KiwiSaver’s big flaw: not enough advice for savers

Sticking with your Plan is the only way to manage the Covid-19 crash in investments, whether they be in KiwiSaver funds or in personalised portfolios.

For most of us, the Plan was to buy and hold for the long term, and that’s what everyone should be doing right now. Holding, and focusing on the long-term Plan that you put in place at some stage in the past.

Remember the Plan?

The reality is that there are a lot of KiwiSaver investors who don’t have a written plan, nor do they have an adviser to turn to at times like these. I talk more about this problem below.

OK, so the Covid-19 thing came out of left field and caught us all by surprise. Our investments had been doing well since the last correction at the end of 2018. Good KiwiSaver performance had affected everybody since then, and we were used to seeing good news whenever we looked at our investment balances.

We were all shocked by the sudden downturn in share markets in late February. Big falls were followed by big rises followed by even bigger falls.

Normally, this would have generated some panic among the more nervous of our clients. We have been through a few market crashes together, with a core of our clients going back to the Tech Wreck of 2001.

During a crash of this latest size, we would expect some clients to be philosophical and a lot to be downright scared.

What is different this time?

This time there is a lot more understanding of the issue causing the crash. By now, everyone knows what Covid-19 is, what it can do and what we must do to stop it becoming a major killer of New Zealanders.

There is the expectation that we will beat Covid-19 at some stage and life will get back to some semblance of normal. We expect eventually there will be a vaccine available, and tourists and students will return to our shores and that sharemarkets will recover.

This time it is not a trade war or dodgy property deals causing all the fuss in investment markets; it is a public health pandemic. People seem to understand that. That’s what is different this time.

This time there are more important things to worry about than our (temporary) investment balances; our health and our lives, they are on the line with this one.

KiwiSaver has been a bit of a worry

We have heard that there have been large numbers of KiwiSaver switches from growth investment mixes back to conservative. A lot more than normal. This is a worry. It is called locking in a loss. Dumb.

KiwiSaver is one of those things that a lot of people are in on their own. They don’t feel they have anyone to listen to them when they are afraid, to give them reassurance when they are under immense pressure to do something!

One person switches to a conservative option and talks about it and it catches like wildfire. Misinformation takes hold and numbers of good, honest Kiwis transfer some of their wealth, effectively, to someone else, without thinking it through, without even knowing that is what they are doing.

For every sale of a share, say, when you move from growth to conservative, there is someone else buying it. Someone thinks it is a good deal to buy when someone else is scared. You bet it is.

When someone switches from growth to conservative, they are effectively selling shares and listed property and buying fixed interest. This is equivalent to selling something that has become cheap and buying something that is relatively expensive. Isn’t this the wrong way around?

To grow wealth over the long term, the idea is to buy things that are relatively cheap and sell when they are relatively expensive. You do this with KiwiSaver by buying and holding long term — in some cases, you will be holding your KiwiSaver investments until you die. Your heirs may even keep what is left of your KiwiSaver funds and retain them invested for another generation.

You get the picture: that share market investment is a really long-term activity. Even someone at age 80 may have twenty years of lifestyle to fund. That is still very long term.

The big problem with the design of KiwiSaver is that there is no advice built into the programme. Not a dicky bird. New Zealanders have been left high and dry by their KiwiSaver providers, and the proof is staring us in the face today. KiwiSaver members shifting out of growth funds into conservative funds to their long-term detriment. Where is the advice for these people? There is none. This is an indictment on all KiwiSaver providers that don’t provide advice, especially when investors are wanting to switch. It is a basic flaw in the original design.

If you are saving on a regular basis into a volatile investment portfolio or fund, one that goes up and down in value a lot, like a growth or aggressive portfolio, you are better off with the ups and downs in value than you are without. Every time the fund goes up you buy less of it. When it goes down you buy more. You end up mathematically better off over the long term than even the average of the market you have ridden through.

The more volatile the ride, the better off you will be compared to a smooth ride, even with the same start and end value.

It is called dollar-cost averaging and it is one of the reasons you should be in a growth or aggressive portfolio/fund if you are saving over the long term. Anything else and you are leaving money on the table that you won’t have once you stop working, all other things being equal.

Any way of looking at it, it is best not to cash in your fluctuating investments when they are down. If you think you may be in the wrong mix, then go back to your original Plan. What were your objectives when you set up your investment? Have those objectives changed? Has your investment timeframe changed? Did you do a risk profile? What did it tell you? How does your Plan accommodate for sharemarket shocks like these?

If you didn’t put a Plan in place for your investments originally, it is not too late to do something about it now. Ask an adviser or your KiwiSaver provider for advice.

Do markets recover?

Always. We just don’t know when. But they do recover.

But to get the recovery in investment markets you must be invested today. You will never time your return to growth investments from where you have been hiding in conservative investments.

Look at how the eight largest sharemarket downturns in the US have recovered in the past.

The biggest sharemarket downturn since World War 2 was the Global Financial Crisis. The sharemarket fell -60%, recovering nearly +54% in the following year and nearly +100% within three. Once you are in these things it is best to ride them to their conclusion.

Treat your investments like you treat your family home

We need to treat our volatile investments like we treat our family homes. Should I be worried that our family home has just gone down in value? If we wanted to sell it today, we would probably have to take a 20% discount on what it was worth two months ago.

No-one though is panicking in our home about its value today. Not anytime, because it is part of the long-term Plan.

We aim to stay here for more than the next two or three years — perhaps even another 30.

Recent market movements

As of time of writing (March 30 in the US market) the S&P 500 accumulation index is down -22% from its high on February 19 2020. It was down a full -34% on March 23 a week ago, but has bounced back 17% in the past 5 trading days.

Is this the beginning of the recovery? I doubt it, but it could be. I have no idea. What we do know is that markets will generally recover in advance of the actual problem. It is a big forecasting machine.

In summary, I recall the proverb of trying to change horses in mid-stream. Very dangerous. Changing your investment Plan mid-crisis is equally as dangerous ... to your long-term wealth.

My advice is to stick to your Plan and wait for the recovery. Don’t look at your investment balances.Your adviser (or KiwiSaver manager) is looking at your investments daily, so you don’t have to. You are better spending your energy on other the things. Wash your hands. Stay in your bubble. Phone loved ones. Walk the dog. If you are investing according to your Plan, chances are you are still on track. Happy investing.

- Rhodes Donald is an authorised financial adviser with Polson Higgs Wealth Management. His disclosure statement can be found at www.phwealth.co.nz. His views do not constitute personalised advice. He welcomes correspondence.