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If you go for growth prepare for falls
 
Q.           I am 56. I am contributing 8% of my salary to KiwiSaver and have been very pleased to see my savings increase steadily. I am currently in the Fisher Balanced Fund. Given that I have nearly 10 years to go until I reach the age of 65, would it make sense for me to switch to their Growth Fund for the next few years? I believe the outlook is good and I want to get the best returns possible. I have a freehold house but no other savings.
 
A.            I can understand your eagerness to get the best possible performance, but be wary of chasing high returns. Nine years may sound like a long time, but it will go quickly enough. As you approach the age of 65 you will need to reduce risk not increase it, so time is not on your side.
 
You probably know that Fisher Funds Management does not have a Balanced Fund as such – investors who opt for a balanced strategy will be allocated 55% into their Conservative Fund and 45% into their Growth Fund. Or they can select their own weightings.
 
The Fisher Growth Fund achieved a strong return of 14.6% (after fees, before tax) for the 12 months to 31 March 2014, compared with 6.3% from their Conservative Fund. Investors like you who have chosen the Balanced Strategy would have achieved 9.8%.
 
While 14.6% looks pretty attractive, historically the Fisher Growth Fund has been very volatile. It currently holds around 87% in Australasian and International shares. According to Sorted’s KiwiSaver FundFinder, the Fisher Growth Fund reported a loss of -17.33% over the 12 months to 31 March 2009. How would you feel if you switched into the Growth Fund and your balance dropped by 17%? Some investors would be tempted to switch smartly out again. If you had done so in 2009, you would have missed out on the stellar 48% that the fund achieved the following year. Big rises often but not always follow big falls, and it takes a resilient investor to ride the waves without flinching.
 
Risk tolerance is a measure of an investor’s willingness to accept the uncertain outcomes associated with their financial decisions. Traditionally we have tested risk tolerance with a series of multi-choice questions. The answers show the investor’s understanding of investment markets and their emotional response to uncertainty.    Because what sounds good in theory does not always work in practice, with the right tools the risk profile results can also be stress-tested against actual market events. This will show the investor what a negative event would have on, say, an aggressive portfolio worth $100,000. How would they really feel if the value fell 17% to $83,000, and how long would it take such a portfolio to recover?
 
Aggressive funds are best left to the young, who have many years of investing ahead of them. If time is not on your side, you are better off with a more cautious strategy particularly as, in your case, KiwiSaver comprises all your wealth outside your home. 
 
Over the past 3 years the Fisher Growth Fund has averaged 7% per annum while the Conservative Fund is not far behind with 6.3%.  Slow and steady may not always win the race but it will give a more comfortable ride.
 
Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 870 3838. The information contained in this article is of a general nature and is not personalised. Send your KiwiSaver questions to shelley.hanna@peak.net.nz