Panicking and changing KiwiSaver funds when the market goes through a bad patch is precisely the wrong thing to do, writes Martin Hawes.
Annual KiwiSaver statements are hitting people’s inboxes about now, and there may be a few gasps from those who don’t generally pay much attention to the business news.
According to financial product comparison site Pocketwise, 80% of KiwiSaver funds suffered losses in the last quarter of 2018 and in spite of this year’s bounce fully 50% of these funds have yet to recover those losses.
Those gasps can turn into worry, even alarm, and begs a question: Am I in the right fund?
Finding your Goldilocks fund – the one that is just right for you – is the key to making the most of your KiwiSaver account.
Many people are still getting this wrong and the result is a much smaller nest egg than they could have when they retire. Far too many KiwiSaver members have their money sitting in funds that are either too risky or too conservative.
In my experience some people neither know nor care the level of risk that they are taking. They should!
The wrong fund sees people pay a very high price, and that’s a great shame. The type of fund you have reflects its mix of investments, and this is likely to be the most important influence on how it performs (in terms of both the returns you get and the ups and downs you will experience).
If you are in a Growth fund, your KiwiSaver account will have a high proportion of shares and property. Over long periods of time this will give good returns but there will be a lot of ups and downs on the way.
A Conservative fund on the other hand will be loaded with bank deposits and other fixed interest investments. Such a fund will not have the stomach-churning volatility of the Growth fund but the returns won’t be as high either.
Pretty much everything else you might do to improve your investment pales to insignificance compared with having a fund containing the right proportion of shares, property, fixed interest and cash. Getting into a fund with the right level of risk is the first and most important thing that smart investors and KiwiSavers do.
Clearly, it is a bad move to take on too little risk – returns will be low and KiwiSaver is for such a long period of time that just a small amount of lost return will see a significantly reduced account balance come retirement.
Worse, however, is to take on too much risk. When markets hit that inevitable bad spot, as they did last December, many investors find that they are not as comfortable with risk as they thought. They get a fright and they jump. They flee to a safer, less volatile fund and that, of course, means that they effectively sell some of their shares and property. And they pay the price for their panic.
While changing funds is easy, lowering risk during a market downturn – moving from, say, a growth fund to a balanced fund – is precisely the wrong thing to do. You are reducing the amount of shares right into the slump.
And yet every time there is a slump this is what a lot of people do. They feel the fear, panic and sell out when they should be able to hold on.
This isn’t a failure of the markets. We know that markets will fall at times and sometimes they will fall hard. Instead, it is a failure to assess your appetite for risk and end up in the wrong fund right from the get-go.
Finding the right fund is really about finding the amount of risk you can tolerate. You want a fund with the maximum amount of risk, but no more. This will give you the best returns but at the same time not so much risk that you will bail out and sell into the next slump.
Conservative, balanced, growth? You really ought to know the fund that you are in and it should be the right fund.
To find your Goldilocks fund you should use one of the many online calculators available (see www.sorted.org.nz). A few quick and simple questions and it will tell you which type of fund is right for you. That’s likely to be the best investment you ever make.
Martin Hawes is the Chair of the Summer KiwiSaver Investment Committee and is an Authorised Financial Adviser www.martinhawes.com. This article is general in nature and not personalised advice.