KiwiSaver’s big flaw: not enough advice for savers
STICKING with your Plan is the only way to manage the Covid19 crash in investments, whether they be in KiwiSaver funds or in personalised portfolios.
For most of us, the Plan was to buy and hold for the long term, and that’s what everyone should be doing right now. Holding, and focusing on the longterm Plan that you put in place at some stage in the past. Remember the Plan?
The reality is that there are a lot of KiwiSaver investors who don’t have a written plan, nor do they have an adviser to turn to at times like these. I talk more about this problem below.
OK, so the Covid19 thing came out of left field and caught us all by surprise. Our investments had been doing well since the last correction at the end of 2018. Good
KiwiSaver performance had affected everybody since then, and we were used to seeing good news whenever we looked at our investment balances.
We were all shocked by the sudden downturn in share markets in late February. Big falls were followed by big rises followed by even bigger falls.
Normally, this would have generated some panic among the more nervous of our clients. We have been through a few market crashes together, with a core of our clients going back to the Tech Wreck of 2001.
During a crash of this latest size, we would expect some clients to be philosophical and a lot to be downright scared.
What is different this time?
This time there is a lot more understanding of the issue causing the crash. By now, everyone knows what Covid19 is, what it can do and what we must do to stop it becoming a major killer of New Zealanders.
There is the expectation that we will beat Covid19 at some stage and life will get back to some semblance of normal. We expect eventually there will be a vaccine available, and tourists and students will return to our shores and that sharemarkets will recover.
This time it is not a trade war or dodgy property deals causing all the fuss in investment markets; it is a public health pandemic. People seem to understand that. That’s what is different this time.
This time there are more important things to worry about than our (temporary) investment balances; our health and our lives, they are on the line with this one.
KiwiSaver has been a bit of a worry
We have heard that there have been large numbers of KiwiSaver switches from growth investment mixes back to conservative. A lot more than normal. This is a worry. It is called locking in a loss. Dumb.
KiwiSaver is one of those things that a lot of people are in on their own. They don’t feel they have anyone to listen to them when they are afraid, to give them reassurance when they are under immense pressure to do something!
One person switches to a conservative option and talks about it and it catches like wildfire. Misinformation takes hold and numbers of good, honest Kiwis transfer some of their wealth, effectively, to someone else, without thinking it through, without even knowing that is what they are doing.
For every sale of a share, say, when you move from growth to conservative, there is someone else buying it. Someone thinks it is a good deal to buy when someone else is scared. You bet it is.
When someone switches from growth to conservative, they are effectively selling shares and listed property and buying fixed interest. This is equivalent to selling something that has become cheap and buying something that is relatively expensive. Isn’t this the wrong way around?
To grow wealth over the long term, the idea is to buy things that are relatively cheap and sell when they are relatively expensive. You do this with KiwiSaver by buying and holding long term — in some cases, you will be holding your KiwiSaver investments until you die. Your heirs may even keep what is left of your KiwiSaver funds and retain them invested for another generation.
You get the picture: that share market investment is a really longterm activity. Even someone at age 80 may have twenty years of lifestyle to fund. That is still very long term.
The big problem with the design of KiwiSaver is that there is no advice built into the programme. Not a dicky bird. New Zealanders have been left high and dry by their KiwiSaver providers, and the proof is staring us in the face today. KiwiSaver members shifting out of growth funds into conservative funds to their longterm detriment. Where is the advice for these people? There is none. This is an indictment on all KiwiSaver providers that don’t provide advice, especially when investors are wanting to switch. It is a basic flaw in the original design.
If you are saving on a regular basis into a volatile investment portfolio or fund, one that goes up and down in value a lot, like a growth or aggressive portfolio, you are better off with the ups and downs in value than you are without. Every time the fund goes up you buy less of it. When it goes down you buy more. You end up mathematically better off over the long term than even the average of the market you have ridden through.
The more volatile the ride, the better off you will be compared to a smooth ride, even with the same start and end value.
It is called dollarcost averaging and it is one of the reasons you should be in a growth or aggressive portfolio/ fund if you are saving over the long term. Anything else and you are leaving money on the table that you won’t have once you stop working, all other things being equal.
Any way of looking at it, it is best not to cash in your fluctuating investments when they are down. If you think you may be in the wrong mix, then go back to your original Plan. What were your objectives when you set up your investment? Have those objectives changed? Has your investment timeframe changed? Did you do a risk profile? What did it tell you? How does your Plan accommodate for sharemarket shocks like these?
If you didn’t put a Plan in place for your investments originally, it is not too late to do something about it now. Ask an adviser or your KiwiSaver provider for advice.