Think before you start: establish your investor profile before tackling the markets
George Carter is the managing director of fund manager and provider of KiwiSaver Nikko AM NZ and investment platform GoalsGetter.
OPINION: If you are in KiwiSaver, then by definition you are an investor, with exposure to financial markets through managed funds.
The term exposure correctly reflects the fact that an investment comes with an element of risk. So, as an investor, how do you determine the level of investment risk you are willing to accept?
The many terms our industry uses to try to explain risk can be misleading. Fund managers are required to label each fund with a risk rating between one and seven (seven being the riskiest).
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However, in this context, risk only measures volatility over short periods. Treasury funds are therefore generally rated one, but for an investor looking to achieve a high return over a 20-year period, there is a very high risk that a Treasury fund will not achieve this objective.
So how can you decide what your own assessment of investment risk is?
While most of us recognize that the presence of risk is outweighed by the prospect of reward, we tend to confuse it with our appetite for danger or our physical courage.
But just because you might love the feeling of jumping out of a plane at 20,000 feet strapped to nothing more than a giant canvas blanket, should that automatically mark you as a high-risk investor?
Or if you prefer to get your adrenaline kicks from a daily dose of Wordle, should you still invest your money in the slow lane of investing? Not necessarily, as my own situation can show.
I started my professional life as an actuary – so as someone who makes a living from measuring and managing risk, I’m naturally quite cautious.
When it came time to buy our family home, I made a very careful decision to ensure that we would be able to cover our mortgage even if interest rates doubled. It may not have gotten us the most expensive house we were told we could afford, but it protected us from any potential upheaval. So far, so obviously cautious.
But then, when it comes to my KiwiSaver, it may seem at first glance that I’ve completely lost the plot by having 100% invested in stocks.
Given my natural instincts, I certainly cringe when I see my tracked balance feel like a rollercoaster in any particular month or year. But then I remember that I have another 20 years to go before I retire, and I hope a lot more in retirement, and I have a strong belief that over that time stocks will outperform bonds, which will outperform cash. Therefore, despite the bewildering sight of a volatile KiwiSaver balance, I believe my money is in the best place to help increase returns over time.
As I get closer to retirement, I will no doubt change my settings to reflect a lesser appetite for big swings in value. But for now, with a goal of achieving the retirement fund I want over a period of time measured in decades, being cash is not the “low risk” option.
Good investment management is not about guessing when particular markets have reached a high or low point, rather it is about defining a strategy and approach that suits the objectives and the time frame.
For example, suppose you want to create a fund to give to your newborn baby when he turns 21. By setting a goal of $35,000, you expect to save $100 per month. Achieving this goal will depend on two sources: the money you intend to invest ($25,200) and the money you will need from the market ($9,800).
You can adopt a fairly aggressive investing strategy to begin with, or deposit a little more each month (our GoalsGetter calculator is a useful resource to give you an achievable strategy), but as you get closer to both reaching of your financial objective and the desire to access the fund, you may decide to be more defensive to avoid a potentially significant drop in value.
Risk management is a fundamental part of investing, but your personal investor profile is defined by more than your risk appetite at different stages of life. It reflects a range of factors that ultimately give you a level of comfort in continuing to invest, including your personal beliefs, preferences, knowledge, and the time, skills and resources you may have to devote to investing. research and follow-up of the company’s activity.
This last point is very important for all investors, as it will determine whether you are equipped to invest directly in companies yourself, for example via online trading applications, or whether you need to mitigate the risk of your exposure via funds managed by professionals.
Choosing to invest in managed funds, rather than directly in companies, does not give up responsibility for achieving what you want to achieve or how you want to achieve it. Institutional investors typically interview a selection of fund managers before deciding who to put their money with. They will make this decision not only on professional competence, which should be a given, but on the philosophies that resonate with them; who they think will make decisions under pressure and based on values they can trust.
Investment markets have always and will continue to move up and down. The journey is not easy and so it is important that when you leave you know which route you are taking and why, and who you are traveling with.
If you don’t have the time or expertise yourself to research the market, research who is ultimately driving the culture of the fund management companies you are interested in. Are they active or passive investors? What do they believe in? How do they choose the companies in which they invest? Are they driven by asset price or company philosophy?
Listen to their podcasts, read the material they publish, and learn about the people who will handle your money to find out if you like the way they think and operate. Feeling comfortable with your response to these aspects will help you develop and understand your own investor profile.