What is Volatility Capacity?
Volatility capacity is your capacity to withstand the ups and downs of the stock market and your KiwiSaver balance.
What is the Investment horizon?
The total length of time that an investor intends to hold an investment until they need the money back. An investment horizon for KiwiSaver investors is generally the length of time till retirement when they can start to draw on their funds. However, this could potentially be longer as the balance that is left in a fund will continue to grow.
How do you calculate Volatility Capacity?
The general rule for volatility capacity is the older you get, the lower your capacity and the smaller your investment horizon is. But your age is only one factor in your capacity to withstand volatility. You need to take the age you wish to retire at into consideration and at what age you will need to start using your KiwiSaver funds to assist or pay for your everyday living expenses. Following that, you will need to account for the length of time you wish to be in retirement. There will potentially be a portion of your money you will need right away, but you may only begin drawing down on the rest, until later into your retirement depending on your financial situation. Your volatility capacity for the entirety of your balance will be different at each stage of your life starting highest when you become eligible for KiwiSaver and lowest when you retire or are close to buying your first home.
How does it help determine which KiwiSaver fund you should be in?
A Volatility capacity is one of the three key factors that determine which fund you should be in, along with required returns and your volatility tolerance.
A portion of your balance will be invested, this amount could be large or small, in the stock market. This means that your balance can fluctuate along with the stock market depending on the fund you choose. This fluctuation can cause ups and downs, and if your balance is experiencing a down because of the volatility and you withdraw your KiwiSaver, the losses would be permanent. By factoring in volatility capacity into determining your fund, the fund chosen for you could prevent you from suffering this permanent loss. A volatility capacity that is low could mean that you will require a lower volatility KiwiSaver fund because you are intending to withdraw soon, and a higher volatility capacity could mean a higher volatility fund as there will be a longer period till withdrawals are made.
National Capital can help you figure out how volatility capacity counts towards your final decision on a KiwiSaver fund. By taking the KiwiSaver Healthcheck we can calculate your volatility capacity and other factors and help you find the appropriate fund for you.