Reality check for KiwiSavers
If you’ve checked your KiwiSaver balance lately, you might have had a nasty surprise. Volatility on sharemarkets around the world has hit KiwiSaver investments.
Research from MoneyHub shows that in the past six months, only four of 27 KiwiSaver growth funds had a positive return.
Growth funds have a higher allocation to riskier assets, such as shares, than balanced or conservative options. This means they do better in the long term but can jump around from month to month.
‘‘The three worst-performing funds belonged to AMP KiwiSaver, with their Nikko AM Growth, ANZ Growth and LS Growth Fund moving down 1.98 per cent, 1.54 per cent and 1.29 per cent in the period respectively,’’ researcher Christopher Walsh said.
‘‘The low-cost index-tracking Simplicity Growth Fund was the best performer with a 0.62 per cent return. Booster’s KiwiSaver Balanced Growth came in second with a 0.47 per cent return.’’
For many KiwiSaver members, this is the first time they will have seen their balances go backwards.
Although markets were turbulent when KiwiSaver started, back then balances were small enough that members’ contributions meant the total in the account kept growing regardless.
Now, members are seeing drops of thousands of dollars.
The only people who should be concerned about a drop in their KiwiSaver balance are those who need the money soon.
If you are retiring and will rely on the money in the next year or two, or you plan to buy a house and need the money for a deposit, a drop is bad news.
This was pointed out earlier in the week by Shane Henderson, who said his balance was ‘‘collapsing faster than the Black Caps in the 90s’’.
But, in theory, those people should already be in more conservative investments, anyway, which will experience smaller drops.
‘‘Saving for a house in a growth fund is not going to work,’’ said Aaron Gilbert, head of the finance department at AUT.
But if you only now realise that you are in the wrong type of fund – a growth fund, say, when you ought to be in a cash fund – you need to decide whether to shift or stick it out.
When you put money in a KiwiSaver fund you buy ‘‘units’’. You still have as many units as you ever did, they are just worth less.
So, if you sell the units in a growth fund and move into a conservative fund, you lock in that lower price (a bit like selling your house during a slow time in the market).
But if you cannot afford to wait it out, you might not have a choice.
It is not clear whether what is happening in the markets is a short-term wobble or the prelude to a bigger downturn. Your units might rebound and be worth more again in a few months. Or they might not.
Gilbert recommended considering how well you can withstand the drop.
If you are saving for a house and could not get the deal done if you lost any more of your deposit, you would have to move the money to secure it.
But if less money in the KiwiSaver account would make things tougher – but not impossible – you might opt to ride it out and hope for a rebound.
If you are in the right type of fund, the drop is good news, Gilbert said.
‘‘If you’re in a growth fund and you don’t need to touch your money for a long period of time, don’t do anything.
‘‘What’s important is what you will end up with when you retire. In 2008, equity markets around the world basically halved but they were back above that point again in two or three years.’’
He said that anyone who thought the market had tanked could put more money into their KiwiSaver accounts, and benefit from the low prices.
‘‘It just comes back to a question of whether people are in the right type of fund. If yes, then it doesn’t matter in the short term. It’s the long term that matters. If we do see a big plunge in sharemarkets, it will be interesting to see if people buy more. That’s the smart play.’’
Tim Murphy, of research house Morningstar, said investors needed to retain perspective.
‘‘Focusing on long-term outcomes, and not getting too worried about short-term market movements, remains the best mindset for investors to keep.’’