During March in the midst of escalating Covid-19 fears and a falling share market in New Zealand, globally I took a lot of calls and enquiry regarding KiwiSaver. Should I move my KiwiSaver into a cash or conservative fund? Should I stop my contributions? Is the market crashing and will it come back at all? They were all good questions in a time of financial crisis. We hadn’t seen financial markets fall anything like this since 2008 / 2009 during the global financial crisis (GFC).
My advice was to everyone was ‘sit tight and stay in your seat’ or simply, if you are in the correct fund for your age and stage of life then do not make any changes and ride out the falling share market. The last thing I wanted anyone to do was to rush into a cash or a conservative fund in a falling market. And thank you to everyone I spoke to over this time as you all held your position and trusted my advice. A number of people in NZ, mostly in bank KiwiSaver funds did make the decision to move into a cash fund or a conservative fund and they were actually selling their shares holdings, realising the paper losses as real losses. Whereas by holding on to your fund selection, you maintained your share holdings and reaped the full benefit of the recovery in the share market in the last four months.
Analysis shows about $1.5 billion dollars of KiwiSaver funds were shifted into cash or conservative funds. The sad part of this is anyone who ‘sold out’ during the falling market and have not come back into their original fund selection have permanently lost a good chunk of their KiwiSaver value, potentially up to 15% and more.
In review having come through the last five months we can see the lessons learnt in the global financial crisis (GFC) have repeated in 2020 with Covid-19. We can see that:
- The investment markets recover quicker than the economy.
- This means the media will be talking doom and gloom about the economy while the investment markets are already rising.
- The lesson here is do not make investment decisions (including KiwiSaver) based on the media reports and the short-term economic environment.
- Investment markets tend to recover quickly compared to the economy, normally catching people out who try and ‘play’ the market.
- Invest in your KiwiSaver with a longer-term view.
- As long as you are in the right fund for your age and stage of life, then hold onto your fund selection and ride out any volatility in the market.
A good illustration of the financial markets fall in its initial response to Covid-19 and then its recovery can be seen in this graph showing the value of one of the Booster KiwiSaver Funds.
We can see that people who did not react and move to a conservative or cash fund have been rewarded with a market recovery and their KiwiSaver fund value has been restored.
Having written this article earlier this week, I have read today a Stuff news article giving some additional figures highlighting many of the points discussed.
If you or your friends and family have any questions relating to the ideas discussed in this article, please feel free to email firstname.lastname@example.org and I will be happy to provide advice and assist you with KiwiSaver and investment questions.