Asking yourself these simple questions will help you understand whether your KiwiSaver (or other managed funds) investments are aligned with your objectives and optimised for your circumstances.
1. What’s your timeframe?
Consider the time you have until you expect to use or withdraw your investment. For example, if you just started out in KiwiSaver and plan to make a first home withdrawal in the next year or two, your timeframe will be very different than someone in their late 40s who owns their own home, for whom KiwiSaver is a small part of their overall investment mix for their retirement. First home buyers who will soon need to access KiwiSaver for their deposit might consider looking at a more conservative mix. Once they’re in their first home, this fund mix can then be adjusted to higher risk funds with a longer investment horizon.
And your investment strategy may change after 65. Learn about the role KiwiSaver plays once you can access it and the concept of gradual ‘decumulation’ of assets to keep you in the lifestyle to which you are accustomed here.
Depending on your timeframe, a specialised investment opportunity that carries higher potential risks and returns – such as the ARK Disruptive Innovation Fund – could have a role to play within a diversified portfolio which may include other types of investment like property, a business, local and global equities etc.
2. What other investments do you have?
This is the (financial) theory of relativity – your ability to withstand volatility based on the size of each type of investment, relative to your total assets. Let’s say your KiwiSaver is heavy on equities, and it halves in value. If you’re a multimillionaire with freehold rental properties, business and cash assets, this is a blow, but one from which you’ll recover, because it’s just one portion of your wealth. If, on the other hand, that KiwiSaver account is your main asset, it’s a much bigger setback.
If KiwiSaver is your entire retirement saving plan, you might want to make sure it's well-diversified across different funds and strategies. But if it is a small portion of your total retirement plan, you may be more comfortable with a more aggressive fund. Consider how to achieve diversity with a mix of assets as you grow your wealth.
3. What’s your personal risk comfort zone?
Your level of comfort with risk is important, regardless of your timeframe and mix of investments. The personal risk element deals with the issue of choosing assets with smaller price movements due to either a preference for not having the worry of seeing things change by large amounts, or not being able to take losses.
For example, if day-to-day price movements in your investments keep you awake at night, then a diversified portfolio of assets that experience smaller price movements may be the best approach to give you a higher degree of comfort.
The flipside is that, over time, this more cautious approach is likely to (but may not necessarily) lead to lower overall returns.
From a diversification perspective, the argument still holds that diversification helps you optimise your risk and is possible to achieve even within a lower-risk group of assets. For example, if all you want to own is term deposits, having these set up with different maturities with different providers will provide you with a more optimal risk profile than having everything in one term deposit in one bank.
Rethinking your approach to risk
In general, investing in the things you’re interested in and know something about, will help you stay engaged with your portfolio and be motivated with your contributions. You don't have to be ‘all-in’ with a higher risk fund – this could be the spice that keeps your portfolio interesting, rather than the main ingredient.
Remember, diversification is a strategy to optimise, as much as lower risk. Consider the most efficient way to manage risk in line with your goals. For example, a portfolio with a very high proportion of cash, may keep you safer from losses, but is unlikely to give you the gains you want either.
Understand when you’re simply exchanging one measure of risk for another – the danger of the loss of opportunity. You’ll never make money off the investments you don't make.
Things you might want to consider: