Investment Risk and Returns

Like my Grandfather used to say, “The higher the return, the higher the risk”. However many investors tend to focus on finding the investment with the highest return rather than appropriately weighing up risks. So what is risk?.

For investors, risk is the chance that an investment’s actual return will be different than expected. It could include the loss of some or all capital, a lower than expected rate of return, or a lower than expected income. Conversely, it could also include a higher than expected return, although most investors see this as ‘skilled’ investment selection. “In the investment world, the rear-view mirror is always clearer than the windshield.”

According to Modern Portfolio Theory, a strategy that carefully chooses different investments that work together in order to achieve a stated outcome, returns are relative to the amount of risk you are willing to take. Investors that are, in the short term, willing and able to accept variance in annual returns as well as variance in capital are able to gain higher returns in the long run.

So why doesn’t everyone just invest in investments with the highest volatility and therefore the highest return? The first reason is that not all investors can emotionally withstand higher volatility, to see capital move up or down by 10% can be quite distressing for some investors, especially retirees who rely on investment income to provide for living expenses. The second reason is practicality. For example, if the funds have been earmarked for a house purchase, security of capital is far more important than achieving a higher potential return.

There are a number of strategies investors can employ to reduce investment risk. One of the most common methods is Diversification. This means spreading investment capital across a range of investments as well as different asset classes including shares, property and interest type investments. My Grandfather referred to this as “not putting all your eggs in one basket”.

There are many resources available online which investors can utilise to help make investment decisions. The Government funded is a good place to start and includes a handy nine question quiz which helps determine how much volatility can be tolerated. The website also recommends researching, comparing and contrasting everything, which reminds me of one last piece of my Grandfathers advice; “If it’s too good to be true …”.

The views in this article are of a general nature only and should not be considered personalized advice. A disclosure statement is available and free of charge.

Investing in Bonds 101

Almost everyone in New Zealand will have heard of bonds, and indeed most New Zealanders are likely to hold an investment in bonds either in private investment portfolios or through their KiwiSaver retirement plans. Bonds are considered one of the four major asset classes along with shares, property and cash, yet are the least understood investment sector.

So what are bonds? Bonds are basically IOUs issued by governments, companies, banks and even international institutions, such as the International Monetary Fund. The investor becomes the creditor while the borrower becomes the debtor. There is a principle component which is repaid at maturity but the investor also receives interest payments, called coupons. Bonds have an intimate relationship with interest rates in that when interest rates fall, bond prices increase and vice versa. The overall return on a bond, referred to as the ‘yield’, is essentially a function of current interest rates plus an extra return for bearing the risk, with bond holders of riskier companies generally expecting to receive a higher return. Government backed bonds generally have lower yields than corporate bonds as it is very unlikely that a Government will default on the repayment of capital at maturity.

Bond investing involves a number of risks therefore it is important to weigh up the advantages and disadvantages which may include interest rate risks, default risk, inflation risk, liquidity risk and early encashment risk. To manage such risks, many investors choose to invest in bonds though a professionally managed fund. Professional fund managers will buy and sell suitable bonds in order to produce returns that meet the objectives of that particular fund. They will often have access to bonds which are not available to the general investing public or will spot differences in market pricing and act on those differences in order to produce returns for their investors.

When a new bond is issued, a Product Disclosure Statement (PDS) must be produced. Recent new laws now require a PDS to be in clear language so that investors can make informed decisions, and must include essential information such as what the financial product is, information about the organisation offering the product, key terms and key risks affecting the investment. Credit ratings services such as Moodys, Fitch or Standard & Poors may give ratings to bond issues, which helps identify the quality of a particular bond. For investors looking for further guidance, The Financial Markets Authority website contains information on this and many other investment topics; If in doubt, seek the advice of an Authorised Financial Adviser who is qualified and experienced in this area of financial advice.

The views in this article are of a general nature only and should not be considered personalized advice. A disclosure statement is available and free of charge.

Updates to your KiwiSaver

From 1 April 2019, the New Zealand Government have introduced changes to KiwiSaver which offer greater flexibility to tailor your KiwiSaver account to suit your needs.

Here’s what you need to know and how this can work for you:

From 1 April 2019

  • New rates

Two new contribution rates have been added for members, 6% and 10%. Members now have five contribution options to choose from – 3%, 4%, 6%, 8% & 10%.

How can it work for you: Time to review your current contribution rate? Are you stuck on the default 3% and never considered other options? Have your circumstances changed? Wanting to save more for your first home? Could you be saving that little bit extra for retirement? Consider your contribution rate and make it work for you and your goals.

  • Contribution ‘Holiday’

Let’s face it, it’s not a holiday so why call it one. The contributions Holiday will now be known as Savings Suspension. The Contributions Holiday allowed members to temporarily suspend contributions to their KiwiSaver account for a specific period of time. Under the Savings Suspension, members can still elect to suspend contributions as required, but going forward this will be limited to a maximum period of one year, before you need to renew it.

How can it work for you:Essentially this is just a name change but we need to change the way we think of it too. We need to think of this as a suspension of our savings, rather than a relaxing holiday. By introducing a maximum suspension period, this also ensures that members are reviewing KiwiSaver accounts regularly and making the most of their saving years.

  • Government Contribution

Until now the annual contribution made by the Government has been known as the ‘Member Tax Credit (MTC)’. This will now be known as the ‘Government Contribution’.

How can it work for you:The change of name does not impact your KiwiSaver account. If you are eligible to receive the Government Contribution, then this will continue as normal. Make sure you are making the most of the KiwiSaver benefits by checking your current contribution amount to ensure you are eligible to receive the annual Government Contribution of up to $521.43 per year.

What’s coming up?

