It is perhaps unsurprising, but nonetheless concerning, that many bond investors know more about their expected returns than the risk of their investments.
More than 60% of Financial Markets Authority (FMA) survey respondents who have invested in bonds knew their interest rates and maturity dates.
Yet only 38% of all 505 of those surveyed between June and August were aware bonds aren’t guaranteed.
Two-thirds of survey respondents who invested in bonds said they were certain the company or government issuer would pay them back, but only 44% knew the credit rating of the bond.
Only 52% of all survey respondents, and 64% of respondents who had bought bonds, knew they were investing in a form of debt.
And only 39% of respondents knew bonds don’t keep their original value if you sell them before maturity.
A 2014 FMA survey found a majority of respondents believed New Zealand bank term deposits are guaranteed, when they aren't.
This level of financial literacy is concerning given over a million New Zealanders have more than $15 billion invested in conservative or default KiwiSaver funds, which are mostly invested in fixed interest assets, including bonds.
The FMA’s external communications and investor capability director, Paul Gregory, says: “Investing in bonds is often associated with greater certainty and lower risk, but that’s not always the case.
“We recognise in our Strategic Risk Outlook that after a long period of lower interest rates, it is inevitable they will rise again. When that happens, bond values tend to fall and there may be negative returns for conservative and default funds.
“It is important investors are not unnecessarily surprised if that happens to their bonds in those conditions. Don’t panic. Don’t sell or switch out just because you have some negative returns. Think about whether you’re still on track for your longer-term goals before making any decisions.”
Nearly 70% of those surveyed thought conservative funds are low-risk investments, almost the same as the rating for term deposits. The FMA points out this is not always true. Conservative funds contain a mix of different bonds, with different maturity dates and credit ratings, and may include some shares.
Gregory concludes: “Improve your knowledge about the risk of your investments. Reduce your potential to be surprised or take hasty action which harms your ability to achieve your goals. Do your own research about what might happen to them in different market conditions. Get some help from your provider or some professional advice.”