Is Investment Risk a Bad Thing? 

What is your personal attitude towards taking investment risk as a TOWER KiwiSaver Scheme member?  How risky do you think your TOWER KiwiSaver Scheme investment fund is? 

Answers to these kinds of questions can vary widely across the population, which makes a lot of sense because everyone is unique.

Risk can be a confusing concept for many investors because it can mean different things to different people. The word ‘risk’ is often associated with danger or something bad, and so it makes sense for people to naturally shy away from anything that is described as risky.

When the word ‘risk’ is used to describe types of investments, this will more often than not be referring to ‘volatility’ or the chance that a particular investment may increase or decrease in value over a short period of time.

The sharemarket, for example, is generally considered to be a riskier investment than a term deposit at a bank. This is because there is a much greater chance that an investment in the sharemarket may shoot up in value, or even drop in value unexpectedly over a short period, whereas a term deposit is likely to be fairly predictable.

The potential benefit of ‘riskier’ investments however, is that over a long period of time they generally produce a larger return.  This is what investors should be expecting in return for taking the extra risk.

Higher risk investments are generally considered more suitable for long term investors e.g. 7 years+. This would probably include a large number of TOWER KiwiSaver Scheme members who will not be looking to withdraw their TOWER KiwiSaver Scheme funds for many years to come.

Insights from a recent survey

The way Kiwis regard investment-related risks have been revealed in a survey called KiwiSaver Evaluation: Survey of Individuals Final Report, produced for the IRD by polling agency Colmar Brunton.  A summary of the report is available on the IRD website here, with the full report available here.

A population sample of New Zealanders was carefully selected to give a representative portrait of views and attitudes towards investing in general and KiwiSaver in particular.

It is quite possible that some TOWER KiwiSaver Scheme members were randomly selected by Colmar Brunton for the survey.

Question time!

In the survey people were asked some questions specifically about investment-related risks and some very interesting results came up. 

You might like to survey yourself by answering a couple of these questions (listed below) and record your answers before reading on about Colmar Brunton’s results. 

There are no right or wrong answers, so just make a note about what you really think and feel about risk as an investor.

Question 1: In your attitude towards financial risk, are you a:

Very high risk taker/high risk taker/average risk taker/low risk taker/very low risk taker/don’t know

Question 2: What type of KiwiSaver investment fund do you have?

Cash (low risk)/conservative (low to medium risk)/balanced (medium risk)/growth (medium to high risk)/aggressive (high risk)/a combination of these types/don’t know

And now for the answers…

You can compare your answers with the responses received from those surveyed to see where you fit in.

Table A: Survey answers to Question 1 - Personal risk profile and attitude towards financial risk

(Please note that due to rounding effects, the percentages described do not add exactly to 100%.)

Check question: What was your answer to Question 1?

Interpretation:

• About half of all people surveyed believe they are average risk takers and another 43% perceive themselves to be low or very low risk takers.
  
• Taken together, the vast majority (91%) report being average to below average risk takers. 
  
• Just 9% call themselves above average (high to very high) risk takers.

To explain these results, which are so heavily skewed towards average and below average risk takers, Colmar Brunton suggested some possible reasons:

• The results could have been affected by lack of financial literacy and poor understanding of financial planning;
  
• Respondents were influenced by the negative effects of the global financial crisis and subsequent recession on investment markets;

Table B: Survey answers to Question 2 - What type of KiwiSaver investment fund do you have?

Check question: What was your answer to Question 2?

Interesting results:

• Two KiwiSavers in five  don’t know what the risk level of their fund is; 
  
• When Colmar Brunton refined its analysis further, it found that 52% of KiwiSavers who were already invested in default funds don’t actually know the risk level of that fund.  In fact, all default funds are considered to be conservative – or low to medium risk.

Many KiwiSavers might in fact be invested in a fund that doesn’t actually match the level of risk they are willing to accept.

Refining your own attitude to risk

There is a significant likelihood of mismatch between the risk KiwiSavers see themselves as willing to take versus the actual risk they are taking with their particular KiwiSaver fund.

To make some sense of this, questions need to be asked to help confirm your risk profile. 

The good news is that TOWER provides an online self-assessment tool that enables you to make this critical check.  Simply go to Choosing a fund.

By responding to a few simple statements there, you can match up your own attitude to risk with the appropriate TOWER KiwiSaver Scheme fund.

It’s free to switch between funds within the TOWER KiwiSaver Scheme should you wish to change to a fund that has a risk level more suited to your needs.

You can set up a fund switch online by logging in or registering via the Check My Balance button at the top left hand corner of your TOWER KiwiSaver Scheme Quarterly email.

Note: If you have not already registered to check your balance online, you will need to register by clicking on Check My Balance, then click on the Reset Your PIN button in the Sign in box and follow the simple steps from there.  You will need your Member number and Plan number shown at the top of this email

For a copy of the TOWER KiwiSaver Scheme investment statement, click here.  

Source for this article: KiwiSaver Evaluation: Survey of Individuals Final Report, by Colmar Brunton, publ. July 2010.