The Price of Ignorance is Low Returns

A recent survey conducted by Colmar Brunton for the Financial Markets Authority shows that many New Zealanders do not understand investment risk. The survey results paint a picture of investors who show a reasonably good understanding of more conservative investments which offer security and a reliable return but who lack understanding of higher risk growth investments such as property and shares. Just under two thirds of respondents preferred more conservative investments while only around a third were prepared to see the value of their investments go up and down in order to get the best return. The implication is that lack of familiarity with growth investments leads investors to avoid such investments and in so doing, they are not giving themselves the opportunity to learn about them. Fear and ignorance are confining investors to lower risk, lower return investments. There is a danger that those with a lack of understanding of investments who venture into higher risk investments will make poor decisions.

Investor education is one way to solve these problems but this is easier said than done. Whose role is it to find investors and engage with them to improve their understanding of investments and risk? If investors are comfortable with more conservative investments what will motivate them to learn about alternative investment opportunities?

There is potential for KiwiSaver to be a good learning tool. KiwiSaver providers offer a range of investment options with different risk profiles. Investing in KiwiSaver should be treated like any other investment. It is important for the investor to determine the most appropriate balance between risk and return, to understand the different investment options and to monitor the performance over time. As KiwiSaver balances grow, investors will increase their familiarity with investing in higher risk assets for the benefit of higher returns.