October 2025
By Jean Stock, Financial Adviser
Investment professionals tend to be wary of September and October. September is historically the weakest month for returns on the S&P 500 index and most major market crashes have occurred in October.
That makes it good time to talk about risk and volatility – two concepts that are connected but not the same.
Risk is the possibility of losing some or all of your investment capital. Anyone who paid $1.85 for My Food Bag shares at IPO will know what that feels like, with shares currently trading at 22 cents.
An investor may take years to recover their capital or even lose it permanently.
How do you manage risk? Simply by being diversified in a portfolio of hundreds or thousands of assets where one or two complete failures will be barely noticed. Some assets are inherently riskier than others. Investing in a start- up tech company could make you a millionaire or you could lose your entire investment. That is the essence of the risk v return trade off in finance.
Volatility refers to fluctuations in the value of your investments over time. Sometimes asset values can move sharply, other times asset values follow a more stable path. Either way, volatility is a normal part of investing. Some say it is the price you pay for liquidity.
How do you manage volatility? By doing nothing and staying the course – but that comes with an important proviso.
You should also hold investments that align with your short- term goals. Over the long term you can ride out periods of volatility. In the short term you may not have that luxury.
Some examples:
- A first home buyer plans to use their KiwiSaver to buy a home within six months. They are invested in an Aggressive portfolio. Unexpectedly markets decline by 20%. They have to either delay their purchase, buy a cheaper home or borrow more. This investor should be positioned for stability, holding low volatility assets such as cash and short duration bonds. Once the house is purchased, they can switch back to an Aggressive portfolio as their fund becomes a long-term retirement savings vehicle.
- A couple are about to retire. They have paid a deposit on two expensive cruises as part of their plans to travel. Then, due to a spike in inflation investment markets enter a prolonged downturn. Their growth portfolio falls by 15%. Without a buffer of low volatility investments, the couple have to draw on their depleted portfolio to fund their trips. The result of having to “sell on the dip” is that they may need to adjust their future retirement spending. Ideally, they would have a cash buffer to cover short-term spending needs. As markets recover, they can replenish that buffer.
Staying the course is one of the most powerful investment disciplines. Missing just a few of the best days for returns can have a big impact on long- term performance – and the best days often come right after the worst days. Timing markets is notoriously difficult and no one wants to make rapid changes at the worst possible time. It is far better to work with a trusted financial adviser to build a plan that minimises anxiety and helps you stay focused on your long-term goals.
Disclaimer
The views expressed are those of the author and do not necessarily represent the views of Saturn Advice. The information is general in nature and is not intended to constitute personalised financial advice. Before making any financial decisions, we recommend seeking advice from a Saturn Financial Adviser or another licensed Financial Advice Provider.