Managing your KiwiSaver account: making sense of market volatility
08 September, 2015
There is no doubt about it — August was unpleasant for share market investors and the media had a field day with hyped headlines about global share markets plummeting because of concerns about China's slowing growth. When there is a broad market selloff, based more on fear than on any fundamental issues, there is nowhere to hide. If you have checked your KiwiSaver account balance in recent days it will very likely be lower than it was a month ago (unless you have made a large contribution).
While it's important to be aware of what is happening in financial markets, we need to be careful about how we react. A volatile market should not lead to panic. Ups and downs are a normal part of investing and over the life of your KiwiSaver investment, you will likely experience multiple periods where markets are volatile. Don't forget, since KiwiSaver began in 2007, we've already lived through the Global Financial Crisis and all sorts of political and economic "crises", yet your KiwiSaver account has taken it all in its stride. This is not the time for knee jerk reactions to a few sensationalist newspaper headlines.
The extent to which your KiwiSaver account balance has been affected in the short-term will largely be determined by how your money is invested.
The Conservative Fund has weathered the storm relatively well as less than 20% of its assets can be invested in higher risk assets such as shares. When shares drop in value as they have recently, "safe haven" or income assets, such as cash and fixed interest, often increase in value and provide a layer of protection. In contrast, the Growth Fund, which is predominantly invested in shares, felt more of the impact of the selloff.
If you are a younger investor, then you have time on your side to earn back the recent losses; the month of August 2015 will have a relatively small impact on your KiwiSaver balance at 65. By continuing to make regular contributions to your KiwiSaver account, you will be able to take advantage of falling prices, as with a long term investing horizon you want to be buying shares whenever they are cheap. One way of looking at it is that shares are currently on sale!
If you are approaching retirement, then recent events will be of concern but again, it's important to retain perspective and to understand your options. As you get older, it does make sense to reduce your level of risk (and therefore increase your allocation to income assets over time). No one knows for sure how long the current market volatility will last (how long is a piece of string?), but if you're tempted to change your investment strategy, bear in mind that moving to a more conservative fund now would crystallise losses by selling out of those assets. You may also run the risk of missing out when the market turns upward again.
The below graph illustrates the performance of the Growth and Conservative Funds in the Fisher Funds KiwiSaver Scheme (note the Conservative Fund started in June 2009). If we look more closely at the Growth Fund, we can see periods of short-term volatility (e.g. in 2008 - 2009 as a result of the Global Financial Crisis and again in mid 2011 when the Fed postponed stimulus for the US economy) but over the long-term the Fund has trended upward and outperformed the Conservative Fund.
Markets generally rise over time however investing over the long-term is never completely smooth and we should all expect bumps along the way. If your investment timeframe is fairly long (at least 10 years) then what happens in between doesn't matter very much as long as your portfolio is ultimately worth more than what you paid for it. On the other hand, if you're losing sleep about your investments then maybe it is time to review how your money is invested. Our team can help you with that and we'd love the opportunity to chat. Investing doesn't need to be scary or unpleasant — even if the media suggests otherwise!