KiwiSavers warned to prepare for fall
How would you cope if your KiwiSaver account lost thousands of dollars? KiwiSaver providers say that after years of strong returns, some investors are unprepared for the reality that, at some point, their balances will slip.
Exactly when is hard to predict. Commentators have been predicting a market downturn for several years.
How much?
Working out how much you might see your balance drop in a downturn requires a bit of crystal ball-gazing.
Ben Trollip, an actuary at MJW, ran the numbers on what could be expected in the worst 1 per cent of downturns, after fees and tax.
If you invest for 40 years, you have a 40 per cent chance of striking one of these events.
But Trollip warned the risk could be higher than that.
‘‘Remember during the global financial crisis how people talked about it being a ‘25 sigma event’? It wasn’t. It was actually that the models were wrong – they couldn’t predict how extreme things could get in reality,’’ he said.
‘‘To use an analogy. Our general insurance actuaries will model ‘one-in-1000-year’ earthquakes. But that doesn’t mean the chance of such an earthquake is one in 1000. Actually it is a way of accounting for the uncertainties in the model and trying to capture the risk presented by unknown factors.’’
Based on a balance of $30,000, he predicts these outcomes for KiwiSaver funds: Growth funds would lose 14 per cent, or $4200 on $30,000. Balanced funds would lose 10 per cent, or $3000. A conservative fund could lose 3 per cent, or $900.
Growth funds lose the most but should also be expected to recover fastest. Joe Bishop, right, head of retail wealth at Kiwi Wealth, said it was vital that people understood risk.
‘‘People tune out but it’s incredibly important. It’s incumbent on us as providers to find a way that resonates the most with people and helps them understand the concepts and makes it easy to make appropriate decisions. It sounds easy but it’s actually incredibly difficult.’’
Markets were volatile when KiwiSaver first launched but few people noticed because their balances were small and increasing quickly due to their contributions.
But now, with bigger balances, movements are more noticeable. People could get spooked when they saw a drop.
‘‘When you see the balance go down, it has a visceral impact. We saw that on Waitangi Day last year when there was a market correction on top of a holiday and it led the news.
‘‘People checked their balances the next day and saw it going down … we know the impact that can have and we need to prepare people for that. It’s important we help people to understand that KiwiSaver is a long-term scheme, and to get focused in on the impact today, while natural, could be a distraction and could lead to bad decisions.’’
Moving to a less risky fund can lock in losses.
Murray Harris, head of wealth management at Milford Asset Management, said that even if investors did not hit a one-in100-year event, they would still see their balances drop some years.
Growth funds would have more negative years than conservative funds did, he said.
But members benefited from dollar-cost-averaging. They put in the same amount each month no matter the price of the markets, so sometimes those contributions would purchase more units.
Harris said timing markets was very difficult. People who switched out when a fund dropped substantially would almost always find it recovered soon after and they missed out.
Growth funds lose the most but should also be expected to recover fastest.