Hang in there, KiwiSavers
by Nick Stewart
With people starting to throw around the word ‘recession’, the path to a comfortable retirement may be feeling less like a track and more like a white-knuckled carnival ride for some. It’s understandable to be nervous in times of volatility – but I’ll let you in on a secret.
The markets are never predictable, even in times of positive growth. Anyone who tells you otherwise is trying to sell you something.
When it comes to KiwiSaver, I’ve been seeing the same type of questions coming through frequently. Namely – should I stay, or should I go?
I’ll preface my explanation with a disclaimer; everyone’s needs are different, and you should always seek to do what is best for you. But in general… if you can stay, do. Time in the markets is always more valuable in the long term than trying to game your way out.
KiwiSaver is a great vehicle for retirement – it’s essentially set and forget, providing your situation and goals remain the same. For every dollar you put into your KiwiSaver account, the Government will put in 50 cents, up to a maximum of $521.43 per KiwiSaver year (the period between 1 July to 30 June)i. Fund holders have the ability to take on different levels of risk, as with any investment. These should correlate to the amount of time you have left before you need to make a withdrawal, be that for retirement or a first home deposit.
If you have more time, evidence shows us you can weather more volatility. This is why someone who is in their twenties and not planning to dip into the fund before 65 will be better positioned to take on more risk (should they choose to) than someone who is planning to use it within the next five years. The person using it in the next five, however, will likely be on a ‘safer’ plan with less risk – and less potential reward – as they no longer have the time to gain it back should the markets take a dive.
Which brings us back to our current predicament, where the markets have done just that. We likely haven’t seen the last of this bout of volatility. In recent examples of extended bear markets, we can see that the global financial crisis of 2008 lasted 517 days.ii We’ve only been in this current downturn since January. Again, I don’t have a crystal ball to know whether this trend will keep going or not – but most reports are picking it won’t be going anywhere soon as central banks continue their tightening policy.
This means that markets (and therefore your KiwiSaver balance) may drop lower than they already have. But fear not – this presents an opportunity for the savvy investor to make their contributions count for more while prices are low.
Think about it like shopping at a big department store. On any average day you can buy a range of products from different counters, for a price you’re relatively happy with. But every so often, they might find themselves with excess stock they want to offload – so, everything goes on sale to keep things turning over. Wouldn’t you rather buy what you need at that point when you can get more bang for your buck?
Generally, the idea is if you buy on the low, your portfolio will hold more securities to sell when the market turns around again.
If you back out of KiwiSaver when things start going downhill, you’re locking in paper losses. For example (and these are arbitrary numbers), say you have $100,000 invested and you pull it out of the markets when it hits $85,000. Option A – you keep it out and accept the $15,000 loss. Option B – you wait until stocks start rising and then you reinvest it, at which point you’re still accepting the loss because you no longer hold those same stocks, and they’re more expensive to buy back than what you sold them for.
So if you’re looking at your KiwiSaver and noticing a dip, don’t panic. It doesn’t mean you’ll never get it back. You can treat your KiwiSaver like a cactus on the windowsill… cast your eye over it every so often, but you don’t need to check in every day for minute changes.
And remember that every time the market declines, the forward looking expected return increases.
Many nervous investors in conservative, or historically less risky funds, have seen the balances decline in the last 12 mths, which doesn’t occur all that often. Yet their forward looking returns from the underlying assets, being predominantly bonds, have their highest yield to maturity since late 2016. They need only remain in their seat to see the return materialise as the bonds reach maturity.
When holding a well diversified portfolio of bonds, much like most conservative KiwiSaver funds do, the bond’s yield to maturity (bond’s total return over its remaining lifetime) will fluctuate as we move through both raising and falling interest rate environments. Typically, interest rates are one of the primary drivers of a bond’s yield to maturity. As central banks like the Reserve Bank of New Zealand increase the official cash rate, investors tend to also see the yield to maturity of their bond portfolio’s increase.
Simply put, the yield to maturity for investors holding bonds within their portfolio will be at a higher rate now that what it was at the beginning of this rate hiking cycle when the official cash rate was closer to zero. This ultimately is a good thing for future investment returns for conservative investors that have a higher allocation towards bonds in their KiwiSaver investment.
By all means, seek advice on whether your KiwiSaver is correctly aligned with your timeframe, goals, and your personal values. Are you comfortable with your level of risk, and with what your money is being invested in?
As with all investing, talking to a trusted fiduciary is a great place to start.
Nick Stewart is a Financial Adviser and CEO at Stewart Group, a Hawkes Bay and Wellington-based CEFEX certified financial planning and advisory firm.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
