What happened to my KiwiSaver balance?
5 things you can do about investment markets taking a dip because of coronavirus
Anyone checking their KiwiSaver balance too often might have noticed a sharp drop in value over the last week or two. This applies to non-KiwiSaver investments too, because the underlying investments that have been impacted the most are shares (sometimes called equities or stocks), which has resulted in many different types of managed funds and, of course, directly held share portfolios all dipping in value too.
Usually, most people who work outside of financial services might not even know about such a dip in values, however, widely reported concerns about the spread of coronavirus have been the main reason for recent market variations in value.
Below are five things you can do at times such as this, though as individual situations vary it’s nearly always best to check with a financial adviser before taking any action:
1. Learn more
The more educated you are about investments, the better you'll be able to stay in control when the markets drop in value, which means you’ll be better-off over the long haul.
Famous entrepreneur, speaker, and author, Jim Rohn once said that a lack of knowledge about investing and risk was called “the language of the poor”. Rohn even said that all risk is relative, and that the bill you'll end up paying for not investing is a lot riskier than investing in the first place.
2. Change nothing
If you’re already invested the best thing to do is usually nothing. Let’s explain this point with a famous story…
Several years ago, during an internal performance audit of its customers’ accounts, a major investment manager discovered a group of standout winners. This group of investors consistently beat the averages.
Naturally, the investment manager wanted to learn more – partly so the approach this group took could be passed on to other customers. After digging a little deeper, they rapidly found these investors had one significant thing in common: they were all dead. The dead investors had their asset mixes frozen while their estates were being worked through. Incredibly, this approach performed better than everyone else, as the investments were protected from any ill-timed adjustments.
The reason for this is because the average stock investor dramatically underperforms the overall stock market. Data from research house DALBAR shows that from 1996 to 2015, the S&P 500 (the most common performance measure of the largest share market in the world) offered an annual return of 9.85% per year, but the average investor’s return was only 5.19%. The reason: investors’ all-too-human behaviour – trying to time the market, which only succeeded in buying when everyone else was buying, then selling when everyone else was impulse-selling.
Avoiding impulsive reactions to things such as variations in investment value, or attention-grabbing news stories, is a key reason why our financial advisers repeatedly tell people to avoid checking their investment values too often.
3. Invest more
Like the seasons of the year, markets generally work in cycles. Once you understand this, you can accept that investing more when prices are reduced can pay off handsomely over the long run. In this way, the fears that others may have can work in your favour. This could be comparable to stocking up at the supermarket on an item you commonly use when you notice it on sale.
In the words of the famous billionaire investor Warren Buffet: "Look at market fluctuations as your friend rather than your enemy, profit from folly rather than participate in it… be greedy when others are fearful".
4. Review your asset allocation (mix of investments)
Performing your own ‘top to bottom’ review of your overall mix of investments (asset allocation) is a good idea at least once every year. Depending on your financial situation, this could be as simple as completing a simple investment profiling questionnaire to confirm if you’re in a suitable KiwiSaver fund choice (such as Balanced, Growth etc.), or it could be a much more thorough process which assesses your overall portfolio of assorted assets.
Closely linked to this is reviewing your goals...
5. Review your goals
Goal-based investing is critical.
For instance, the average 12-month term deposit rate at major NZ banks has dropped to around 2.50%. Retirees attempting to provide their retirement income from term deposits will have to pay tax on that 2.50%, and then take account of inflation too. By our maths, that might mean their real return is negative – they’re going backwards. That means keeping money in term deposits is unlikely to be the best way to provide sustainable retirement income. To re-hash what Jim Rohn said in point #1 above, in such a case the risk of not investing is probably worse than the risk of investing.
Taking the time to review your goals can help ensure you’re invested in a way that meets your needs.
The bottom line
The nature of all investments is that there are constant market fluctuations - peaks and troughs - when investment values rise and fall. However, with nearly all investment markets, values are expected to rise over sustained periods of time, which is the very reason that investors invest in the first place!
Let’s recap the five actions you might consider taking in response to recent market movements:
- Learn more
- Change nothing
- Invest more
- Review your asset allocation (investment mix)
- Review your goals