What To Do With Your KiwiSaver During A Pandemic
The economic uncertainty we’re collectively experiencing as a result of the Coronavirus pandemic is…confronting.
Amanda Morrall is the Head of Communications and Education at Simplicity. She’s also the author of Money Matters: Get Your Life and $$$ Sorted, which seeks to empower people to live the life they want while still getting ahead financially. Basically, she knows her stuff. So I put forward some of the most common concerns raised by readers during these uncertain times (ps how sick are you of hearing those words “uncertain times” twenty-seven times a day?).
Amanda’s answers were practical and thoughtful and I hope they serve as a gentle reminder that this season is only temporary.
A lot of readers in their late twenties and thirties currently have their KiwiSaver in a growth/high-risk fund and have lost upwards of $10,000 in the past two weeks due to the market implications of the Covid-19 pandemic. They have asked for advice as to whether they should switch to a conservative or defensive fund immediately, or if there’s an argument to be made that Kiwi’s in this age bracket are better off leaving their funds where they are, as they will likely recover by the time they want to use them. What would your advice be?
Unless you believe the world is going to end, stay invested. It’s not a matter of if, but when markets recover and just this week we saw a massive rally, the biggest since 1933. Governments worldwide are acting fast to hold up the global economy and as humans, we still all need to be fed, watered and entertained, so to some degree, despite the calamity, businesses will carry on in some sectors. Those who moved into Conservative funds won’t enjoy the benefit of today’s uptake in the markets to the extent that those who are in Growth-oriented funds will because they won’t have as many shares in their portfolios. Remember, shares have the most volatility but also the highest returns over the long term.
Unfortunately, we’ve seen many KiwiSaver customers react emotionally to the current health crisis and switch into Conservative funds in recent weeks, thinking they would be safer in those funds. But effectively what they did was crystallise or lock in their losses. Moving back into a Growth fund, after realising their losses earlier, will only compound their pain because they’ll have to pay more to get back into the fund they fled from! The key thing to understand is that markets go up and down over time and the more shares you own the more the expected volatility.
KiwiSaver for the vast majority of customers is a long-term investment, so if you’re in your early or late twenties, your KiwiSaver still has a long time to go before you will use it. The exception to this is prospective first-time homebuyers – for you guys, it’s important to understand your time frames for investing. If you’re thinking of buying a home in the next six months to a year, and you’re in a Growth fund, you’re vulnerable to shocks that could affect your balance when you can least afford it – that’s what we saw just now. Unfortunately, some KiwiSaver customers would have gone into these high-risk funds chasing high returns, without fully appreciating the risks. Obviously, what we’ve seen with Covid19 is harsh and probably no one could have imagined just how bad a shock it could be, but as a result, some KiwiSaver customers are now having to borrow more money to make up the difference for their first home. The good news is that interest rates are low – so that’s a positive amid all this gloom! Borrowing is cheaper than ever.
Let’s say you fall into the camp of people who panicked a couple of weeks ago and switched into a conservative fund and now regret your decision. Is it worth switching back?
Hindsight is a beautiful thing. Many investors reacted on the basis of fear and panic and switched funds only to now regret their decision after doing some research. The markets are still hugely volatile, so getting the timing right may come down to luck. Invariably, people enter the market when it looks better without realising it’ll cost them more to buy back into the fund they left. The key is understanding your time frame for investing and your tolerance for risk. It may be worth taking this risk profile questionnaire, to satisfy yourself on which fund is best for you. Alternatively, consult with a fee-based financial advisor – we recommend fee-based advisors because some are paid a commission for putting you into an affiliated scheme. Once you’ve got all your ducks in a row, choose the best fund for your circumstances and stick with it.
One reader asked: “Is it okay to take a savings holiday until we are back to business-as-usual?”
Absolutely. If you’re feeling the pain financially and you find yourself newly unemployed (contributions will cease anyway in that case) you may want to take a break. However, long-term it’s not something you want to do because being out of the market will be costly. This article by the IRD explains savings suspensions in simple terms.
More specifically, I would try to ensure you’ve paid at least $1,043 into your account before June 30th, so that you qualify for the $521 government contribution.
And lastly, for all of the self-employed readers (myself included!), do the same rules apply at a time as uncertain as this? TTC reader Ruby asked, “I’m self-employed and on a 100% active growth fund. I’ve been told to stay put and not switch to a conservative fund, however it’s terrifying to see my KiwiSaver drop so significantly. I recently made the decision to stop contributing while the pandemic plays out, but is there any other actions I should take?”
Stop obsessing over your fund. If you’re in a position to keep up contributions then do so as you’ll be taking advantage of buying cheaper units. Amid these scary and unusual times, perspective is important. Your health is number one and keeping others healthy too. Stay calm and carry on. This too shall pass.