In the third part of our series with Kiwibank answering your questions about Covid-19’s impact on New Zealanders’ finances, two readers at different ends of their saving journeys ask what to do with their KiwiSaver account. Melissa Vasta, Kiwi Wealth GM retail and product, responds.
My KiwiSaver ‘growth’ fund has been pummeled in the last month, and I’m pretty freaked out. Should I swap it to a more conservative fund to minimise any further losses or should I not touch it and wait for things to improve? I’m in my late 30s.
Kia ora Freaked Out,
As a general rule, the time frame of the investment is the most important consideration when you’re choosing a KiwiSaver fund, so the main question is how long it will be until you’re likely to retire or withdraw from your KiwiSaver account to buy your first home.
If you’ve got more than 20 years until retirement and aren’t planning on making a first home withdrawal, you should generally be in a growth fund. There are a few exceptions though – one of them being that if you get particularly nervous every time the market drops then your tolerance for risk might be too low to be in that type of fund.
The key thing is for you to be in the right fund for your age and stage in life. And once you’re in a fund that you’re comfortable with, sit tight and hold on when the market moves. It does pay to reassess every few years, but where it can go wrong for people is if they move their money around too often in reaction to a fluctuating market, suffering the losses on the way down but not sufficiently benefitting from the rebound.
Remember there was a big upswing in the markets before Covid-19, so while we’re certainly down from the heights of a few months ago, on balance it hasn’t been as bad as it looks right now. Over the long term, markets tend to return – that’s what has happened throughout history, though you can’t guarantee they will again. People always adjust to the new normal of increases: when the market goes up, they tend to think of the new dollar value as their total savings and don’t factor in the chances of the market going down again.
Having said all that, as a very broad rule people should be in a growth fund unless they have plans to retire or make a first home withdrawal in the next few years. If that’s your situation, it might pay to look at a more conservative fund to minimise any potential losses in the future – but be aware that if you switch while markets are down you will lock in any losses you’ve already experienced. If the market bounces back, you won’t benefit from that recovery as much as you might have if you had stayed in a growth fund.
I recommend you spend some time on our Risk Profiler tool to help you figure out which fund you should be in. It will ask you some simple questions to help you understand your appetite for risk and to see how various outcomes could impact your savings in actual dollar amounts rather than percentages.
There’s no right answer for everyone, but if you can understand more about your appetite for risk, you can find a fund that will suit where you are in life, when you plan on accessing your investment, and what impact further losses would have on your financial plans.
Kia ora Melissa,
I have four years to go until I retire and have my KiwiSaver account in a conservative fund. Should I move my funds to a higher risk fund to take advantage of bargains in the share market? Or should I leave it in the conservative fund to prevent any major losses at this time?
Kia ora Nearly Retired,
As with my advice to Freaked Out, it’s key to look at your appetite for risk. If you’re in a conservative fund and see that the markets have dropped considerably, the reality remains that you only have four years until you retire so you have less time to recover from further losses if the market plateaus or continues to fall. So it really depends how quickly after retirement you plan on using your KiwiSaver funds. If you have other savings or income and you could leave your KiwiSaver funds in there for another 10-15 years, you may want to think about less conservative funds if you have the appetite for that risk. Have a look at our Future You tool, which will project what your balance would be in different time frames and funds. You can compare those projections with your savings goals and make sure whatever fund you’re in is a conscious decision, recognising the impacts of whatever risks you might be willing to take.
You say “take advantage of bargains in the share market” which assumes a level of knowledge about the market being correctly valued prior to any dip as opposed to potentially being inflated prior and correcting itself. For this reason, seeing stocks as “on sale” can be an optimistic way of looking at things, while still potentially advantageous if you’re working with disposable income. Certainly, if you’ve got money to invest that you’re not necessarily reliant on, you might see a market drop as an opportunity – but for a lot of people, the reality doesn’t work like that. If you transition to a growth fund now because of the bargains in the market and we see another drop in a year’s time, how comfortable would you feel at that point?
Since you’re so close to retirement, you should seek advice from a financial adviser if you have access to one. Your KiwiSaver account is just one piece in the puzzle and it’s important that all the pieces align with your retirement plan.
Congratulations in four years’ time!
Please be advised that our response is based on information you have provided but there may be other things that we don’t know about your situation that would be relevant to the answers provided and would change the outcome. You should speak to a financial adviser before making any decisions or a budgeting service.
Information provided by Kiwibank and Kiwi Wealth is limited to providing a general response to the specific question and is based on the limited information provided. It does not take into account any additional financial information or possible financial solutions available. This shouldn’t be relied on as the sole basis for any financial decisions. For information and assistance for your specific situation, you should call a financial adviser. Kiwibank is a Qualifying Financial Entity (QFE) under the Financial Advisers Act 2008. For a full copy of Kiwibank’s QFE disclosure, please view this link for more information. Kiwibank and Kiwi Wealth are related entities. Kiwi Wealth Limited is the issuer of the Kiwi Wealth KiwiSaver Scheme. The Product Disclosure Statement for the scheme can be located at kiwibank.co.nz. Kiwibank is only a distributor of the Scheme.
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