Decoding the "Risk Indicator"
You’ve probably seen it on your KiwiSaver statement or fund update, a little colour-coded bar with numbers from 1 to 7, often looking a bit like a speedometer.
If you are like many of the clients I speak with, you might glance at it, see a number like "4" or "5", and wonder: "Is that good? Is that bad? Am I in trouble?"
Today, I want to explain exactly what that number means for you and your retirement nest egg.
It’s a Volatility Meter, But Not a Crystal Ball
The first thing to know is that the Financial Markets Authority (FMA) requires every managed fund in New Zealand to use this same 1-to-7 scale. This is great for making comparisons between some investment options.
However, the word "Risk" can be misleading. When we see "High Risk," we often think, "I could lose all my money."
But this indicator doesn't measure the chance of the fund going to zero. Instead, it measures volatility, which in simple terms is an investor’s “up and downs."
Low Number (1–2): A low, stable return. The value of your account shouldn't go up and down too much day-to-day. (Think: Cash or Term Deposits).
Medium Number (3–5): A ‘balanced’ or ‘balanced growth’ return. There’ll be some bumps (market drops), but you’re generally moving forward faster than the low-risk options. (Think: Balanced or Growth Funds).
High Number (6–7): A ‘high growth’ return. Expect big drops and big jumps. It can lose value quickly along the way, but after rebounding it often gets you to a higher peak at some point. (Think: Aggressive funds or Cryptocurrency).
The "Rear-View Mirror" Problem
Here is the most important thing for you to understand: This number is calculated looking backwards, not forwards.
To get that number, the fund manager looks at how much their fund’s value moved up and down over the last five years.
Why does this matter? Imagine driving a car looking only in the rear-view mirror. You can see clearly where you’ve been, but it doesn't guarantee there isn't a sharp corner coming up ahead.
A fund might have been a "3" (calm) for years, but if the market suddenly has a sell off followed by a big rebound (like it did during COVID-19), that fund might suddenly look like a "5" or "6" in the next update, even if you haven't changed a thing.
What the Number Won't Tell You
While the 1-7 scale is a useful quick check, it has blind spots. It focuses purely on those price ups and downs. It generally does not warn you about:
Solvency Risk: The risk of a specific company in the fund going bust (though diversification usually protects you here).
Liquidity Risk: How hard it is to get your money out quickly if you need it for an emergency.
What Should You Do?
If you are investing for over 15 years, you can afford a little more risk.
If you need your money in a shorter period, you need to dial down the risk a little, or balance your investment in multiple different options.
If you are retired or approaching retirement, you likely don't have 20 years to wait for a market crash to recover. You may need that money for groceries, travel, and bills now.
As financial and investment advisers we can construct the best investment portfolio for you. We start by establishing your risk capacity based on what we know about your situation, and also by establishing your risk tolerance based on what we know about your views on volatility. Then we mix the best opportunities into a tailored portfolio, which we can manage and monitor long-term to ensure it meets your objectives.
What can you do yourself? Check your number: Grab your latest fund update. If you are relying on this money in the next 1-2 years but your risk indicator is a 6 or 7, you might be taking on too much "volatility" for your timeline.
But don't panic: If your number is higher than you thought, don't rush to switch immediately. Selling during a dip turns a "paper loss" into a real loss.
Talk to a human: A financial adviser can look at your holdings and tell you why the number is high and what a better alternative would be. Sometimes, a little bit of risk is necessary to make sure your money lasts as long as you do (exceeding inflation).
The Bottom Line: The risk indicator is a helpful metric. Use it to start a conversation, but not to make a panic decision. This is general information only and isn’t personalised financial advice. For personal financial and investment advice please talk to one of our financial advisers.