NZ Herald
  • Home
  • Latest news
  • Herald NOW
  • Video
  • New Zealand
  • Sport
  • World
  • Business
  • Entertainment
  • Podcasts
  • Quizzes
  • Opinion
  • Lifestyle
  • Travel
  • Viva
  • Weather

Subscriptions

  • Herald Premium
  • Viva Premium
  • The Listener
  • BusinessDesk

Sections

  • Latest news
  • New Zealand
    • All New Zealand
    • Crime
    • Politics
    • Education
    • Open Justice
    • Scam Update
  • Herald NOW
  • On The Up
  • World
    • All World
    • Australia
    • Asia
    • UK
    • United States
    • Middle East
    • Europe
    • Pacific
  • Business
    • All Business
    • MarketsSharesCurrencyCommoditiesStock TakesCrypto
    • Markets with Madison
    • Media Insider
    • Business analysis
    • Personal financeKiwiSaverInterest ratesTaxInvestment
    • EconomyInflationGDPOfficial cash rateEmployment
    • Small business
    • Business reportsMood of the BoardroomProject AucklandSustainable business and financeCapital markets reportAgribusiness reportInfrastructure reportDynamic business
    • Deloitte Top 200 Awards
    • CompaniesAged CareAgribusinessAirlinesBanking and financeConstructionEnergyFreight and logisticsHealthcareManufacturingMedia and MarketingRetailTelecommunicationsTourism
  • Opinion
    • All Opinion
    • Analysis
    • Editorials
    • Business analysis
    • Premium opinion
    • Letters to the editor
  • Politics
  • Sport
    • All Sport
    • OlympicsParalympics
    • RugbySuper RugbyNPCAll BlacksBlack FernsRugby sevensSchool rugby
    • CricketBlack CapsWhite Ferns
    • Racing
    • NetballSilver Ferns
    • LeagueWarriorsNRL
    • FootballWellington PhoenixAuckland FCAll WhitesFootball FernsEnglish Premier League
    • GolfNZ Open
    • MotorsportFormula 1
    • Boxing
    • UFC
    • BasketballNBABreakersTall BlacksTall Ferns
    • Tennis
    • Cycling
    • Athletics
    • SailingAmerica's CupSailGP
    • Rowing
  • Lifestyle
    • All Lifestyle
    • Viva - Food, fashion & beauty
    • Society Insider
    • Royals
    • Sex & relationships
    • Food & drinkRecipesRecipe collectionsRestaurant reviewsRestaurant bookings
    • Health & wellbeing
    • Fashion & beauty
    • Pets & animals
    • The Selection - Shop the trendsShop fashionShop beautyShop entertainmentShop giftsShop home & living
    • Milford's Investing Place
  • Entertainment
    • All Entertainment
    • TV
    • MoviesMovie reviews
    • MusicMusic reviews
    • BooksBook reviews
    • Culture
    • ReviewsBook reviewsMovie reviewsMusic reviewsRestaurant reviews
  • Travel
    • All Travel
    • News
    • New ZealandNorthlandAucklandWellingtonCanterburyOtago / QueenstownNelson-TasmanBest NZ beaches
    • International travelAustraliaPacific IslandsEuropeUKUSAAfricaAsia
    • Rail holidays
    • Cruise holidays
    • Ski holidays
    • Luxury travel
    • Adventure travel
  • Kāhu Māori news
  • Environment
    • All Environment
    • Our Green Future
  • Talanoa Pacific news
  • Property
    • All Property
    • Property Insider
    • Interest rates tracker
    • Residential property listings
    • Commercial property listings
  • Health
  • Technology
    • All Technology
    • AI
    • Social media
  • Rural
    • All Rural
    • Dairy farming
    • Sheep & beef farming
    • Horticulture
    • Animal health
    • Rural business
    • Rural life
    • Rural technology
    • Opinion
    • Audio & podcasts
  • Weather forecasts
    • All Weather forecasts
    • Kaitaia
    • Whangārei
    • Dargaville
    • Auckland
    • Thames
    • Tauranga
    • Hamilton
    • Whakatāne
    • Rotorua
    • Tokoroa
    • Te Kuiti
    • Taumaranui
    • Taupō
    • Gisborne
    • New Plymouth
    • Napier
    • Hastings
    • Dannevirke
    • Whanganui
    • Palmerston North
    • Levin
    • Paraparaumu
    • Masterton
    • Wellington
    • Motueka
    • Nelson
    • Blenheim
    • Westport
    • Reefton
    • Kaikōura
    • Greymouth
    • Hokitika
    • Christchurch
    • Ashburton
    • Timaru
    • Wānaka
    • Oamaru
    • Queenstown
    • Dunedin
    • Gore
    • Invercargill
  • Meet the journalists
  • Promotions & competitions
  • OneRoof property listings
  • Driven car news

