‘Risk’ isn’t a popular concept in these uncertain times. But financial advisor Jas Gill says rather than running for the hills, we should think about our goals and assess the risks accordingly.

In a global pandemic, fear is probably the only thing more contagious than the virus itself. Fear breeds panic and panic leads to rash decisions, which is why in March – when thousands of KiwiSaver balances started to plummet – many investors rushed to switch from share-heavy growth funds into more cash-based conservative funds, amounting to a sell-off of $1.4 billion. This was in spite of the general advice from experts at the time to stay put.

Jas Gill, an authorised financial adviser at Kiwi Wealth, says one reason for the mass exodus could be a lack of understanding around how high-risk funds work.

“I think a lot of people don’t really know what the risk of investing actually is, and that investing in things like shares comes with volatility,” he says. “It could be that some investors have never had a chat around how their portfolio could behave in different market conditions. The more informed investors basically sat tight because they had their long-term goals in mind and they knew that markets could go up and down.”

Fund managers are concerned that many who switched, spooked by the experience, will likely never go back to more share-heavy investments. Outside of KiwiSaver, those with savings might also decide to opt for “risk-free” investments like term deposits instead. And while a “better safe than sorry” approach might be suitable for some, taking on some level of risk is crucial to achieving larger financial goals, particularly ones that come with a hefty price tag like retirement or buying a first home.

“You need to take on risk in order to grow your money. If we’re talking about retirement, there are going to be a lot of Kiwis that won’t be able to afford the lifestyle they’re after if they don’t invest for those goals,” says Gill.

“If they don’t take risks, inflation [the rate of price increases] will likely eat into their investment value. Right now inflation is 2.5%, which means the cost of living is going up by about that much, [so you want] the value of your investment to increase at least in line with that.

“But if you put your money in the bank right now, where 2.2% seems to be the going term deposit rate, it’s actually less than inflation. You take tax off that and effectively you’re sitting at 1.82% and that’s assuming the lowest tax rate is applied.”

Taking on risk is obviously intimidating, especially in today’s turbulent times. As a concept, risk can conjure up negative connotations like fear, uncertainty, loss, and even gambling. No one wants to wager their retirement on a losing bet, but there are many ways to mitigate the risks involved in investing, like diversifying your investments. That’s why KiwiSaver funds invest in a range of different assets such as bonds, cash, property and shares.

Market risk isn’t the only type of investment risk either. Liquidity risk, for example, is the risk of being unable to sell your investment at a fair price and get your money out when you want to.

“For example, let’s say you buy shares in company X and you want to sell those shares but you can’t find buyers. You’ve got a risk of liquidity there because you can’t turn your investment into cash quickly,” explains Gill.

“Particularly in New Zealand, our market’s pretty small, so if you want to try and sell tens of millions of dollars of shares, it can take a while to find buyers. And if you try to sell so many shares in one go it can also drive the price down, so that has to be timed. That’s one of the reasons we invest globally at Kiwi Wealth because compared to the rest of the world, we’re only tiny.”

Another form of risk has to do with the quality of your investment. For example, if a company you’re investing in has a proven track record, a competitive advantage and a clear business model that’s financially built to last, then the level of quality risk you’re taking on is low. But if your investment is based on what you see in the media, a sudden spike in the price of shares, or the company only has a single source of income, then it’s likely you’re taking on more quality risk than you should. After all, not all companies that look like gold mines are going to turn into the next Apple, which is why Gill says it’s important to do the homework.

“Quality is a risk you’ve got to manage because you don’t want to buy into companies where, if things start to go south in the world, they’re not able to survive those conditions,” says Gill. You want them to be able to get through [tough times] and come out stronger, which is why it’s so important to research the companies you invest in.”

While many have fled from high-risk investments like shares due to the volatility caused by Covid-19, others are making the most of the sharemarket dip to go on the hunt for bargain deals. So is it the right time to be investing right now? Or has the lingering threat of Covid-19 simply made things too risky?

Ultimately, it depends on your financial goals. If you’re looking to cash in your investment for a lush retirement 20 to 30 years down the line, then it could very well be a good opportunity. But if you’re looking for funds to buy your first home in Auckland in just six months’ time, then maybe not so much.

“Assess your risk accordingly – nothing’s personalised until you personalise it,” says Gill.

“It’s about having time in the market, not trying to time the market, since there’s always going to be volatility.”

This content was created in paid partnership with Kiwi Wealth. Learn more about our partnerships here.