Share plunge arguably good for KiwiSaver
Despite some irresponsible reporting, the low returns on many KiwiSaver funds in their first few months are no reason not to join up. I’d even say the rough start was good in some ways.
The one big worry is that people have read a few headlines and decided to stay away from KiwiSaver without understanding what’s really happening.
The low returns are because share prices have plunged. KiwiSaver funds that include a small share investment fell a little, funds holding more shares fell a lot. But there are two reasons that this is not a big deal:
- A large proportion of KiwiSaver money comes from the government. Most members have already received their $1,000 kick-start plus $20 of the $40-a-year fee subsidy — and there’s more to come.
When comparing KiwiSaver with other investments, this makes a huge difference.
Let’s say you contributed $500 to KiwiSaver in 2007. Add the government’s $1,020 to get $1.520. If your fund has dropped 10 per cent, your account is now worth $1,368. But your $500 contribution has grown by $868 or 174 per cent over six months. Wow!
What if you contributed $2,000? The government boosts that to $3,020, and after a 10 per cent drop you have $2,718. Your $2,000 has grown by $718 or 36 per cent over six months. That’s still fantastic.
Over longer periods, the government contributions will have less effect on total returns. Still, everyone will get a tax credit of up to $1,043 a year and many will also receive employer contributions — which will continue to make KiwiSaver hard to beat.
- Judging a share fund by what happens over a particularly bad six months is like judging the road toll by what happens over one weekend when there were several fatal crashes. It’s ludicrous.
What’s more, we’re really looking at just three months. KiwiSaver money was sitting in Inland Revenue earning interest until the scheme got up and running in October.
Any investment fully or largely in shares should really be for ten years or more, to allow time for recovery from market slumps. Over a decade or more, share fund investors almost never lose money, and usually they do really well.
Still, many KiwiSaver members new to this type of investment worried over recent headlines. So how can the rough start to KiwiSaver be good? Because it has sorted the brave from the timid, and both benefit.
Firstly the timid. If the recent slump worried you, consider switching to a conservative KiwiSaver fund that invests in term deposits, government bonds and the like. Its average returns will probably be lower over the long term, but the ride will be smoother.
If you switch in the next few months, while you don’t yet have much money in KiwiSaver, you will lose little relative to your total KiwiSaver savings in retirement.
But what if — instead — shares had performed well for the first years of KiwiSaver and then plunged? If you had switched at that stage, you would be cementing in bigger losses. Better to know your risk tolerance early.
What about the brave, who will stick with KiwiSaver funds that include shares? You, too, have put relatively little into shares so far. Now that share prices have fallen, your future contributions will buy more shares for a while.
This is a big advantage of drip-feeding a regular amount into any share fund. You end up with a larger number of cheap units than expensive ones.
That means that your average price is lower than the market average price — a bonus for having the courage to stick with volatile investments through the hard times.
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.