Puzzles & Quizzes

  • Puzzles
    • All Puzzles
    • Sudoku
    • Code Cracker
    • Crosswords
    • Cryptic crossword
    • Wordsearch
  • Quizzes
    • All Quizzes
    • Morning quiz
    • Afternoon quiz
    • Sports quiz

Regions

  • Northland
    • All Northland
    • Far North
    • Kaitaia
    • Kerikeri
    • Kaikohe
    • Bay of Islands
    • Whangarei
    • Dargaville
    • Kaipara
    • Mangawhai
  • Auckland
  • Waikato
    • All Waikato
    • Hamilton
    • Coromandel & Hauraki
    • Matamata & Piako
    • Cambridge
    • Te Awamutu
    • Tokoroa & South Waikato
    • Taupō & Tūrangi
  • Bay of Plenty
    • All Bay of Plenty
    • Katikati
    • Tauranga
    • Mount Maunganui
    • Pāpāmoa
    • Te Puke
    • Whakatāne
  • Rotorua
  • Hawke's Bay
    • All Hawke's Bay
    • Napier
    • Hastings
    • Havelock North
    • Central Hawke's Bay
    • Wairoa
  • Taranaki
    • All Taranaki
    • Stratford
    • New Plymouth
    • Hāwera
  • Manawatū - Whanganui
    • All Manawatū - Whanganui
    • Whanganui
    • Palmerston North
    • Manawatū
    • Tararua
    • Horowhenua
  • Wellington
    • All Wellington
    • Kapiti
    • Wairarapa
    • Upper Hutt
    • Lower Hutt
  • Nelson & Tasman
    • All Nelson & Tasman
    • Motueka
    • Nelson
    • Tasman
  • Marlborough
  • West Coast
  • Canterbury
    • All Canterbury
    • Kaikōura
    • Christchurch
    • Ashburton
    • Timaru
  • Otago
    • All Otago
    • Oamaru
    • Dunedin
    • Balclutha
    • Alexandra
    • Queenstown
    • Wanaka
  • Southland
    • All Southland
    • Invercargill
    • Gore
    • Stewart Island
  • Gisborne

Media

  • Video
    • All Video
    • NZ news video
    • Herald NOW
    • Business news video
    • Politics news video
    • Sport video
    • World news video
    • Lifestyle video
    • Entertainment video
    • Travel video
    • Markets with Madison
    • Kea Kids news
  • Podcasts
    • All Podcasts
    • The Front Page
    • On the Tiles
    • Ask me Anything
    • The Little Things
  • Cartoons
  • Photo galleries
  • Today's Paper - E-editions
  • Photo sales
  • Classifieds

NZME Network

  • Advertise with NZME
  • OneRoof
  • Driven Car Guide
  • BusinessDesk
  • Newstalk ZB
  • Sunlive
  • ZM
  • The Hits
  • Coast
  • Radio Hauraki
  • The Alternative Commentary Collective
  • Gold
  • Flava
  • iHeart Radio
  • Hokonui
  • Radio Wanaka
  • iHeartCountry New Zealand
  • Restaurant Hub
  • NZME Events

