Wait. Pause. Breathe.
We get it. Volatile markets can be really scary. And for many, the impulse to do something about It – like looking at switching funds or KiwiSaver schemes – is really strong. But while by doing that you may be following your instincts, it is very rarely the right option to take.
That impulse is completely human of course – watching your KiwiSaver balance that you have been growing for some time, drop, is never an easy experience. But here’s the thing: this is a mere moment in the history of markets; this will pass, and provided you don’t make rash decisions, may even prove beneficial to your long terms savings.
Here’s what’s important to remember: The history of markets shows us time and time again, that what goes down, does come up, and then some. None of us know (at the time) exactly when or by how much, but that is the consistent direction you can rely on. And remember, you are a long term investor with your KiwiSaver, so you really need to focus on the longer term.
Let’s take a walk back in time to see how
As you can see from the chart below, $100 invested in 1969 is worth almost $9,0001 today, but that clearly has not always been plain sailing. You can see there have been some scary moments and a number of pretty large dips along the way. But, the market has always recovered.
1 Based on total return of the MSCI World Index from 31 December 1969 through to 30 June 2022
We took a look at a number of global downturns over the past 30 years, and found that on average markets have fallen 38% from their peaks and it has taken 26 months for markets to recover from their troughs. The most recent – the 2020 Covid ‘dip’ - was a short lived dip: markets only took two months to bottom out and five months to recover. For a more detailed read with data on the history of market downturns and rebounds, check out our blog here.
Lessons from the worst of all, the Global Financial Crisis!
The deepest and longest crash was the 2009 Financial Crisis, which saw global markets fall 51% over the course of 17 months, and took 50 months to recover.
But as the graph2 below illustrates, once the recovery was complete in April 2013, the rebound was on and global markets increased by 27% in two years. Zoom out further, five years after the recovery, and global markets were up 60%. And zoom out even further, by December 2021 (which marked the end of the longest bull market of all time), and the global markets had risen by over 169%.
2 Based on total return of the MSCI World Index from 31 October 2007 through to 31 December 2015
It’s not all bad
As you can see, volatility and markets heading south for a time, can also mean opportunity. In a nutshell, the market dropping allows investors – like you with your KiwiSaver plan – to buy shares at a cheaper price and benefit from the rebound.
Take the current market performance for example: global markets have fallen 18% since December 2021. Let’s assume that your fund is tracking to this – that means that your contribution dollars are purchasing 18% more now than they were six months ago, and so when the market rebounds, you’ll get that 18% upside.
What should you do, now?
So, there are both upsides and downsides to volatility – but what should you do?
Do not try and second guess the markets
No one has a crystal ball – we don’t whether the markets will continue to fall or if they will recover tomorrow.
What we do know, is that when the market recovers it recovers very quickly. In April 2020 after the Covid Crash and in March 2009 after the US Government rescued the banking system, markets recovered c.20% over the space of two weeks. Most market commentators at the time thought they were short-term bounces, but they were very large parts of the sustained recovery.
So, if you move to a conservative fund expecting to quickly switch back when the markets start to recover, you will more than likely lose out on that bounce back.
And, remember even if the market falls further your growth fund will recover, it is just a matter of when. But if you are no longer in that growth fund, your funds won’t be able to participate in that recovery.
Make sure your KiwiSaver is set up properly for your objective and risk tolerance
Regardless of market conditions, (seriously, just forget about those for a moment), are your KiwiSaver settings right for you? Is your asset allocation (equities, bonds etc) right for your risk profile, and most importantly, your investment timeline (i.e., the amount of time your money will be invested for before you reach your goal)?
As a general rule, the longer your investment horizon, the more risk you can take simply because you have more time to ride through a downturn to capitalise on the rebound. On the other hand, if your investment horizon is shorter, market volatility makes it all the more important to protect your downside. You can use the kōura Portfolio Generator here to explore the appropriate fund type and asset allocations for your goals and investment horizon.
Not in the right fund type? Take action
Given the current heightened volatility and uncertainty, it is more important than ever to make sure that you’re in the right type of fund.
It might be painful moving to a conservative fund right now if you want to purchase a house in the next few years, but you need to protect yourself against the chance that the market might fall further, further depleting your first home deposit. Alternatively, it can be really scary moving to an aggressive or growth fund right now, but now is the best time to make that shift, as long as you are invested for the longer term.
Now is as good as any to think about changing scheme provider
While you should never change scheme provider because of market movements - all KiwiSaver schemes have performed badly over the past six months - you should not be put off changing KiwiSaver scheme providers because of market movements.
Are you getting the right level of help from your KiwiSaver provider? Are their fees reasonable? And most importantly, do they have a set of funds that matches your needs? These are the questions you should be asking now (and on a regular basis) and if the answer to any of those questions is no, then don’t hesitate to find a new provider to look after your hard earned retirement savings.
A final note
Volatility is part of investing – with upsides and downsides. Which it is for you ultimately depends on where you are in your investment journey and how soon you need to access your KiwiSaver funds.
While it’s uncomfortable, and contrary to instinct, for many or most Kiwis with time on their side, this latest bout of volatility and poor market performance is likely an opportunity for greater returns in the future, when the market does what it always does and rebounds. So, as a parting note – the best thing you can do is: breathe, review and be clear about what’s right for you.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.