11 August 15
When it comes to choosing how much risk to take while investing, I can’t help but think of relationships. Call me a romantic if you like.
There is always a certain amount of risk involved when we open up our hearts to someone. The bull can get in the china shop; we can get hurt along the way.
But there’s also a fair amount of risk for the future if we don’t open up, wouldn’t you say? It can be the difference between something fleeting or a lifetime of happiness together. Being too cautious early on could lead to ending up alone later.
With investing, this is the classic “now risk” vs “later risk” – taking greater risks now means reducing them later, and vice versa: taking too small a risk now means it will loom larger down the line.
There is always some form of risk with investing. Don’t let anyone convince you otherwise! But taking more in the short term can lead to more growth in the long term. Conversely, not taking enough now could limit our financial security later.
Risk comes in many forms, but let’s keep things simple. In essence, risk is the chance that you might not reach your goal. Wherever you set it – putting together a house deposit, your child’s education fund, a retirement nest egg – the question is, what are the chances of you not making it across that line?
Experts like fund managers spend hours gauging the probabilities. With managed funds like KiwiSaver, taking on more risk usually involves dialling up the proportion of growth assets in your fund – like shares and property, which typically have greater returns in the long run. They come with a number of risks – one is that they tend to have more ups and downs in value (“volatility risk”) along the way.
So the “now risk” with shares and property is indeed greater in the short term than with income assets like bonds or cash. However, the “later risk” of not having enough to reach your goal – or having your money whittled away by inflation – is less with growth assets because of the better results you can get over a longer period of time.
So what level of risk have you set in your KiwiSaver fund? Have a look.
Most of us have an allergy to risk – we naturally tend to put it off for the future. Somehow we need to overcome that.
With relationships, thankfully there’s this thing called falling in love. With investing, I’d say successful investors somehow manage to “fall into it” in some way, too.