Your KiwiSaver provider could fail. Your bank could go bust. Term deposits are not "risk-free". And property investors sometimes lose everything.
There - I've said it. I felt the need to after watching a video of an informal survey the Financial Markets Authority (FMA) carried out at the Westfield St Lukes shopping mall in Auckland.
"Stupid bleeping journalist," some readers will think. "Everyone knows that."
Yet it would appear from the FMA experiment that not every Kiwi does know that KiwiSaver, private super, managed funds, shares, bonds, property and term deposits are not guaranteed.
Random members of the public were stopped and asked to drop jelly beans in jars representing investments they believed were "guaranteed". Their answers were captured on video.
"I'm going to choose KiwiSaver," the first interviewee said. "Bonds will come with some sort of guarantee, term deposits will come with a guarantee," a middle-aged man added. He believed that bonds were government issued and therefore guaranteed.
An elderly lady in a pink hat was sure term deposits were guaranteed. A young mother speaking with a foreign accent said that KiwiSaver was guaranteed because it was "run by the government".
Young, middle-aged and old got it wrong, wrong and wrong again. Only one young woman knew or guessed that none were guaranteed. She got a high five from the presenter for saying: "I don't think you can get all of your money back on any of them." The video can be found at tinyurl.com/fmavoxpop1.
Rob Everett, chief executive of the FMA, said that some of the confusion may arise from the fact that the Government did run a retail deposit guarantee scheme for banks and some finance companies during the global financial crisis. The scheme no longer exists. Another source of confusion, says Everett, is that such deposit guarantee schemes are common overseas.
I did wonder what the shoppers thought the word "guaranteed" meant. They may have thought "guaranteed" meant the bank guaranteed to return the money from your term deposit. But that doesn't guarantee the bank will be able to. Banks can fail and got very close to it during the global financial crisis.
I suspect, however, that most of the respondents thought "guaranteed" meant "government-guaranteed". A survey by UMR Research four years ago found that nearly half of people sampled thought their fund was government-guaranteed and 35 per cent were unsure. I doubt that this has changed much. Yet the reality is that there is no such guarantee.
The Government sets the KiwiSaver rules. But it doesn't guarantee that your money will be returned in the event of the fund value collapsing or any jiggery pokery or fraud going on.
Everett says his organisation was constantly amazed at people's ignorance.
I Googled "guaranteed investment" and limited my searches to New Zealand. The majority of the first page related to property investors and real estate agents who were selling properties on Realestate.co.nz and Trade Me. The privately owned rental properties in question are leased to Housing New Zealand, which offers a guaranteed rent for a period of 10 or 15 years.
That doesn't mean that it's a failsafe investment. The bank can call in the investor's loan any time it wants. Property prices can fall. The house can burn down and be found not to be adequately covered by insurance. Tenants can be rough on properties and landlords say they're not always adequately compensated for that.
In short, even Housing NZ "government-guarantees" are not risk-free.
The FMA took to the streets of central Auckland and asked passers-by to say whether a variety of investments such as term deposits, property, shares and crowd-funding were low, medium or high risk. Watch the results at tinyurl.com/fmavoxpop2. As the interviewer pointed out when one respondent stumbled over the picture of the house, property risks vary hugely according to the owner. Property for an owner-occupier with a high level of equity, a well-paying job in a good company and adequate income protection and other insurances will be relatively low-risk. Exactly the same house owned by a property investor with an insecure day job, bad tenants and a low level of equity in the property could be high risk.
There is also the risk that you're buying a property with unseen faults, such as a leaky home. Or you're buying a leasehold property without understanding the lease, or an apartment without realising that a huge charge for maintenance was going to arise in the next few years.
One respondent said, "Property's low-risk if you know what you're doing. In Auckland, it's only going to go up", as I directed a few unprintable words at the screen. This otherwise intelligent-looking man in a shirt and tie thought property can never go down in value and suggested in the same breath that he knew what he was doing.
Asked about sharemarket risk another respondent hesitated, thought, and said: "Pretty safe if you know what you're doing". Someone who threw all their money into one penny stock would be taking a huge risk. Another person who diversified his or her investment across a number of shares in different sectors and different markets would be taking a lot less risk.
Likewise, KiwiSaver is not a homogeneous beast. There are conservative, balanced and growth funds with different levels of risk. Scratch the surface and there are a whole lot more layers to the risk question that most of us don't even think about.
Binu Paul, who is launching SavvyKiwi, a tool to help people make a KiwiSaver choice, says even funds in the same sector can have different levels of risk. For example, there are conservative funds as well as balanced and growth funds that have a proportion of the underlying funds invested in hedge funds. When oil prices went south in the past few weeks, the hedge funds suffered. As a result some of the KiwiSaver funds that have hedge fund investments took a hit.
The value of those funds will rebound, but it's a lesson that some KiwiSaver funds are more volatile than others.
Paul cited the AON Tyndall Balanced fund, which has about 18 per cent of clients' money invested in alternative investments, and the Westpac KiwiSaver Balanced Fund (6 per cent). On the other hand the Smartshares Smartkiwi Balanced Fund had no exposure to underlying alternative investments. Yet all of those funds come under the banner of "balanced" KiwiSaver investments.
Meanwhile, some KiwiSaver funds borrow to invest more than they receive in KiwiSaver contributions. This is great when the fund managers make good decisions. But when markets turn against them they can lose a good deal of money.
An investor with a distant horizon might look upon these alternative investments as being the icing on the cake that makes their KiwiSaver funds grow.
One of the problems with a survey such as the FMA's is the breakdown in communication between the interviewer and many of the interviewees. Although the FMA's representative may know what risk means, many of those answering questions would have mistaken volatility for risk.
Volatility - the ups and downs of investments responding to market conditions - isn't a risk in itself. There is volatility risk. That's the risk that you have to sell when the market is down.
You sometimes see "capital guaranteed" or "capital protected" investments on offer. Such "capital guarantees" are offered by the provider. Ironically, it's investors who pay for guarantees on their investments through higher fees.
A third video in the series can be found at tinyurl.com/fmavoxpop3, or visit the NZFMA channel on YouTube.