From 1 July 2019

  • Opening the doors…

From 1 July, KiwiSaver will be open to all ages – people 65 and over will now be eligible to join KiwiSaver. Now’s your chance to enroll in your desired KiwiSaver scheme. This can be included as part of your overall retirement planning or just a back up for a rainy day.

  • …and throwing away the key

Current KiwiSaver rules state that a member who enrolls in KiwiSaver between the ages of 60 to 64 (inclusive) are locked in to their KiwiSaver scheme for five years.

From 1 July, new members will no longer be locked in to the scheme and able to withdraw their KiwiSaver funds at age 65.

From 1 April 2020

KiwiSaver members who are impacted by the 5-year lock in period (i.e. a member who enrolled before 1 July 2019, and aged between 60 and 64 inclusive when they enrolled) can elect to opt out of the lock in period any time after they reach the age of eligibility for NZ Super.

Remember, if you choose to opt out you will no longer be eligible for compulsory employer contributions or the government contribution. Please consider this when making your decision.

For further information on KiwiSaver and how these changes may affect you, head to the KiwiSaver website, or get in touch with an adviser from First Capital to discuss.

Falling in love with volatility

We recently came across an article by investment heavyweights, Vanguard, that raised some interesting points around market volatility. The article demonstrates ways that we can learn to love market swings, and that volatility might not actually be as bad as we think.

Whilst the article refers to American investment options (401k, Roth, IRA), the values remain the same –

set financial goals, keep track of those goals, learn from your mistakes, switch off the media buzz and lastly, talk it through with your trusted adviser.

Read more…

If you have any questions or if you want to have a chat with us about your future planning, please get in touch. We are here to help.

Coronavirus & the investment markets

We expect you are noticing the media headlines regarding Coronavirus and the higher levels of investment volatility. We want to reassure you that we continue to actively monitor your investments closely.

After a strong 12 months for investment markets, February has seen a reversal in confidence due to the Novel Coronavirus outbreak, a more contagious virus than SARS (2002) and MERS (2012). The issue for consideration is the impact on the global economy and the influence of China which is now far larger than it was in 2002 when SARS occurred. Using SARS and MERS as a benchmark in history, it is expected that markets will typically rally once the number of new cases peak. Until that stage, we do expect investment markets will be somewhat volatile. Some commentators suggest a 6 to 8 month period between initial outbreak and peak cases, suggesting July or August.

The advantage of a diversified investment portfolio is the range of holdings across different sectors and regions. A key strategy of investing is to include local and international shares, property & infrastructure as well as interest generating investments to position your portfolio for both the good times and times of volatility. We have been discussing with the fund managers and their current views on markets, and can confirm that the active managers are taking a safety first approach, banking profits, and holding a greater percentage of cash. We expect managers will wait for signs of an improving market before deploying cash as new opportunities arise.

Whilst there is uncertainty in the short term, we believe that in the long term it is likely that global economic growth will continue, supported by low interest rates and by governments poised to respond.

The views in this article are of a general nature only and should not be considered

personalised advice. A disclosure statement is available and free of charge.

Time in the markets – not market timing

Market corrections are not uncommon and should not be unnerving. However, when investors see the value of their investments dwindling, their aversion to losses can compel them to sell. And once they have sold, they stay out of the market.”

Capital Group have produced a guide that demonstrates the importance of long-term investing and that time in the markets is key element to surviving a market downturn. Investors who leave the market at the wrong time may risk losing out on price appreciation.

Read the full guide here

Credit: Capital Group

The views and opinions expressed in this article are of the author and are not necessarily those of First Capital Financial Services. The information in this article is of a general nature only and should not be considered personalised advice.

A disclosure statement is available and free of charge.

What’s your investing style?

With share markets at all-time highs it’s a question of, how long can this go on for? When will a crash occur? When will prices drop? When should I invest – when the market crashes and stocks are cheap?

The ability to time the market can be a tricky exercise. It requires expertise and waiting for the opportune moment, but in most cases can lead to poor investment decisions or missing beneficial investment time altogether. This strategy is often known as a losing strategy as there is no guarantee that you will ever ‘time’ the market right. So, what method should we use?

There are two investing methods to explore: Lump-sum investing and dollar-cost averaging.

Lump sum investing is an all-in approach of investing one lump sum into the market. History shows that the market climbs more often than it falls and with this theory, lump sum investing provides instant exposure and should increase over time.

Dollar cost averaging is the little and often approach. This method means that the investor invests the same amount of money at a set frequency, weekly, fortnightly, monthly etc. If you think of how a KiwiSaver account is operated and where contributions are generally made on a regular basis – this is the same method. If the market has a downturn, this method means that more shares can be purchased at a lower cost. This method can also introduce investor discipline and prevents the investor from attempting to time the market because you’re buying all the time.

As an example, two investors decide to invest $10,000 each in one company. The first invests as a lump-sum in one go, the other invests the same amount in five monthly amounts of $2,000. In the five months, the share prices fluctuate – here’s what would happen to the investment:

In this example, person B ends up ahead. By investing a fixed dollar amount in the fund every month, Person B bought more shares when the price was low, less shares when the price was high, and ended up with more shares after five months, at a lower cost per share.

Which method is the best option for you? Whether you prefer to time the market, invest in lump sums or spend little and often, the method most appropriate largely depends on your investment timeframe, your goals or objectives and if you are looking to maximise returns or reduce risk.

Investing in lump sums can be ideal for shorter timeframes and may maximise returns however, can come at a higher risk. Dollar cost averaging offers a disciplined approach while reducing the risk of investing at market peaks. Every investor is different and what suits one may not suit others, so what is your style, all-in, or little and often? Or perhaps you are prepared to apply both methods and make the most of every situation.

The views in this article are of a general nature only and should not be considered

personalised advice. A disclosure statement is available and free of charge.