride out periods when the markets are down and be well-positioned when they recover. Generally, the more time you have in the market, the more risk you can comfortably take.
Q2: Can you describe your approach to managing risk and how this is balanced against achieving the investment objectives for your funds?
At Generate, risk management is a key focus – it ranks right up there with returns.
We’re active managers. We believe that doing the mahi and looking for investments with the best potential is a better approach.
Our investment professionals don’t have crystal balls and so will not always get these investment selections 100% right. This is why risk management is important – it’s all about diversification. That means we use a variety of investment approaches from many different investment professionals, spread across many different asset classes to minimise risk.
Q3: What would you say are the 3 biggest risks that investors face going forward?
Three big risks that investors face are making decisions based on market volatility, reducing contribution rates and choosing the wrong fund type.
Making decisions based on market volatility
From election results to a pandemic, unforeseen events can always pop up and cause market volatility. It’s common for investors to have a kneejerk response and feel tempted to adjust their investments, for example, by switching from an aggressive fund to a conservative fund.
However, it’s important to always keep in mind that short-term market volatility is normal and doesn’t necessarily reflect long-term trends.
We recommend that investors with a long-term investment horizon stay in their current fund and maintain their investment strategy, regardless of volatility.
Reducing contribution rates
Many Kiwis are struggling with the cost of living right now, and some may decide to reduce their KiwiSaver contribution rate, or even opt out completely.
In severe circumstances this might be necessary, but we always advise investors to continue contributing if possible.
The power of compounding returns means even small amounts invested make a big difference in the long run.
Choosing the wrong fund type
Growth funds offer the highest potential for returns over the long term. Approximately 83% of Generate members are in growth funds, compared to just 47%* for KiwiSaver members as a whole.
The reason more of our members are in growth funds is because the majority of them have met with an adviser and talked through their goals, risk tolerance, and investment timeframe – which is often a longer time frame because it’s for retirement. For those with a shorter time frame, such as buying a house in a few years, the recommended fund will be different. Speaking with an adviser gives valuable guidance and peace of mind.
For those investors who want to do it themselves without talking to an adviser, we recommend thorough research on key investment principles. We also have tools on our website that guides people through their risk tolerance and investment timeframe to decide on their preferred fund type.
* KiwiSaver Demographic Study Melville Jessup Weaver February 2024