SubscribeSign In
Advertisement
Advertise with NZME.
Home / New Zealand

<EM>Brent Sheather:</EM> How to keep that shirt on

7 Nov, 2005 11:16 PM6 mins to read

Subscribe to listen

Access to Herald Premium articles require a Premium subscription. Subscribe now to listen.
Already a subscriber?  Sign in here

Listening to articles is free for open-access content—explore other articles or learn more about text-to-speech.
‌
Save

    Share this article

Good and bad, night and day, risk and return. They are two sides of the same coin but given the number of disasters that regularly visit themselves on investors perhaps we don't fully understand the nature of risk.

Furthermore, mum and dad may not always be able to rely on
their investment adviser to do the right thing: Risky investments typically pay higher fees and commissions than less risky ones.

As we saw a couple of weeks ago (link at end of this article), many truly low-risk assets cannot sustain the fee structures typical locally, thus higher-risk investments often dominate portfolios.

But first a definition of risk: Professional investors see risk as the difference between expectations and results.

Back in 2000 when world stock markets seemed like they never fell, some advisers, using historical data, sold financial plans with unrealistic forecasts.

When reality hit and share prices headed south, things often got nasty.

With a better understanding, perhaps mum and dad will be able to accept some risks and reject others depending on their individual circumstances.

Mismatch risk

Despite the name, mismatch risk has nothing to do with marriage, although that institution can be very risky.

Mismatch risk is simply the risk that the investments you choose may not be suitable for your needs and circumstances.

The best way to avoid this risk is to accurately define your investment objectives - by deciding on the total sum you want to build up, or the annual income you need, and to qualify that objective with a time frame.

It is, however, much easier to invest emotionally letting either greed or fear prevail. A conservative investment may make us feel safer. The prospect of fantastic returns makes us feel richer. It's harder to invest rationally. Understanding Investment Risk includes the objective timeframe investment table, above, that matches investments with time frames.

Inflation risk

Inflation is an increase in the price we pay for goods and services. Because of inflation, $1 today will buy you more now than it will in the future.

Even if the rate of inflation remained at a relatively low 3 per cent per annum, a $1 purchase will cost $1.56 in 15 years.

Inflation risk is thus the risk that the value of your investments or the income they produce - or both - may not increase as fast as inflation. If this happens the real (after inflation) value of your portfolio will fall.

One of the most insidious risks facing long-term investors is the effect of inflation eroding the real value of their income, which is particularly likely if that income comes entirely from fixed-interest investments.

Someone who retired in 1980 and lived another 18 years (realistic given today's life expectancies) and who put all his or her money into New Zealand 90-day bills, would have seen the value of the resulting income drop by about 80 per cent in real terms over that 18 years.

The key to managing inflation risk is to have a diversified portfolio with about half your funds in real assets - property and shares.

Although Understanding Investment Risk doesn't mention it, deflation - falling prices like what happened in the 1930s - is another risk.

It doesn't happen often, but when it does, it can be a big deal because it is harder to fight than inflation. You can protect yourself from the risk of deflation by having some nominal assets in your portfolio - low-risk government bonds mind, not junk.

Interest rate risk

This applies to fixed-interest investments such as bank deposits, government stock and so on. Australian experts say it can be broken down into three parts:

* Credit risk.
* Reinvestment risk.
* Market volatility.

Credit risk is the risk that the company to which you have lent money will become insolvent and be unable to meet interest payments or repay your funds.

We have had some good local examples of credit risk in the past few years and, no doubt, a weaker economy will throw up a few new ones.

A good strategy for dealing with credit risk is to trust no one and buy only bonds with the highest ratings determined by an international rating agency such as Standard & Poor's - such as government stock and SOE bonds.

Reinvestment risk relates to the fact that interest rates can go up and down.

