Risk can sound like something to avoid.
When people hear the word risk, they may think of losing money, uncertainty, or making the wrong decision. In investing, however, risk is not automatically bad.
Risk is part of investing. The key is understanding what type of risk is being taken, why it is being taken, and whether it fits the investor’s goals and timeframe.
Risk and return are linked
Investments that have the potential for higher long-term returns usually also come with more short-term movement.
This means the value of an investment can rise and fall along the way. For some investors, that movement can feel uncomfortable, especially when markets are making headlines.
However, avoiding risk completely can also create challenges, particularly if investments need to grow over time.
Too little risk can be a risk too
Some people assume the safest option is always the best option.
For money needed soon, a lower-risk option may be appropriate. But for long-term goals such as retirement, being too conservative may make it harder for investments to keep up with inflation or grow enough over time to meet the needs of the investor.
This is why investment risk needs to be considered alongside the purpose of the money.
Timeframe matters
A person investing for a goal that is many years away may be able to accept more short-term ups and downs than someone who needs the money soon.
For example, a KiwiSaver member in their 30s may have decades before retirement, while someone planning to withdraw money for a first home in the next year may need a different approach.
The right level of risk depends on how long the money will be invested and how the investor feels about market movement.
Comfort matters too
Even if a higher-risk investment suits someone’s timeframe, the changes in value of the investment also needs to be something they can live with.
If market falls cause someone to make sudden changes at the wrong time, the investment approach may not be suitable for them. A good plan should consider both the numbers and the person behind them.
Risk is not one-size-fits-all
Two people of the same age may need different investment approaches.
Income, savings, debt, goals, family circumstances, and previous investing experience can all influence what feels appropriate.
That is why it is important not to choose an investment fund simply because it has performed well recently or because someone else is using it.
Making informed decisions
Investment risk should not be ignored, but it also should not be feared unnecessarily.
The aim is to take a level of risk that supports the investor’s goals, matches their timeframe, and feels manageable through normal market ups and downs.
A financial adviser can help explain the options, review KiwiSaver or investment settings, and support investors to make decisions that fit their circumstances.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.
