About those eggs and baskets

Had an excellent question come up in a KiwiSaver seminar last week: if the idea is to spread your risk and not “put all your eggs in one basket”, as they say, why not split your savings among different providers? Some to Generate, some to ASB, some to Superlife, etc.

It brought up some important points about “diversification” and what investing safely is really all about.

One thing to know is that KiwiSaver providers typically engage other fund managers on the wholesale level that specialise in international equities, overseas bonds, etc. So you may be with one provider, but you actually have different teams of experts working for you to make sure you get many, many pieces of the action.

In terms of what not to do, that question reminded me of the finance companies here which collapsed, whose directors have been sentenced these past months. In that situation, people thought they were diversifying by spreading their savings between the different finance companies. When the firms fell like dominoes, millions of savings went with them. The baskets and eggs were too similar.

With KiwiSaver, the rules only allow you to be in one scheme at a time, but you can still diversify.

Most providers allow you to distribute your money between the various funds they offer, but that’s not diversifying. Some people do this in order to tailor their investment mix (what experts call “asset allocation”) and get certain results. But most of the time you don’t need to – each fund typically has its own mix already, so you just need to find the one that suits your needs.

But again, adjusting your allocation is still not what it means to diversify. The two often get confused, and you need to do both.

To really spread your risk, you have to drill down and look at the individual assets that you’re holding within your fund. As an example, let’s say you have a growth fund with 75% in shares. If that 75% was in a single company, you would have tied your success to that of one firm. Sketchy. But if it’s spread across 50 companies here and abroad, that’s diversified.

The advantage of managed funds like KiwiSaver is that even though you start small as you drip feed in your savings, you can immediately own a multitude of companies, in a range of industries both in New Zealand and overseas.

That’s far wider – and far safer – than we could ever accomplish on our own. For example, if you were an Apple fan and started investing all on your own, you might only be able to afford a single share of the company.

It would be hard to put that single apple in more than one basket.