Taking more risk could make you $200k

Q. I’ve seen a few people talking about the ‘‘risk’’ being taken by their KiwiSaver funds. But my question is, why would anyone want to take any risk with the money they are investing?

A. Good question! When we talk about ‘‘risk’’ in investing, we mean the chance that an investment might drop in value, or not deliver the returns you expect.

KiwiSaver funds are classified into risk categories: Cash, conservative, balanced, growth and aggressive.

If you haven’t made an active choice, you’re probably in a default balanced fund.

Cash funds take the least risk – they keep their money in things like term deposits. Growth and aggressive funds take the most – aggressive funds usually have more than 90% of their money in things like shares and property.

While it might sound like a good idea to stick with a conservative investment for something as important as your retirement funds, it can actually end up hurting you.

If you have a long investment horizon, you can usually afford to take more risk because you have time to ride out the market movements. And over time, higherrisk investments tend to deliver better returns.

An 18-year-old starting out in a career paying $45,000 now (and increasing over time) could end up with just under $200,000 saved at 65 if they were in a conservative fund, contributing 3% matched by their employer.

If they switched to aggressive, they could save almost $400,000 – based on putting exactly the same amount of money in (those calculations are from AMP’s KiwiSaver calculator).

That’s an extra $200,000 just from making a fund choice.

If you go for an aggressive or growth strategy it’s important not to panic when markets are volatile – shifting your money during a market slump can mean you just lock in your losses.

Of course, unless your money is completely in cash, there’s no such thing as a no-risk investment.

Even investors in conservative funds have had an unpleasant surprise recently. Some conservative funds experienced losses because rising interest rates reduced the value of the bonds they hold.

If you want to check the right fund for you, you can get in touch with your provider or use one of the online tools available like Sorted’s KiwiSaver fund finder.

Susan Edmunds is Stuff’s business editor. Each week, she will answer your money and personal finance questions. You can send yours to susan.edmunds@stuff.co.nz. This information is not intended as personal financial advice and should not replace advice from a professional.