2022 got off to a rocky start for the investment markets, both in New Zealand and globally. As a result, many KiwiSaver members have seen a noticeable drop in their balance of late.

But as disheartening as this negative performance might be in the short term, if you’re invested in KiwiSaver, now is even more important to stay put and focus on the long run.

Here are some tips and thoughts from our SHARE financial advisers, for making the most of KiwiSaver in a volatile world.

Lessons from the 2020 KiwiSaver ‘big switch’

In 2020, following the first Covid-related fall in share markets, many KiwiSaver members panic-switched their KiwiSaver funds to lower-risk options. Research found that overall fund-switching was three times higher than the normal volume, and Kiwis aged 26 to 35 were the most likely to switch.

No one could predict that the markets would bounce back soon, entering a cycle of heightened volatility. But by that time, they had already locked in their losses, with long-term implications on their savings.

The 2020 ‘big switch’ was a sobering reminder that impulsive investment decisions can carry a cost. The good news? There are ways to keep emotions at bay.

Focusing on the long term

Remember: with KiwiSaver, you’re in it for the long haul. Unless you’re planning to use your money within the next few years to buy your first home, or you’re nearing retirement, your funds are likely to have plenty of time to recover from short-term losses. And the reality is, there will usually always be losses along the way.

Understand investment risk

Most types of managed fund investments, including KiwiSaver, involve a certain level of risk in exchange for the likelihood of higher returns. Put simply, share markets are volatile by nature; they fluctuate up and down all the time. The frequency and magnitude of these movements depend on a number of factors, including how different asset classes respond to market conditions.

As you can appreciate, we’re oversimplifying a much more complex matter. The bottom line is that market movements are unpredictable, but they also tend to reward long-term patience. While your KiwiSaver balance will usually experience short-term fluctuations, it’s also likely to grow over the long term – and that’s what matters most.

Choosing a KiwiSaver fund based on your risk profile

Making an active choice of fund based on your risk profile is one of the most important steps you can take in your retirement planning.

In short, most KiwiSaver funds are designed with five different levels of risk and likely returns: defensive (lowest risk), conservative, balanced, growth, and aggressive (highest risk). If you’ve never selected a fund, you’re likely to be invested in a default (balanced) fund: this may not be aligned with your risk profile, and you might be missing out on potentially higher returns.

So, what does ‘risk profile’ mean? Your risk profile is the combination of:

• your risk tolerance (how comfortable you are with the value of your savings fluctuating), and
• your risk capacity (how much risk your KiwiSaver allows you to take, based on your investment time horizon).

In other words, your risk profile has an emotional component, and it also depends on how long you have until you plan to access your funds (for retirement or your first home). The longer you have, the higher level of risk you can probably afford to take – if your emotional tolerance allows it, of course.

Not quite sure what your risk profile is? Get in touch with a SHARE adviser – we can help you understand your options.

Seeking expert help

As we’ve seen, sharemarket volatility can’t be avoided. However, you can choose a level of likely volatility that aligns with your goals and personal tolerance. You don’t have to check your KiwiSaver every week or month: once a year or at key life events is enough for most members.

And in the meantime, getting quality financial advice can also make all the difference. Our SHARE advisers have extensive knowledge of the current market and can help you make informed decisions every step of the way. Most importantly, we can be your sounding board whenever you need support or would like to check that things are going to plan.

Like to explore your options? Please don’t hesitate to contact us, or click here to find an adviser near you.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.