The roll-out of vaccines in New Zealand and worldwide provides light at the end of the COVID-19 tunnel. However, the coming year will still be a challenging one for the New Zealand economy, according to Infometrics' latest forecasts.

After a probable recession to start the year, growth will remain patchy throughout 2021 as tourism struggles with lower-than-normal revenue – even with the Trans-Tasman bubble in place.

"Even by March 2023, we only expect tourist numbers to New Zealand to be at 58% of their pre-pandemic peak," says Infometrics Chief Forecaster Gareth Kiernan. "Reduced airline capacity and the loss of previous routes, higher ticket prices, and more complicated and uncertain travel requirements will all constrain the medium-term recovery in international tourism."

New Zealand's economy shrank 1.6 per cent in the March quarter, which is the biggest fall since early 1991. According to Finance Minister Grant Robertson, the decline is expected to be worse in the June quarter.

In its latest interest rate decision on 14 April, the Reserve Bank of New Zealand's Monetary Policy Committee maintained its official cash rate at a historic low of 0.25 per cent, introduced earlier in 2020, and its medium-term outlook remains highly uncertain, determined in large part by both health-related restrictions, and business and consumer confidence.

The Committee agreed to maintain its current stimulatory monetary settings until it is confident that consumer price inflation will be sustained at the 2 per cent per annum target midpoint and that employment is at or above its maximum sustainable level. Meeting these requirements will necessitate considerable time and patience. The Committee agreed that it was prepared to lower the OCR if required.

Lowering interest rates would typically slash lending and deposit rates, which is positive news for businesses and individuals looking to invest and spend more — actions that help the economy grow. But it will hurt more than a third of New Zealanders with term deposits or savings in the banks (mostly Australian-owned).

It is calculated in 2019 that it costs kiwis somewhere between $400m and $900m a year in lost interest – depending on how the numbers are crunched.

Without sound financial education, there will always remain a group of people who live by the "no risk" mantra. These people most likely park their money in low-risk investment options like bonds, bank term deposits, and as returns dwindle, they either cut back, defer spending or eat further into their asset base.

Then comes a pain point – like negative interest rates. That's not to say cash doesn't have benefits. If you want to offset risk, save for a significant purchase or keep a fund for emergencies, cash is the way to go. But in the long term, your money in the bank is a bad idea.

Stock market risk vs volatility – what you need to know

Financial planning for your future retirement can quickly become a daunting task without proper guidance. Throw in some stock market volatility, political discord, and the twenty-four-hour news cycle, and it may make you impatient and worried. Our view is that you either take the time to understand how the market works, so you can ask the right questions and protect your wealth, or you allow your emotions to drive your decisions.

Stock market risk is the probability of losses relative to the expected return on any particular investment or investment vehicle. To give an example, a risky stock or investment could go up big time, but it also comes with a larger potential to be a big loser.  Picture a tech stock – that is hoping to be the next Google or Facebook, but with the risk of becoming another long-forgotten social media platform.

Stock market volatility is another fancy way to describe the unpredictable fluctuations in the value of an investment. In plain English, it refers to the movement of the stock market both up and down, or down and up over and over again.

Diversification is your friend. Sound investment starts with identifying the risks worth taking, minimising the chances of a negative outcome and maximising the opportunities of an expected reward. You can reduce risk and increase flexibility by diversification.

Seeking advice: While it may be normal to be scared during the roller coaster ride of market volatility, the chances of you achieving and maintaining financial freedom without at least some changeable investments are not very high.

You don't have to go on this journey alone.  You can work with an investment fiduciary who should be able to help you reassess your attitudes towards investing and the inevitable stock market volatility. All your financial decisions should be made based on your specific financial goals, time frames, and risk tolerance.  Just be aware that too little risk may cause you to run out of money in retirement.  The one thing you were hoping to avoid by not taking more risks.

Face your financial fears and take proactive steps towards your important financial goals. Having a financial plan can support you to make smarter financial choices over time. If you know where you want to be, it can make getting there easier.

• The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz