The editorial below reflects the views of the editorial contributor only and content may be out of date. This article is sourced from a previous JUNO issue. JUNO’s content comes from sources that it considers accurate, but we do not guarantee that the content is accurate. Charts are visually indicative only. JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions.
By Brenda Ward, JUNO Editor
Risk versus Safety
For some, a drop in the value of their investments would give them sleepless nights. Yet others can accept a dip, knowing that eventually, long-term gain is likely. So before making an investment, it’s important to assess how much risk you’re willing to take on.
Start off by asking yourself a series of questions that will help determine your tolerance to risk. You could use an online tool to do this, before seeking more specialised advice. For example, the investor kick-starter questionnaire on Sorted.org.nz will help determine what kind of investor you are – Defensive; Conservative; Balanced; Growth; or Aggressive – and the mix of investments best suited to your investor type.
Figure 1 shows some example responses to the type of question about risk you might answer in a typical risk-tolerance questionnaire.
Youth versus Maturity
Investor profiles change with age: for example, a 40-year-old businessman can have a very different investment style to a 72-year-old widow.
Your investing life mirrors the seasons.
In spring, you’re young and new to the concept of investing. You may not be earning much, but you have neither a mortgage nor children. You can take some risks because if your investments fail, you have time to recover.
In summer, your earning power is good. But you may have a mortgage, car loan, and credit card debts. And children also cost more than you expect. You can make some riskier investments, but you’ll also need to be making contributions to KiwiSaver or other retirement savings.
In autumn, you are in your earnings prime. Your children have left home and you may have paid off your mortgage. Your focus is to grow a good lump sum to invest, in order to fund your retirement. You’ll be looking for safe places for your money.
In winter, you may be getting a pension. You’ll be living on this, and on any money earned by your investments. Your income is now fixed and you can’t afford to take risks.
Men versus women
Many studies have shown that female investors spend more time researching, trade less often, plan better and take fewer risks than men. For example, according to a Fidelity Life report, women are more focused on holistic financial planning, while men tend to focus on investment returns.
In her book, Warren Buffett Invests Like a Girl (and You Should Too), Louann Lofton says: “Testosterone helps traders take risks and move fast. But too much testosterone for too long can encourage too much risk-taking”.
In fact, women have to be better with investments. They’ll need more money over their lifetimes than men. On average, they earn less than men and live longer. They’re also likely to spend more on their health as they age.
However, many women are still not seeking financial advice, despite 44 per cent of them making the financial decisions in their households, says UK financial services giant Prudential.
And US behavioural finance researcher Professor Meir Statman has found that whereas women are less self-assured in their choices, men veer towards overconfidence.
“Some overconfidence can be a good thing,” he says, “It gives you the push needed to make decisions and execute them.” But it can backfire though. In the stock market, trying to do better than average is more likely to get you results that are below average, says Statman.
Hands-on versus hands-off
Do you like to know exactly where your money is invested?
Some people are happy to let a fund manager make all the decisions for them. When you invest in a fund, you’re giving the fund manager the freedom to manage your money using their professional expertise.
Others use a stockbroker or financial adviser to guide them in their decision-making, but make the stock choices themselves. A stockbroker will buy and sell shares, subject to your approval. An adviser will talk to you about your circumstances and objectives, and then recommend an investment portfolio for you.
And then those that want to be hands-on and trade in the stock market themselves, can do so directly, from their home computer. Online brokers provide access to software that enables investors to research, monitor, and trade stocks – without even interacting with a person.
Fund managers and those in the investment business have a range of investing styles. Choosing a number of investments will provide access to these different styles and help to reduce the overall volatility of your portfolio. This is called ‘style rotation’.
Money managers’ investment styles can be:
• Active or passive (outperforming an index or benchmark, versus tracking an index or benchmark)
• Growth or value (growth funds focus on companies that managers hope will grow rapidly; value investing is about finding stocks that are undervalued by the market)
• Small cap or large cap (fast-growing small companies, versus big, solid, well-known performers)
• High risk or low risk (many ups and downs, versus stable returns)
The best way to work out your own investor profile is to talk to a qualified professional, such as a financial adviser, who will look at your assets, income, risk profile, and years to retirement. The adviser will identify all your investment options and work out a plan to suit your age and stage of life.