Caught in the balance

I hear this all too often: people joining a certain KiwiSaver scheme in order to see all their balances in the same place.

Admittedly it’s convenient, but unfortunately it’s not really great in terms of criteria to choose the right fund for you.

Your KiwiSaver account is actually fundamentally different from any other savings accounts you have. You are indeed setting money aside for your future, but in many ways KiwiSaver is a misnomer – there’s a lot more going on than just saving.

Remember that you’re an investor: you’re handing your money to a fund manager to buy assets, with the aim that these will hopefully increase in value over time. And because it’s an investment fund, depending on the mix of assets you’ve invested in, your balance won’t always go up. It can also go down.

Experts call this a market “correction”: confident investors drive prices of shares and property up and up, but then a bubble bursts and values come crashing down before eventually heading up again. These are the typical ups and downs you experience in investing, but if you’ve got a decade or more before you need the money, like for retirement, you can afford to ride out these highs and lows to gain more in the long run.

But if you’re watching your KiwiSaver balance devotedly as it plays out, you could get a bit sick to your stomach as you ride that rollercoaster.

And if you panic and bail out of your fund to a more conservative one because of a market crash, you cement in your losses and make it much more difficult for your finances to recover. That’s a bigger worry.

Here’s an example to bring this to life. Let’s say in five years’ time you've got a KiwiSaver balance of $150,000 in a growth fund. Suddenly it tanks 21%, so your balance drops to $120,000. It feels like you’ve “lost” $30,000, so you call your provider in a panic and change to a conservative fund so that you never feel that way again.

When the market recovers, though, your old growth fund gets back to $150,000 after just 40 months and keeps heading upward.

But how long does it take your new conservative fund to get back to $150,000? It will take 51 months instead of just 40, and by then your old growth fund will have grown to $160,000 without you. That’s when you’ve really lost money.

Because we all hate to lose even more than we like to win, this is one case where ignorance can indeed bring bliss – you might be better off not checking your balance too regularly.