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Choosing KiwiSaver investment options is more complex than simply depositing money at the bank. There are many different options such as cash, property, bonds and share-based KiwiSaver funds. These different options have varying types of risk and possible returns – suitable for different types of investors. In other words, there is a KiwiSaver fund for everyone when you know how to choose a fund and what to look for.
Types of risk with KiwiSaver
Risk refers to the likelihood that you will lose some (or in very extreme circumstances, all) of the money you have put away in investments. When you’re looking at KiwiSaver investment options, risk comes in two forms:
Risk 1: Volatility
Volatility is the fluctuation of the price or worth of an investment. KiwiSaver investment options that have shares, property, and bonds in them mean that your investment can go up or down in value, because the worth of those investment asset classes has been volatile. This is why for some years, the total value of an investment may drop and not go up, then in subsequent years, large rises provide the catch-up.
The important point to understand about volatility as one of the types of risk with KiwiSaver is that savers don’t “lose” their money. They merely experience a fluctuation in the value of their investments – and these gains or losses are not realised until the money is withdrawn.
Risk 2: Absolute risk
Absolute risk refers to the possibility that your KiwiSaver investment options may fail – that is, you make a realised loss (an actual loss) and permanently lose all or part of your money. This only happens in extreme cases, such as when a company or government you’ve invested in goes bankrupt and cannot pay back your funds. It is not very likely that a KiwiSaver fund would be invested in such high risk investments unless you choose a very high risk investment option.
The Government does not guarantee the safety of your KiwiSaver investment options, so it is important to know what the appropriate level is for the types of risks possible with your KiwiSaver fund.
Types of risk by risk profile
Understanding your risk profile is a good start towards managing your KiwiSaver risk level. The six main types of KiwiSaver investment option, each with their own risk profile, are:
- Life Stages
Every person is different and the types of risk they are likely to encounter will vary depending on their risk profile and the KiwiSaver investment option they choose.
The risk profile suited to you can depend on your financial situation, your personality, your money-related attitudes and habits, and how close you are to retiring. Some people are naturally more timid with their savings, while others are happy to take risks in the hope of bigger gains. There is a simple money personality profiler on Sorted, designed to help people understand their own profile.
As an example, a younger person might be more willing to utilise a riskier growth fund because they have more time to recover from downturns.
Conversely, someone who is close to retiring wouldn’t want the value of their fund dramatically falling when they’re just about to withdraw from it.
So when you know the level of risk suited to you, you might wonder how that risk is managed.
These life stages are provided purely as an example, and are not intended as advice. Different people will have different financial situations and should consider carefully how to invest their KiwiSaver savings.
How KiwiSaver investment options manage risk with diversification
Diversification is a way of managing various types of risk by scattering money across a variety of different assets. Essentially, it’s founded on the “don’t put all your eggs into one basket” mantra.
KiwiSaver investment options use diversification – spreading investors’ money across different assets classes such as shares, bonds, property and cash – so that the poor performance of one asset can be offset by the good performance of another.
As the table below shows, each type of KiwiSaver investment option has a different mix of diversified asset classes, with a different amount of “growth assets” (more risky assets) involved. Growth KiwiSaver funds will have more money concentrated in high risk growth assets such as shares, whereas Conservative funds will have more money invested in low risk investments such as cash and fixed-interest investments.
|Fund Type||Growth Asset Allocation||Definition|
|Defensive||0% – 9.9%||These are generally suitable if you don’t want your KiwiSaver account to ever go down (although there are no guarantees), even though that means your account almost certainly won’t grow as fast, over the long term, as accounts in riskier funds.|
|Conservative||10%-34.9%||These are generally suitable if you are willing to take on some ups and downs in value, and are seeking average long-term returns a bit higher than in a defensive fund but probably not as high as in riskier funds.|
|Balanced||35% – 62.9%||These are generally suitable if you are middle of the road, comfortable with seeing your account value sometimes fall a little and seeking mid-range long-term returns.|
|Growth||63%-89.9%||These are generally suitable if you are looking for fairly high growth over the long term, and won’t want to switch to a lower-risk fund whenever you see your account balance fall quite a lot.|
|Aggressive||90%-100%||These are generally suitable if you are looking for strong long-term growth, knowing you will stick with your fund even when your balance falls fast.|
In order to mitigate some of the risk around governance and capability of KiwiSaver scheme providers, all scheme managers are now treated as managed investment scheme managers. This new regime, established by the Financial Markets Authority in 2013, means all scheme managers had to be licensed by 1 December 2016.
Overall, when it comes to our money, not many of us enjoy risk. But it’s important to recognise and be comfortable with whatever types of risk you choose to take from the KiwiSaver investment options.
Canstar New Zealand general manager, Jose George, caught up with the New Zealand Herald to talk about how to play the long game with KiwiSaver, as well as other hints and tips. Hear more advice in the podcast.
This advice is general and has not taken into account your objectives, financial situation, or needs. Consider whether this advice is right for you. Consider the product disclosure statement before making any purchase decision. See Canstar’s detailed disclosure on our website.
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