KiwiSaver - Resist The Itch To Switch

As we navigate a rather turbulent time in the market, many of us are wondering what impact this will have on our KiwiSaver come retirement, and what, if anything, we should do. Lifetime Adviser Michael Heriot explains.

“Someone’s sitting in the shade today because someone planted a tree a long time ago.” Warren Buffett.

I planted a “tree” and joined KiwiSaver when it first started in 2007 with the express goal of it helping me eventually retire and to be able to enjoy those (hopefully) 20+ retirement years in a better financial position.

The benefits were clear. Investing in a scheme where I made regular contributions, my employer matched them, and the government chipped in as well. The schemes themselves were well regulated, offered diversified funds, were low cost and easy to operate.

Being a Financial Adviser at the time, my experience told me that I needed to follow some investment principles to get the most out of the plan, and these were:

• Whatever fund(s) I used HAD to be diversified, across assets, across sectors and across countries. The reasons were to lower overall risk by spreading the eggs into different baskets, and to get returns from multiple sources.
• Whatever strategy I used (Conservative, Balanced, Aggressive) I needed to be comfortable with the volatility. History had shown me that the more growth assets in the strategy, the more ups and downs …but the better long-term returns. History also showed me there would be some uncomfortable moments along the way.
• I thought that patience in sticking to whatever strategy was decided on, would pay off in time. Trying to time things or predict the short term was a distraction and more likely to go wrong than right.
• It made sense to continue to think of what my KiwiSaver was for – providing the “shade” when I’m over 65 - and not focussing on what the number might be (or how high the tree was) on any given day.

We live in unique times. But our whole lives are a sequence of many unique times, and in general there is more good than bad in the story for most of us.

This is true also of economies and markets. They deliver us rewards more often than not and each crisis, as unique as it is, eventually passes. As history teaches us, we recover.

KiwiSaver Switching

Providers have stated that there is increased switching to more Conservative funds in the last week. While this might be a suitable course of action for someone using their KiwiSaver for a first home deposit, or for someone withdrawing under significant hardship provisions, longer term investors will “bank” the fall in markets into the price by doing so. That is, locking in the loss and reducing the opportunity for recovery.

History shows us that recovery is inevitable. It also shows us that changing strategy in the midst of a downturn does not pay off, and that those that stick to their plan come out better in time.

To use the Buffet analogy once more, the chances of the tree providing future shade will be a lot less if half the branches are cut off.

So, what should you do?

In many cases, nothing. However a call to your financial adviser is always a good place to start. For those in certain circumstances during this market downturn, there may be some things to consider, such as;

For those planning on a home loan withdrawal:

• It could be considered to lower the volatility so first home buyers can be more certain of their deposit amounts at any given date, a cash-based fund is more suitable than a balanced or growth fund, but professional advice should be taken first.
• If it is many years before a first home withdrawal is likely, then more risk could be taken.

For those experiencing significant hardship:

• Hopefully very few people are in this position but if so or likely to be so, a cash-based fund could be appropriate.
• The Government have relaxed the criteria around hardship withdrawals but do note there are numerous government assistance programmes to consider using before exercising a last resort KiwiSaver withdrawal.

If you are retired, or nearing retirement:

• Being too aggressive is not generally considered wise because there is less opportunity to ride out any downturn. Bear in mind that average life expectancy has risen, and we are retired for a lot of years. So many will be able to handle some ups and downs and slowly use their KiwiSaver to supplement retirement.

If you have longer than 10 years before retirement:

• Given the longer time frame before accessing the KiwiSaver money, having a level of growth assets like shares and property will deliver enhanced returns over that longer timeframe.
• For those that are saving with KiwiSaver, regular contributions at this time are buying more assets than they did two months ago so investors are getting more “bang for their buck”. This concept of dollar cost averaging will boost long term returns.
• Because you are not using the money now or soon, looking towards the future is more beneficial than focussing on what’s happening today.

Everyone is unique and each circumstance is also. The above is generalised and your “tree” and “shade” requirements will be different to mine.

In all individual cases we recommend discussing with a financial adviser if you are thinking of making changes.

Let’s hope we get through the pandemic without a high human or economic cost.

Article by Michael Heriot, AFA - Meet Michael