NZ Herald 11 December 2021

ADon’t judge a book by its cover, nor a KiwiSaver fund by its short-term performance. How the fund does over a few months, or even a year, is not important.

In a growth fund such as yours, not only will your balance sometimes go nowhere for a while, but it will sometimes plummet. However, over a decade we expect it to rise — usually more rapidly than in a less volatile, lower-risk fund.

The Smart Investor tool on sorted.org.nz says your fund holds 64 per cent shares, 19 per cent bonds, and some property and cash. About half the fund is invested in international shares, which have grown well through 2021, but not so well just lately. It’s nothing to worry about.

You should consider, though, how you would feel if your balance halved in a share market crash. If you would panic and switch to a lower-risk fund — turning your paper losses into real losses — you should make that switch now while there is no loss.

But if you know you would stay the course, your balance will rise again, although it could take a few years.

That leads me to another important point. I hope you’re not planning to spend the money for at least ten years — to give it time to recover from a prolonged downturn. If you expect to spend it sooner, it would be wise to switch to a medium-risk fund and, as the spending time approaches, to a low-risk fund.

On withdrawing your money, as an over-65 you can take it out of KiwiSaver whenever you want to — although it may take a few days to set up withdrawals. Ask your provider about that in advance.

On safety, while your balance will bounce around, it would be really surprising for you to permanently lose money. KiwiSaver funds are closely monitored by their supervisors and the government.

You might, though, consider moving to another KiwiSaver growth fund that charges lower fees. Your fund charges 1.39 per cent a year, which is lower than the 1.47 per cent average for growth funds. However, Smart Investor lists seven providers that charge less than 1 per cent.

Why do fees matter? Read on.

AThere’s no question that your return after fees — in KiwiSaver or any other managed fund — is way more important than the fees themselves, as your example shows.

The trouble is we have no way of predicting future returns. Research shows us, over and over, that past high returns are often not repeated. Sometimes they continue for a few years, but then Oops!

On the other hand, fees are highly predictable. Occasionally a provider changes their fees, but not often.

Research also shows that, on average, high-fee funds don’t produce better returns than low-fee funds at the same risk level. This means that a valid comparison is:

• A 3 per cent before-fees return, with fees of 1 per cent.
• The same return but with fees of 2 per cent.

Clearly, the fund with the lower fees is better. In the absence of knowledge about future returns, it’s a better bet to choose a low-fee fund.

Interestingly enough, your favoured investments, exchange traded funds, are nearly all low-fee index funds. I agree that they can be good long-term investments. But it’s best to firstly get the most out of KiwiSaver, by investing enough there to receive the maximum contributions from the government and your employer.

AAnd thanks for writing. Can I just suggest that you read the previous Q&A, about how good performance doesn’t necessarily continue.

Sure, your fund manager may have made some good calls in recent years, but what about the future?

Note, too that many people are impressed with their KiwiSaver performance in recent years, not realizing that all funds have done unusually well simply because the markets have grown heartily. For example, according to Smart Investor:

• The return for the average KiwiSaver balanced fund over the last five years is a very respectable 6.6 per cent a year after fees and tax. Over the year ending 31 March 2021 it’s a terrific 17.1 per cent.
• For the average growth fund, it’s 9.1 per cent for five years and 27.3 per cent for the year.
• For the average aggressive fund, it’s 11.7 per cent for five years and 36 per cent for the year. If the 36 per cent continued, your money would double in just two years.

Don’t expect those returns to continue though. The astonishing one-year figures are because the year started near the bottom of the Covid-19 downturn in early 2020, and ended after the remarkably quick recovery. It included all the upturn and none of the preceding downturn.

If your KiwiSaver fund didn’t perform well over that period, something would be wrong.

Even though your balance isn’t huge, high fees will still impair its growth. If I were you, I would switch to a low-fee fund now.

AI fully agree. The “walk a mile in their shoes” cliché is appropriate.

The clawback situation is tricky though. If the government lets a beneficiary earn a fairly good income before their benefit is cut, there would be an outcry not just from beneficiary bashers but others earning the same pay or less, who can’t add the benefit to their income.

And if you let someone keep their benefit while earning for a short period and then gradually reduce the benefit, their financial situation might keep deteriorating, which is hardly encouraging. Whatever is done, there’ll be somebody crying, “Unfair!”.

Still, I think the government should err on the side of generosity to beneficiaries trying to re-enter the work force. In the long run everyone is better off when they succeed.

AThis is a classic case of a quote out of context.

What I said last week was: “But an argument can be made that contributing New Zealanders who then strike major health problems — as last week’s correspondent did — have earned the right to support from the state.”

Firstly, I said “an argument can be made”. I wasn’t stating a fact.

Secondly, you omitted that I said “contributing New Zealanders.” Many beneficiaries have earlier paid taxes for decades, or done a sterling job of raising children, or served the community. Those are all important contributions.

Thirdly, I don’t think the only rights that count are the ones spelt out in a legal document. It seems to me that anyone living in New Zealand has the right to be treated decently, simply because that’s the way we do things.

Hey, it’s Christmas time. Please stop being mean. It will make you happier, I promise!