Commentators often judge bank deposits to be low risk and indeed they are if the only risk you consider is the chance of a bank defaulting. But when you consider the volatility of income returns, they can have a high degree of risk.

Back in the 1980s, investors could buy good-quality bonds yielding 18 per cent - today you are lucky to get 7 per cent.

To minimise interest rate risk, we need to spread our fixed-interest investments over a range of maturities.

The other risk, market volatility, arises because some fixed-interest investments, such as government bonds, pay a fixed income (coupon payment) for a long time (sometimes 10 years or more), according to what interest rate prevailed when the bond was issued.

Whether the bond is worth more or less today depends on whether interest rates are now higher or lower than when you purchased the bond and, importantly, on the credit rating of the borrower.

Legislative risk

When you map out an investment strategy you do so on the assumption that laws and regulations won't change.

But what if they do? This is especially important in the superannuation field where governments have made many major changes over the years.

Just recently, the Government has announced its intention to tax capital gains on overseas investments.

This ridiculous legislation, if enacted, could mean major changes and huge costs for many portfolios.

Objective timeframe investment

* Short term (a holiday, appliance purchase). Less than 12 months. Cash.
* Medium term (a home deposit). At least three years. Emphasis on fixed interest with some cash and growth assets.
* Long term (children's education, retirement). More than five years. Emphasis on growth assets (shares and property) with some access to cash.

* Brent Sheather is a Whakatane-based investment adviser.

Advertisement
Advertise with NZME.
Advertisement
Advertise with NZME.
Save

    Share this article

Latest from New Zealand

New Zealand

NZ Herald News Update: July 8, 2025

New Zealand

Herald NOW Weather: June 23, 2025

New Zealand

Couple jailed for neglect of 4-year-old were suspected of his murder

07 Jul 06:44 PM

From early mornings to easy living

sponsored
Advertisement
Advertise with NZME.

Latest from New Zealand

NZ Herald News Update: July 8, 2025

NZ Herald News Update: July 8, 2025

NZ Herald News Update: July 8, 2025

Herald NOW Weather: June 23, 2025

Herald NOW Weather: June 23, 2025

Couple jailed for neglect of 4-year-old were suspected of his murder

Couple jailed for neglect of 4-year-old were suspected of his murder

07 Jul 06:44 PM
Premium
'100% a crisis': More than 900 women wait for specialist gynaecology care in Hawke’s Bay

'100% a crisis': More than 900 women wait for specialist gynaecology care in Hawke’s Bay

07 Jul 06:00 PM
Solar bat monitors uncover secrets of Auckland’s night sky
sponsored

Solar bat monitors uncover secrets of Auckland’s night sky

NZ Herald
  • About NZ Herald
  • Meet the journalists
  • Newsletters
  • Classifieds
  • Help & support
  • Contact us
  • House rules
  • Privacy Policy
  • Terms of use
  • Competition terms & conditions
  • Our use of AI
Subscriber Services
  • NZ Herald e-editions
  • Daily puzzles & quizzes
  • Manage your digital subscription
  • Manage your print subscription
  • Subscribe to the NZ Herald newspaper
  • Subscribe to Herald Premium
  • Gift a subscription
  • Subscriber FAQs
  • Subscription terms & conditions
  • Promotions and subscriber benefits
NZME Network
  • The New Zealand Herald
  • The Northland Age
  • The Northern Advocate
  • Waikato Herald
  • Bay of Plenty Times
  • Rotorua Daily Post
  • Hawke's Bay Today
  • Whanganui Chronicle
  • Viva
  • NZ Listener
  • Newstalk ZB
  • BusinessDesk
  • OneRoof
  • Driven Car Guide
  • iHeart Radio
  • Restaurant Hub
NZME
  • About NZME
  • NZME careers
  • Advertise with NZME
  • Digital self-service advertising
  • Book your classified ad
  • Photo sales
  • NZME Events
  • © Copyright 2025 NZME Publishing Limited
TOP