This article was published on 13 August 2011. Some information may be out of date.

Watched KiwiSaver funds boils too much

The internet can be a curse when it comes to long-term investments such as KiwiSaver. With many providers, you can log in and check your account balance daily. But while a watched pot might never boil, a watched KiwiSaver account can boil too much — especially at times like these.

The volatility of your KiwiSaver fund depends on what it invests in. If you are in a default fund or conservative fund, only a small portion or none of your money will be in shares. Your account balance won’t be affected much by share market movements.

But if you have invested in a balanced, middle-risk fund, roughly half your money will be in New Zealand and/or overseas shares, so your balance will probably have fallen a fair way. And if you are in a growth, aggressive, share or equity fund — or as one provider labels it, a dynamic portfolio — the drop will be bigger.

Many people won’t have confirmed this yet. They are content to wait until their next statement. But others will be online, anxiously watching the ups and downs. More fools them.

Long-term investing is different from most things in life. Vigilance is not good. All you need to do is decide two things when you first pick a fund. They are:

  • How long will it be until you withdraw the money, to buy a first home or to spend in retirement? If it’s more than 10 or 15 years, you’re almost certainly going to get higher growth in a fund holding lots of shares.
  • Can you tolerate market volatility? Even if you don’t keep close track of your account, there’s no escaping the news that markets are down, and that still worries some people.

Once you’ve picked your fund, stick with it through thick and thin. Don’t switch funds depending on market movements. You’ll tend to go into shares after they have risen and out of them after they have fallen, and end up doing poorly.

As Warren Buffett, who has become one of the world’s richest people through share investment, puts it, “Our favourite holding period is forever.”

Still, those in higher-risk funds might need a bit of help to cope with market downturns. Keep a couple of things in mind.

The first is that you drip feed your money into KiwiSaver over time. While your account balance has fallen, the contributions you make in the near future will buy more shares than they would have a month ago. Over all, of course, you’re still behind, but bargain buying does mitigate that effect.

The second is that — even after all the proposed KiwiSaver changes take effect, by April 2013 — only about a half to two-thirds of the money going into your account will come out of your own pocket.

To be more precise, an employee earning $20,000 will see their contribution multiplied by 2.3 because of government and employer contributions. At $60,000, the contribution will be doubled, and at $200,000 it will be multiplied by 1.8.

Non-employees don’t do quite as well, but their contributions will still be multiplied by 1.5. Not to be sneezed at.

Broadly speaking, then, your account would have to worse than halve before you end up with less than you would have had in lower-risk non-KiwiSaver savings. That’s a big buffer. Over long periods, it’s impossible to imagine a KiwiSaver share fund halving.

When the market wobbles, picture your government and employer contributions as the portion on the surface of the ocean, being tossed about. Meanwhile, the money you put in is sitting quietly in the calmer depths.

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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.