Financial journalist and author Mary Holm looks today at understanding risk and return. In a recent ASB survey, people were asked “which type of savings or investment product gives the best return?” and given a list of possible answers.
New Zealand's share market immediately fell two percent on opening Photo: RNZ / Rebekah Parsons-King
In their replies, people rated term deposits over KiwiSaver, even though KiwiSaver returns are in the vast majority of cases higher than term deposits.
Also people thought rental properties easily beats shares. Sometimes rentals do perform better than shares, but in recent years shares have performed really well, and in many cases would have done better than rental property.
Perhaps the problem lies partly in the question, says Mary. The people who chose term deposits may have been taking risk into account when they looked at “best” returns. If they had been asked about “highest” returns they might have answered differently. But that doesn’t explain why many more people answered “rental property” than “shares”.
Mary Holm Photo: RNZ/Cole Eastham-Farrelly
So let’s get things straight on risk and return, says Mary. Of the investments ordinary New Zealanders should consider, property and shares are the riskiest, but also have the highest annual returns. Bonds are less risky, and term deposits have very low risk, but their average returns are lower.
What do we mean by risk in this context? If you invest in a single property or company, there’s the risk you will lose all your money. But if you invest in lots of property or shares, or a fund that holds lots of them, there’s virtually no risk of total loss – unless you borrow to invest. However, your returns will be volatile. That’s why you should invest in property and shares over at least a ten-year period.
Who should take investment risk? People who can tie up the money for ten years or more. And – importantly – people who can tolerate volatile returns, including losses in some years, without bailing out.
You can listen to all of our chats with Mary Holm here.
