The KiwiSaver risk ladder - a step by step guide

Wednesday, 21 August 2019

Many KiwiSavers do not see themselves as investors, and do not grasp investing basics.

OPINION: Climb a ladder and the higher you go, the harder the bump is, if you fall off.

It's a simple relationship, though neighbours I've seen working at heights have shown me not everyone grasps the seriousness of it.

There's a KiwiSaver risk ladder, and many people fail to grasp how that works either.

The Financial Markets Authority surveyed investors and found some confusion over the KiwiSaver fund risk ladder.

The higher you climb on a ladder, the more you feel the wobbles.

* Strategies for the five ages of KiwiSaver

* Five ways KiwiSaver scheme will change this year

* Want to sort your KiwiSaver? Here's how**

Nearly everyone is in KiwiSaver, but many KiwiSavers don't think they're investors, the FMA's new Investor Confidence Report shows.

That's not surprising. We didn't call it KiwiInvestor, did we?

Investment words were often coined for their marketing value, not because they are accurate labels.

It's no wonder the FMA found 41 per cent of people thought a KiwiSaver growth fund was low or medium risk, and 29 per cent thought a KiwiSaver balanced fund is low risk.

What are the natural meanings of the words 'balanced' and 'growth'?

Something that grows gets bigger.

Something that is balanced has reached equilibrium.

To understand KiwiSaver is to have to learn a new set of meanings for words.

The ladder of KiwiSaver risk goes like this: Cash funds, conservative funds, balanced funds, growth funds.

Sometimes there are more rungs: Cash funds, conservative funds, moderate funds, balanced funds, growth funds, aggressive funds.

Once you have the logic of the ladder in your head, things start making sense.

Each step up the KiwiSaver risk ladder increases the proportion of funds that are invested in company shares listed on stockmarkets like the ASX, the NZX, and the UK and US markets.

As a result, there is a decrease in the amount of cash and fixed interest bonds the funds own.

Why would anybody climb the ladder of risk?

The answer, of course, is the same reason that people climb actual ladders.

They are trying to reach something. With an actual ladder, it is the gutter which needs cleaning out, or the barge boards which need a lick of paint.

With KiwiSaver, the goal is to amass enough money to supplement NZ Super and live a decent life after you retire.

The reason people choose growth funds is they hope over the long term history will repeat, and shares will deliver them the highest return.

Over a working lifetime a growth fund should beat a balanced fund, and a balanced fund should beat a conservative fund.

As with an actual ladder though, the higher up you climb the wobblier things feel.

In any year a growth fund is likely to rise further, or fall further, than a balanced fund, and a balanced fund is likely to rise further, or fall further, than a conservative fund.

This is all why those clever online 'fund finder' calculators ask you to say how long you will be invested before you need the money, and how much of a rise, or fall, you can live with in a single year.

They are helpful because they give investors an idea of the kinds of ups and downs they have to learn to live with if they want to be a KiwiSaver investor, and achieve their goals.

For a conservative fund, it's roughly a 0-5 per cent gain, on the Sorted fund finder calculator.

For a balanced fund, it's a roughly 10 per cent loss to 20 per cent gain.

For a growth, or aggressive fund it's a roughly 30 per cent loss to 100 per cent gain.

Hopefully, when there's a fall in the value of your KiwiSaver fund in any given year, it will be made back in the next, and over the long run, you end up reaching your goal.

GOLDEN RULES:

* Understand you are an investor

* Take calculated risks

* Learn the KiwiSaver lingo