Early in February after a long period of relative calm, the world found out that markets do contain a level of volatility they move up and DOWN and sometimes they can move quite quickly. For a majority of the past 18 months markets have been trending up with the odd flat spot or dip but nothing to compare with the nearly 5% drop in US markets we saw in early February.
KiwiSaver was no exception to this with growth funds falling approximately 3% over the first couple of weeks in February, however putting that in perspective the markets had been growing extremely well in December and January and as at the writing of this the Booster Asset Class Growth fund was at the same unit pricing as it was in mid-December.
What does this all mean to your average KiwiSaver investor… not much.
Essentially you will have made a loss for the month of February, for the past three months you’ll still be ahead and for the past 12 months still doing well. If however, you decided that you wanted to change fund or move to a conservative fund then you may well have locked in that paper loss and by doing so you have missed out on the rebound that has occurred to date.
KiwiSaver is a great example of why it is extremely difficult to pick and time investment markets and that if you take a long-term approach to investing the short-term volatility that occurs in markets every day has no impact on your decision making.
The more time you have, the more risk you can think about taking. Time gives you the space to make back your losses and benefit from compounding returns. A 20-year-old can generally take more investment risk than a 50-year-old, so if you have a long time to go until retirement (i.e. more than 10 years), you might want to consider an investment fund that has a higher exposure to shares.
While there are exceptions to this - such as for people who are looking to withdraw money to buy a first home (if you are eligible) – once you’ve determined how long you have left until you need to access the money in your KiwiSaver account, you will know your investment timeframe. And this can help you understand your tolerance for taking on investment risk.
Your risk tolerance is how comfortable you are watching market volatility potentially affect the money in your account. With market upswings, you could see your account grow in size, but, as with the recent market downturns, you could also watch the money in your KiwiSaver account shrink too.
If you have a longer investment timeframe, then it may allow you to take on a higher level of risk, because you have time to ride out the ups and downs that come with high risk assets such as shares.
Another factor to consider is what your entire financial situation looks like. What other assets will you have at retirement? To what extent are you relying on KiwiSaver to fund your retirement? If you will be relying heavily on your KiwiSaver account to fund your retirement, then it makes sense to take less risk – but again, you need to consider your investment timeframe and risk tolerance before you make this decision.
If you have any questions about which KiwiSaver fund you are in please give us a call on 0800 878 961.
- 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 particular financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any investment decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961.