By Gillian Boyes, Investor Capability Manager
First published by NZ Herald on 27 February 2020.
It’s an unpredictable world we live in: trade wars, real wars, virus outbreaks and natural disasters appear with alarming regularity. And this kind of uncertainty can have an impact on world financial markets, which can then flow through to your KiwiSaver balance.
KiwiSaver providers have been good at developing apps and online dashboards that help us easily check our balances. That’s all great when balances are rising, but it also means we get a box seat view when they fall, or flatline for a period.
So what’s the right thing to do? It’s a good time to focus on your KiwiSaver journey – the destination doesn’t change when headlines get scary.
Pick where you’re going
KiwiSaver investments work in timeframes of decades, up to 40 or 50 years. For these long term goals a growth or balanced fund is usually the best option. These funds have higher -risk assets in them, such as shares and property. So when world markets are unpredictable, they will be the ones with balances that move around more. The (significant) upside is, over the longer-term these funds will usually provide higher returns, growing your money more.
If you’re going to need your money soon (say within 3-5 years), either for a first home or retirement, then a conservative fund is generally best. Conservative funds are stacked with lower-risk assets like cash and bonds – assets that hold their value. This means the balance you’re seeing on your app or website will be close to the one you’ll receive when you access the money.
Get some sleep along the way
Higher growth funds for long term goals is fine in theory – but what if you don’t have the stomach for constant ups and downs? KiwiSaver providers call this your risk profile and it’s your appetite for handling that moment when your balance suddenly falls.
It can be tough to watch your KiwiSaver balance go down. But panicking and moving to a more conservative fund during a market downturn isn’t a good idea.
Remember if your KiwiSaver balance falls, you haven’t actually lost any money – it just means the value of your investments has dropped. But if you change your fund that loss becomes real – your KiwiSaver provider has to sell your investments at that new low value so you end up locking in that loss. Even stopping contributions can be a bad idea because you’ll be missing out on the bargain buying your fund manager will be doing.
Have an honest conversation with yourself at the start about whether your head can over-rule that very human response we have to take action when things look like they’re going wrong. Then choose a fund that you’re happy with and stick with it.
Let the guides point you in the right direction
Take the hard work out of planning and managing your KiwiSaver journey by using a guide.
Your KiwiSaver provider is the best place to start. They’re required to give you information and help on how to choose the right fund and plan your trip. If your needs are more complex they’ll be able to put you in touch with a financial adviser who can advise on your personal situation.
There are plenty of do-it-yourself guides as well on the FMA and the Sorted website.
And if scary headlines or a bouncing balance is making you nervous at any point- check in with your preferred guide. The fees you pay for KiwiSaver entitle you to help along the way.
KiwiSaver is set up to be a long term investment, which means it’s a journey to be measured over decades, not weeks or months. There’ll be up and downs along the way, but keep that destination – a comfortable retirement – in sight.
Tips to manage an unpredictable KiwiSaver balance: