Almost fifteen years into KiwiSaver, there are 30 different KiwiSaver providers and over 300 funds to choose from. Comparing funds is a bit like comparing apples and oranges. Trying to assess and prioritise different asset mixes, fees or historical performances can be hard. So it's understandable why so many Kiwis put KiwiSaver in the ‘too hard’ basket and leave their KiwiSaver account with their bank.
And whilst some are starting to take KiwiSaver more seriously there are still a whole lot not getting it right.
Choosing the right type of KiwiSaver fund
Each KiwiSaver fund has a very different makeup of assets. Growth funds have much higher allocations to growth assets like shares, real estate and infrastructure while conservative funds have much higher allocations to fixed income products like bonds and bank deposits. Growth assets will typically be more volatile (have more ups and downs), but they’ll usually deliver higher returns over the long term.
Mention 'volatility' in the same sentence as 'your KiwiSaver' and most people get scared and tend to just go with whatever seems to be the safest option. While the type of fund you invest in should definitely take your risk appetite into consideration, you also need to assess your decision in terms of your objectives and investment horizon.
If you're like Ben saving for your retirement and your retirement is a long way away, then you need a higher proportion of growth assets because even if there's a market downturn, you will have plenty of years for your investments to recover. However, if you're planning to purchase your first home in the next few years or approaching retirement then you need a higher proportion of fixed income and cash assets. These assets will deliver a lower return but will have less volatility, giving you the protection of your portfolio not falling as much in value even if there's a market downturn.
Most providers offer a generic Growth, Balanced and Conservative fund structure to cater to people’s needs. But you need to be careful because a growth fund could mean different things to different providers. Check the asset allocations of your chosen fund to make sure that it is giving you an appropriate asset allocation mix for you.
Key points:
If you’re investing for the longer term you need a high proportion of growth assets (though you will be exposed to more ups and downs).
If you’re investing for the short term (approaching retirement or looking to purchase a home) then you need to have a higher proportion of fixed income assets.
Fees
Fees are an important metric to consider as they are a fixed expense that will be deducted each and every year despite what happens in teh markets. And the more you pay in fees, the harder your money will have to work to offset those higher fees.
Investment performance will fluctuate, and funds will have periods of strong performance and weak performance, but fees are a constant and hence an important consideration.
When looking at fees make sure you understand all of the different components of the fees, management fees, administration fees and performance fees. They all matter....
Key points:
Make sure you review and understand all of the components of the fees.
If you’re investing in a higher-priced fund, make sure you understand why that is the case.
Making financial decisions based on past performance could end in disappointment
Investing in something that’s historically performed well might seem like a pretty good idea. But in reality, funds that have done well in the past, don't necessarily do so in the future. That's why the number one rule in finance is that 'past performance does not determine future performance'.
If you’re going to choose a fund based on the performance you need to look at performance over both the short and long term. It’s easy for a fund to be lucky for 1 or 2 years, though it is very hard for a fund manager to consistently beat the market over a long period of time. In fact, research shows that it is almost impossible. If you’re selecting a fund manager based on historical returns, you’re effectively saying that the fund manager is more skilled than the rest of the market. You need to hope that they will still have the skills for the duration of your KiwiSaver investment, which is a very long time!
Our recommendation is always to be wary of funds that have been serial under performers, but don't pay too much attention to historical performance.
Key points:
Research shows that people very rarely outperform the market over the long term. Historical performance is often not a good indicator of future performance.
If you’re going to use historical returns to choose your fund, make sure you look at both the short term and long term performance of that fund.
Disclaimer: The content provided in this article is intended as an overview and as general information only. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.