Predictions of financial markets doom are everywhere you look. What does this mean for your KiwiSaver?
It seems everywhere we turn there is a financial commentator warning the good times cannot last much longer. There is some validity to this point, the average “upcycle” (a period that shares keep rising for) has historically ranged from 5-8 years and at 10 years this is one of the longest cycles on record. On top of the cyclical considerations, there are also the worrying themes around the US and China, Brexit or a continuing slowdown in Germany, Europe’s manufacturing heartland.
Problem is, they’ve been talking about this for the past three years and in that time the New Zealand share market has risen almost 35%. This theme is reflected by many markets around the world, including the US. If you had listened to those naysayers back in 2016 and decided to move your funds from a growth fund to a conservative one, you would have missed out on those returns.
It is notoriously difficult to predict markets, and very few people are successful at predicting the peaks or troughs. Research out of the US shows that the average US Retail investor underperforms the general market by 3-4% annually, with one of the biggest drivers being the attempt to time the market and predict returns.
So, what should you do the next time you hear the markets are about to come crashing? Before you do anything first it’s important to understand what a market downturn means for your KiwiSaver account.
What does a downturn mean for my KiwiSaver fund?
KiwiSaver was introduced in 2007, right before the Global Financial Crisis of 2008. However, when the financial crisis hit, most KiwiSaver balances were very low and people didn’t know enough about KiwiSaver. They didn’t really notice their funds going backwards and even if they did the balance was too low for it to really matter. In 2019, the average KiwiSaver balance is $20,000 and as a country, we have come to increasingly rely on our KiwiSaver for our retirement. So this time around, a market downturn will be a big deal for lots of people.
In a market downturn, we would expect markets to drop 30-40%. This drop is likely to happen over a significant period. For a KiwiSaver with a growth-orientated portfolio, this means that the value of their KiwiSaver savings could fall by 20% or more. For those in more conservative options, the value of their KiwiSaver accounts will fall significantly less, or potentially not at all.
What should you do?
It’s never easy logging into your portfolio and seeing that it has dropped by 15 – 20%. The only thing worse is logging in again after another month and seeing it drop even further. Couple this with all the negative talk about the market and the emotional nature of our retirement savings it’s easy to get worried. So here's what you should do:
Option 1: Do Nothing
Markets are cyclical, they will have their ups and downs. If you move to a conservative investment style after a dip in the markets, you will lock in those losses and will not give your portfolio a chance to participate in the market recovery. Equally importantly, you will be contributing to your KiwiSaver fund, so you will be purchasing more units in your fund at the absolute bottom of the market. To put this in perspective, we have tried to talk you through how your KiwiSaver might have performed through the Global Financial Crisis if you had taken different options.
The global stock market peaked in October 2007 and did not reach its bottom until February 2009. During this period the market fell by 51%. The market took 4 years to recover with global stock markets returning to their 2007 peaks in 2013. Our average KiwiSaver with a starting balance of $30k and an annual contribution of $4,500/yr had two options through this period:
1. Retain their allocation to growth assets through the entire cycle
Under this scenario, the balance would have grown to $54k by April 2013 when the market reached its previous peak. This balance is made up of $45,620 of contributions (including the starting balance) and $8,313 of investment gains. These investment gains have been made because our KiwiSaver has continued investing through the cycle and the new contributions have been made at the lowest point in the cycle
2. Move into conservative assets in mid-2008 just before the market really tanked
By May 2008, the markets had fallen by 9% though there was real concern about what might happen. If the investor had taken this as the catalyst to withdraw their funds and move into a conservative fund their KiwiSaver balance would be $51k by April 2013. The value of that set of investments would not reach $54k until January 2014, by which time the value of the first scenario would have grown to $64k.
What we have shown is what might happen in the most extreme of scenarios as the Global Financial Crisis of 2008 was the largest market event since the Great Depression. We accept it would have been stressful and difficult to hold your nerve, though you are always better remaining invested through the entire cycle.
In building your kōura portfolios, we use sophisticated portfolio theories to build a portfolio that matches your objectives and risk horizon. In real speak this means we give you a level of growth assets that match perfectly to the length of time you have left before you can access your funds. If you have a short-term objective or lower risk tolerance, then we will make sure you have a more stable portfolio so you don’t need to access your capital in the middle of a downturn.
Option 2: Increase your contributions
This may sound a bit perverse and eyebrows may be raised but in a market downturn, you may also want to consider increasing your contributions. You are effectively getting 30% more investments for your money by continuing to invest in a market downturn. As a well-known CEO said to me in the middle of the Global Financial Crisis, “Of course I am buying shares now, I think about it like I am getting two for one!”
If committing to a regular increase in contribution seems hard, you can make voluntary contributions whenever possible and even these small additions can make a big impact on your KiwiSaver balance.
Market downturns can be scary but it's important to remember that things always get better. As a long term KiwiSaver, your best strategy to weather a recession is to stay invested. Like Jessie Livermore, one of the greatest traders American has known said, “After making and losing millions of dollars in Wall Street I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting.”