Why KiwiSaver balances go up… and down

Quick question: what’s the difference between a savings account and a KiwiSaver account?

Short answer: when you put money in, the first always goes up, but the other goes up and down. That’s no small thing.

And while we personal finance folks like to go on about the magic of compounding for both saving and investment, sometimes we’d be better off pointing out how different the two are.

The one caveat to saying that a savings account always goes up is inflation. Savings can actually roll backwards as well, when you bring inflation into the picture. You’re adding money, but its real value and how much it can buy gradually becomes less and less. This is why we need investing.

Which brings us back to KiwiSaver, which is not a savings account as many people think of it, but rather an investment account. And investing is aimed at buying assets that become more valuable over time, despite inflation. It’s the remedy for inflation.

But what could make a KiwiSaver account balance lose ground?

Why your KiwiSaver account can go down

Okay, so I won’t bore everyone with too technical a discussion on unitisation, but the key thing to know is that when you put money into KiwiSaver, you’re buying units. Units are a way of keeping track of what we own in KiwiSaver.

These units are linked to the assets our fund has invested in, such as shares, commercial property or bonds. Think of the investments like a big fat orange – and our units as a segment of that. When the orange rises or falls in value, so does the value of our segment.

Unlike a savings account, where we’re setting money aside, in KiwiSaver we are buying things that have value. That orange can be priced higher on the market at some times, lower in others. It’s a very normal state of affairs.

When we look at a savings account balance, we rightly think about how much we have. Not so with our KiwiSaver balance. When we look at that, what we’re really seeing is how much our fund’s investments and our corresponding units are worth – what their value is right now. Again, no small thing.

So perhaps instead of asking ourselves how much we have in KiwiSaver, we should be asking, “How much is my KiwiSaver worth at the moment?” Might be higher, might be lower.

Of course, the idea is for our units to increase in value over time. Either because someone else will pay more for them on the market or because they earn income like rent or dividends, the overall trend should be up. That’s why we do this! Without the aim of a return, there would be no point.

But there is such a thing as a negative return.

Why your KiwiSaver account will go down

Since the GFC in 2008, we’ve had good times of growth in KiwiSaver. Long may that continue!

But this also means that most of us have only seen things move in one direction, with KiwiSaver balances almost never heading down. Things did dip a bit last August, but because most of us contribute small amounts regularly to our KiwiSaver, we probably only saw things flatten out a bit. Our balances would not have gone down at all.

At some stage they will. If you remember the GFC or are a veteran of the dot com bubble, you’ll remember how quickly markets can turn, and how assets can suddenly be worth less. When something like that happens again, we will see our KiwiSaver balances tumble. Again, this is because our balances do not measure the money we have, but what our units are worth.

And because people feel losses so much more acutely than gains, typically there will be thousands of people calling up their KiwiSaver providers trying to understand how on earth they have lost money when they have been putting in cash all this time!

We’ll need to be ready.

Much of this is about the right mindset to have when there is a downturn. Ideally, we’ll say something like:

• “Yep, saw that one coming.”
• “Bound to occur from time to time.”
• “Must be that point in the cycle.”
• “I wonder what it’ll be worth in 10 years?”
• [Insert your own, cool, calm, collected response here.]

The worst action would to be to act rashly and run for cover. “Sell! Sell!” is the classic scene of a moneybags barking into a phone to his broker. If we suddenly sell our units and buy others that seem far safer in another fund, we effectively lock in our losses and miss out when values rebound. We lose money permanently.

It’s all about perspective. Because we are typically drip-feeding into our funds, when unit prices plunge, they actually become a bargain. Someone might say, for instance, “I’m putting even more money in now because I know I’ll reap rewards in the future.” When oranges are on sale, it can be a good time to buy.

Now if any of this talk about balances moving up and down makes you anxious, you could have a look at the KiwiSaver fund finder to make sure you’re in the fund that suits you best. After all, you should be relaxed about your KiwiSaver and not losing sleep.

So what’s the difference between a savings account and a KiwiSaver account? One only goes up. The other goes up and down, but should always be worth much more in the long run.