Key Risks and Disadvantages

Everything we do in life has some level of risk attached to it. With investment, there is the risk that returns might not meet expectations or we might incur short-term losses or even loss of capital. This may happen due to volatility in the marketplace (meaning the markets fluctuating and thereby having an impact on the returns).

It is important for me to understand your tolerance for these market fluctuations that will impact on the returns you receive so that I can match your risk tolerance with the KiwiSaver funds I recommend to you for investment. If you want to reduce this investment risk, the trade-off is usually reduced returns. Some level of risk has to be accepted if you are to meet your goals.

Here are the key risks and disadvantages of the recommended strategy:

a)      Market fluctuations: Your KiwiSaver Scheme value and returns are subject to market fluctuations. While designed to provide greater diversification, and higher long-term returns, investments in growth assets such as shares and property can be more volatile than other investments. Values are likely to move up and down (sometimes quite markedly during economic crises such as the GFC and COVID-19) when valued on a regular basis. This means that the projected market value at the time you wish to withdraw your KiwiSaver balance could be less than projected.

b)     Lack of regular income: Your KiwiSaver investment does not make income distributions.

c)      Illiquidity: The KiwiSaver funds are locked into the age of entitlement to New Zealand Superannuation and can only be accessed before then in very limited circumstances.

d)     Legislation and tax changes: Legislation around things like tax and KiwiSaver could change. These changes might affect your tax and KiwiSaver investment and reduce the end value.

e)      Cost: The KiwiSaver Scheme and individual investment funds have some fees. These are outlined in the Product Disclosure Statement. Working with an adviser means the adviser may charge a fee and/or receive commissions from product providers. Our disclosure information clearly outlines what these are.

f)       Impact of inflation: Inflation will erode the purchasing power of money. Even relatively benign inflation (targeted by the New Zealand government at less than 3% per annum) could reduce the value of [$10,000] today to approximately [$7,440] over the next [10] years.

g)      Inaccurate risk profile: You misjudging your appetite for risk. If you position yourself to be more conservative than what you need to be, your returns from your investments could be lower than the return you could have received. If you position yourself as more aggressive than what you actually are, then you may become concerned with the short-term market fluctuations.

h)     Longevity risk: There is a risk that you will live longer than expected and thus outlive your investments and savings. This is especially the case with general trends towards increasing life expectancy.

i)        Fund manager performance: The relative performance of the selected fund manager may decline, and this could lead to a lower than projected accumulated value.