How volatile is your KiwiSaver?
Kiwisavers should be prepared to take a certain amount of jitters, Rob Stock writes. UNCERTAIN FUTURE KIWISAVER VOLATILITY MENTAL GAMES
Veteran economist John Carran is unruffled by jitters in global stockmarkets.
There is nothing especially abnormal about a drop of 5 per cent in a sharemarket, he says.
Markets move ‘‘up by the stairs’’ with occasional ‘‘sharp corrections’’.
His message to KiwiSavers is this: If you are going to seek returns, you have to be able to live with risk.
Stock markets operate at a historic long run risk level of 18 per cent volatility, Carran says.
‘‘That means that two-thirds of the time they can be up or down 18 per cent in any one year.’’
‘‘That’s the risk that all investors in shares accept in anticipation of earning higher returns.’’
‘‘In this context, even a 10 per cent correction is nothing to be concerned about,’’ he says.
WHAT THAT MEANS FOR KIWISAVERS
For the KiwiSaver, an 18 per cent fall in sharemarkets does not translate into 18 per cent of their money lost.
KiwiSaver funds are banded into groups.
There are cash funds, conservative funds, balanced funds, growth funds, and aggressive funds.
Cash funds have no shares. Aggressive funds are heavily invested in shares.
If stockmarkets fall 18 per cent, aggressive funds will fall more than growth funds, which will fall more than balanced funds, and so on down to cash funds – which should remain unfazed by a sharemarket crash.
Sam Stubbs from the Simplicity KiwiSaver scheme says: ‘‘Investing in KiwiSaver is like having faith in humanity, and human progress.’’
Money flows to where returns are to be made, he says, monetising human progress for the investor.
Over the long run, growth investments such as shares have delivered higher returns than money in the bank, or bonds.
But just as human progress does not always head in the right direction, so sharemarkets won’t either, though the trend has tended to be upwards over time.
The trick for KiwiSavers is to find funds that deliver the returns they need, at risk levels they can stomach, over the timeframe they have to invest. The finance industry has tried to give investors indications about the likely range of future returns on KiwiSaver funds.
Sorted, the Government-funded financial capability website, has a fund finder to help people choose what kind of KiwiSaver fund to invest in.
Users have to say what kinds of ups and downs they can bear.
Investors who are investing for ‘‘10 years of more’’, and could live with a range of returns from a 10 per cent loss to a 20 per cent gain in any given year, are steered to growth funds.
Nervous types seeking a returns range of zero to 5 per cent gain are steered to balanced funds.
But those who can live with really big ups and downs from a 100 per cent gain to a 30 per cent loss in any given year, are steered towards aggressive funds.
KiwiSavers should take note of those ranges, as their balanced, growth, and aggressive funds are likely to fall in that range in any given year.
OFFICIAL RISK SCALE
To get an indication of the kind of risk a KiwiSaver is taking with theIr fund choice, they can look at the risk rating their fund has been given.
There’s a 1-7 risk scale imposed by the Financial Markets Authority.
Where each fund falls on the scale can be found in the disclosure statement for the KiwiSaver scheme.
It’s a backward-looking scale, based on the past five years of returns, but the higher a fund is on the scale, the higher the ups and downs it has delivered investors.
The more growth assets the fund has, the higher the chances of a big loss, or a big gain.
While it has value to guide KiwiSavers, the FMA’s risk scale is no guarantee of a fund’s future performance. Stubbs studied yearly returns on giant diversified KiwiSaver funds between September 2007 and January 2018.
It was a period that included some stellar bull runs, and one massive crash, the Global Financial Crisis, which fortunately for KiwiSavers happened early in the scheme’s existence, when balances were small.
The biggest calendar year gain during that period for giant growth funds was just under 30 per cent.
The biggest calendar year loss was just over 25 per cent.
For balanced funds, the range was minus-18 per cent to plus-24 per cent.
For conservative funds it was -0.5 per cent to just under 10 per cent.
Stubbs said such returns could be expected 95 per cent of the time.
But the future is uncertain, and returns can defy any attempt to predict them. How investors choose to think about losses can have an impact in KiwiSavers’ decision-making, including influencing whether they panic and sell up.
Thus, they crystallise their losses and deprive themselves of the chance to earn their money back when, or if, markets rebound.
Studies in the US show such attempts to ‘‘time the market’’ by investors tend to fail.
Leighton Roberts from Sharesies, a business enabling ordinary people to get into share investing, says the business works hard to educate its investors.
A great deal of effort is put into training investors about ‘‘dollarcost averaging’’, the process of drip-feeding money into markets.
Dollar-cost averagers (and this includes KiwiSavers) are taught to see market falls as an opportunity to buy shares at cheaper prices in anticipation of markets recovering.
Early on, Sharesies used the traditional ‘‘red’’ to indicate portfolios that had fallen in value.
Now it uses gold instead, and Roberts says that has increased the likelihood of investors seeing falling prices as being a good opportunity to buy.
Having only launched a year ago, Roberts said its investors had experienced a extremely profitable, and low volatility year in 2017, a year when for the first time in history the NZX, the ASX and the S&P, all three markets experienced 12 consecutive monthly gains.
It was a year in which the average KiwiSaver growth fund delivered a return of 15.7 per cent, according to fund research agency Morningstar.
‘‘What they experienced was probably not a particularly sustainable or realistic view of the stock market,’’ he says.