Life is risky business
Last week I accused our dear leaders of being financial illiterates who don’t appear to have a clue how the stock market works.
I’m not the least bit sorry – they crossed a line in playing politics with our KiwiSaver balances – but I do want to give fair play to the other (less stupid) change they introduced.
Again, this has to do with the ‘default’ KiwiSaver providers. These low-risk funds were intended to be temporary holding pens for new members before they choose a proper strategy.
Unfortunately, that’s not what happened. Close to 700,000 people are still in the default funds, and most of them haven’t made an active choice.
At this point, it seems fairly clear that some people are never going to leave. Which means the default investing strategy takes on a lot more weight.
Over the long run, not taking any risk is about the riskiest thing you could possibly do. If you stay in a conservative fund forever, you’ll end up with about $150,000 less at retirement, compared to a more ‘balanced’ fund which also invests in shares. And you’ll end up with about $250,000 less than a ‘growth’ fund, which is almost entirely invested in risky assets.
And so, the Government has decided to make the decision for us: from July 2021, inactive default members will be shifted into a balanced fund.
If KiwiSaver was a pure retirement scheme, this would be a no-brainer, and barely worthy of comment.
Our money would be locked up until age 65, which gives us plenty of time to ride out the ups and downs, with the added bonus of making it slightly harder to panic-sell. Great!
The fly in the ointment is that KiwiSaver is also a house deposit-saving scheme. You can withdraw your money after as little as three years, which is nowhere near long enough to be investing in the share market.
Even a 10-year investing timeframe is iffy. The risk is having to cash out your chips with the worst possible timing – say, when the markets are tumbling, like they are right now.
In setting the default strategy, the Government has to make a one-size-fits-all decision, which will almost certainly be wrong for any given individual.
I sympathise with them on this one. While the greenwashing move was pure meddling, they didn’t exactly have a choice here.
One of the things I try to do in this column is foster a healthy distrust of authority figures and ‘experts’ who presume to know what’s best for you.
Politicians are perhaps the worst offenders, because their interests are not aligned with yours. And given there are no qualifications for the job they do, we also end up with a fair number of MPs who are charming or well-intentioned, but somewhat lacking in the brains department.
But the most important reason is that they can’t make personalised decisions. An allpurpose policy forces each citizen to lie in a Procrustean bed: if you’re too short, they will stretch you out to fit; too tall, and they lop your limbs off.
The only person who knows what’s best for you is you.
If you’re one of those people still camped out in the default KiwiSaver funds, it’s crucial that you make an active decision – even if you decide to stay put – before the new rules come in.
It might sound strange to be talking about the importance of taking more risk right now. The bottom has fallen out of the share market, which probably has something to do with the run on toilet paper.
But the best time to make money is when the streets are running red.
Tune in next week, and we’ll look at strategies for surviving and thriving in a time of market mayhem.