Every investment involves risk. The goal isn’t to eliminate risk — it’s to take the right type and amount of risk for your situation, and be rewarded for it.
Higher potential returns come with higher short-term volatility. The key variables are your time horizon (longer = more risk capacity), your need for the money (essential vs discretionary), and your emotional tolerance for seeing your portfolio fall. Time is the most powerful risk-reducer available.
What Is Investment Risk?
In everyday language, risk means “chance of losing money.” In investing, it’s more specific: risk is uncertainty about future returns, which includes both downside (losses) and upside (unexpected gains).
The most commonly measured risk is volatility — how much an investment’s value fluctuates over time. A term deposit has near-zero volatility (guaranteed return). A global shares fund might fall 30% in a year and rise 25% the next.
The Risk-Return Relationship
Higher expected returns require accepting higher risk. This isn’t optional — it’s how markets work. If a safe investment paid the same as a risky one, nobody would take the risk, and prices would adjust until risk was rewarded again.
Approximate long-run annual returns and volatility (NZ perspective)
| Asset class | Avg return (nominal) | Worst single year (approx) |
|---|---|---|
| NZ cash / term deposits | 3–5% | 0% (no loss, but may lag inflation) |
| NZ bonds | 3–5% | -10% to -15% (in 2022) |
| NZ shares (NZX 50) | 7–9% | -30% (2020, 2008) |
| Global shares (hedged NZD) | 8–11% | -38% (2008) |
| Global shares (unhedged) | 8–11% | -40%+ (with NZD effects) |
Historical returns don’t guarantee future returns. All figures approximate.
Types of Investment Risk
Market risk (systematic risk)
The risk that the whole market falls. This affected every investor in 2008, 2020, and 2022. You can’t diversify away market risk — but time and discipline manage it.
Company/asset-specific risk (unsystematic risk)
The risk that one company or sector collapses (e.g. a NZX company with fraud). This can be diversified away by holding many companies. Owning 500 companies instead of 5 dramatically reduces this risk.
Currency risk
If you hold overseas investments in foreign currency, NZD strength reduces your returns. A 10% NZD appreciation against USD wipes out a 10% US market gain. Hedged funds eliminate this risk (at a cost); unhedged funds don’t.
Inflation risk
The risk that your returns don’t keep pace with inflation. A term deposit paying 5% when inflation is 5.5% leaves you worse off in real terms. Over long periods, holding too little in growth assets is its own risk.
Liquidity risk
The risk that you can’t access your money when you need it. Term deposits have early-withdrawal penalties. Most managed funds offer weekly or fortnightly redemptions. KiwiSaver is largely locked until 65 (with exceptions). Individual shares listed on the NZX are highly liquid.
Concentration risk
Too much in one company, sector, or country. Many NZ investors are overweight NZ property and NZ shares relative to global markets — partly through KiwiSaver and partly through familiarity. This can be managed by adding global exposure.
Time Horizon: The Most Important Variable
Your time horizon — how long before you need the money — determines how much volatility you can absorb.
Why this matters: Markets fall, but have historically recovered and reached new highs. The longer your time horizon, the more likely you are to ride out downturns.
| Time horizon | Suggested risk level | Example |
|---|---|---|
| < 2 years | Low (cash, term deposits) | House deposit you need in 18 months |
| 2–5 years | Low to moderate (conservative/balanced fund) | Investment you might need in 3 years |
| 5–10 years | Moderate (balanced to growth fund) | Medium-term wealth building |
| 10+ years | Moderate to high (growth fund) | Retirement savings, KiwiSaver |
| 15+ years | High (aggressive/growth fund) | Long-term wealth accumulation |
The classic mistake: holding too much in cash or conservative investments because of fear, when your actual time horizon is 20 years. The cost of that mistake is significant.
Risk Tolerance vs Risk Capacity
These are different things, and both matter.
Risk tolerance: How much volatility you can stomach emotionally. Some people sleep fine when their portfolio drops 25%. Others panic-sell. Knowing your tolerance prevents bad decisions at the worst time.
Risk capacity: How much risk your financial situation can actually absorb. Someone with a stable job, no debt, and a 5-year investment horizon has high capacity regardless of their tolerance. Someone with no emergency fund, relying on the investment for income, has low capacity even if they feel confident.
The rule: If your capacity and tolerance conflict, use the lower of the two to set your risk level.
How NZ Fund Risk Ratings Work
The Financial Markets Authority (FMA) requires all NZ funds to display a risk indicator — a number from 1 (lowest) to 7 (highest) — based on the fund’s historical volatility.
| Risk indicator | Fund type |
|---|---|
| 1–2 | Cash, short-term bonds, term deposits |
| 3–4 | Conservative, balanced income funds |
| 5 | Balanced, moderate growth funds |
| 6 | Growth funds, global share funds |
| 7 | Aggressive, emerging markets, crypto |
These ratings are standardised — you can compare them across providers. A Kernel growth fund and an InvestNow growth fund with the same risk indicator score have similar historical volatility.
Diversification: The Free Lunch
Diversification reduces risk without necessarily reducing expected returns. Spreading across many companies, sectors, and countries means a single bad event affects a smaller portion of your portfolio.
In NZ terms:
- An NZX 50 index fund gives you 50 companies instead of 1 — far less company-specific risk
- Adding global funds (US, EU, Asia) reduces NZ-specific risk (NZX can underperform global markets for years)
- Adding some bonds or cash smooths out volatility for investors with shorter time horizons
Diminishing returns on diversification: Most of the benefit comes from the first 20–30 holdings. Going from 500 to 1,000 stocks adds little extra diversification. A simple two-fund portfolio (global shares + NZ bonds) can be highly effective.
NZ-Specific Risks to Know
Home country bias: NZ makes up less than 0.2% of global markets, but many NZ investors hold 50%+ in NZ assets. Diversifying globally is especially important for NZ investors.
RBNZ and interest rates: NZ’s relatively high interest rates have historically attracted foreign capital, strengthening NZD. When rates fall, NZD can weaken. This affects unhedged overseas investments.
Property concentration: Many NZ households have most of their net worth in a single property. Adding financial investments (shares, bonds) actually reduces overall household risk in this context.
Small market risk: The NZX 50 is heavily weighted to a few large companies (Fisher & Paykel Healthcare, Meridian, Contact Energy, Infratil). A problem with any one can significantly affect NZX index funds.
Frequently Asked Questions
Is investing in shares riskier than a term deposit? In the short term, yes — shares can fall 30% in months; a term deposit can’t. Over 10+ years, the risk profile reverses: inflation erodes term deposit real returns, while shares have historically recovered and delivered real growth.
My KiwiSaver is in a conservative fund. Is that a problem? Possibly. If you won’t need KiwiSaver until age 65 and you’re currently 35, a conservative fund is likely too low-risk for your time horizon. You’re sacrificing growth for stability you don’t need yet.
Can I lose all my money in an index fund? A global index fund would need every company in the world to go bankrupt simultaneously. This has never happened. Individual company shares can go to zero; diversified funds effectively can’t.
Next Steps
- PIR Rate NZ — Tax affects your real return
- Understanding Investment Fees NZ — Fees are a certain drag on uncertain returns
- Dollar Cost Averaging NZ — A practical way to manage entry risk
- KiwiSaver Fund Types NZ — Choosing the right risk level for KiwiSaver
- Back to Getting Started