George Carter is Managing Director of fund manager and KiwiSaver provider Nikko AM NZ and investment platform GoalsGetter.
OPINION: When you are with KiwiSaver, you are, by definition, an investor exposed to the financial markets through managed funds.
The term engagement correctly conveys that there is some risk associated with investing. So how do you, as an investor, determine what investment risk you are willing to accept?
The many terms our industry uses to explain risk can be misleading. Fund managers must label each fund with a risk rating of between one and seven (seven being the riskiest).
CONTINUE READING:
* NZX50 loses 3 points, holds as global markets turn negative
* Why you shouldn’t panic if your KiwiSaver crashes
* Should you switch your KiwiSaver from Growth to Conservative?
However, in this context, risk only measures volatility over short periods of time. Cash funds are therefore generally rated one – but for an investor trying to achieve a strong return over a 20-year period, there is a very high risk that a cash fund will not achieve that goal.
So how do you decide what your own assessment of investment risk is?
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George Carter: “Good investment management… is about establishing a strategy and approach that is appropriate for the goals and time period under consideration.”
While most of us recognize that the presence of risk is balanced by the prospect of reward, there is a tendency to confuse it with our appetite for danger or physical courage.
But just because you might like the feeling of throwing yourself out of a plane at 20,000 feet, attached to nothing more than a giant canvas ceiling, should that automatically flag you as a high-risk investor?
Or if you’d rather get your adrenaline pumping from a daily dose of Wordle, should you put your money on the slow investing lane forever? Not necessarily, as my own situation can show.
I started my professional life as an actuary – as someone who makes a living from measuring and managing risk, I am naturally very cautious.
When it came to buying our family home, I took the very prudent step of making sure we could cover our mortgage even if interest rates doubled. It might not have gotten us the most expensive house we could afford, but it did protect us from potential upheaval. So far, so obviously prudent.
But then, when it comes to my KiwiSaver, it might seem on the surface like I lost track because I’ve invested it 100 percent in stocks.
Given my natural instincts, I certainly cringe when I see my tracking scale resemble a roller coaster in any given month or year. But then I remind myself that I have 20 years to go before I retire, and hopefully many more to retire, and I’m adamant that during that time, stocks will outperform bonds, which in turn will outperform cash. So, despite the unsettling sight of volatile KiwiSaver balances, I believe my money is best invested contributing to increasing returns over time.
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Risk management is a fundamental investment, but your personal investor profile is defined by more than your risk appetite at different stages of life (file photo).
As I near retirement, I will no doubt change my attitudes to reflect a reduced appetite for large swings in value. But right now, with the goal of achieving desired retirement savings over a period of decades, cash isn’t the “low-risk” option.
Good investment management isn’t about when particular markets have hit a top or bottom, it’s about determining a strategy and approach that is appropriate for the goals and timeframe under consideration.
For example, let’s say you want to set up a fund to give to your newborn child when they turn 21. You set a goal of $35,000 and plan to set aside $100 a month. Achieving this goal depends on two sources: the money you want to invest ($25,200) and the money you need from the market ($9,800).
You can start with a fairly aggressive investment strategy, or deposit a little more each month (our GoalsGetter calculator is a helpful resource to give you a viable strategy), but as you get closer to both your financial goal and desire, access the fund , you might decide to take a more defensive stance to avoid a potentially large drop in value.
James Hose/Unsplash
As I near retirement, I will no doubt change my attitudes to reflect a reduced appetite for large swings in value (file photo).
Risk management is a fundamental investment decision, but your personal investor profile is defined by more than your risk tolerance at different stages of life. It reflects a number of factors that ultimately give you some level of comfort to continue investing, including your personal beliefs, preferences, knowledge, and the time, skills, and resources you may devote to researching and monitoring the company’s activities have to.
This last point is very important for all investors as it determines whether you are able to invest directly in companies yourself, for example through online trading apps, or whether you should de-risk your exposure through professionally managed funds.
Choosing to invest in managed funds rather than directly in companies does not mean relinquishing responsibility for achieving what you want to achieve or how you want to achieve it. Institutional investors will generally consult a panel of fund managers before choosing who to invest their money with. They will make that decision based not only on professional competence, which should be self-evident, but also on whose philosophies align with them; of who they think will make pressured, values-based decisions they can trust.
Investment markets have always oscillated and will continue to do so. The journey does not go smoothly and that is why it is important that you know at the outset which route you are taking, why and with whom you are traveling.
If you don’t have the time or expertise to study the market yourself, research who is ultimately driving the culture of the fund management firms you are interested in. Are they active or passive investors? what do you believe in How do they choose the companies to invest in? Are they driven by asset price or company philosophy?
Listen to their podcasts, read the material they publish and get a feel for the people who will be managing your money to see if you like the way they think and work. Being comfortable with your response to these aspects will help you develop and understand your own investor profile.
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