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Should you switch your KiwiSaver from growth to conservative?

To be in this top 20 per cent of households, you now need worth of $1.1m.

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You have likely noticed that both markets, and KiwiSaver balances, took a hit over January. While KiwiSaver isn’t usually a hot barbecue topic, chances are you heard the question “With markets falling, should I switch my KiwiSaver from growth to conservative?” Maybe you’ve even wondered this?

Your first duty to yourself in KiwiSaver is to make sure you’re in the right fund risk profile for your circumstances, the three main options being conservative, balanced and growth.

As a general rule, if you’re a long way from needing to use your KiwiSaver, like ten years or more, you can probably take more risk.

This will mean a bumpier short-term ride at times, but a better overall long-term return.

Conversely, if you soon need to draw on your KiwiSaver for a first home or in retirement, you should likely take less risk.

The smoother ride, but lower long-term returns of conservative or balanced funds may be a better match. Your KiwiSaver provider or financial adviser should be able to guide you.

Choosing the right risk profile fund means you’ve set a savings plan. Don’t ditch the plan by switching funds simply because you’re nervous or unsettled when markets fall. Markets go up and go down, but over longer periods they’ve proved to go up much more than down.

If you switch from a growth to a conservative fund you may feel you’ve “de-risked” your KiwiSaver. But here’s why you’re more likely to be doing yourself long-term financial harm:

Moving with perfect timing is really hard, even for professionals, especially given markets are forward-looking and anticipate events. Reacting to a scary news headline will often mean reacting too late.

It’s not just about getting perfect timing for a move from your growth fund to a conservative fund, how are you going to time it right going back into growth? Literally thousands of Kiwis failed to do this switch-back in 2020 when markets fell and then swiftly rebounded. They were left stranded in lower returning conservative funds and missed the market bounce to new highs.

If you and your employer contribute monthly to KiwiSaver then as markets fall you’re buying cheaper. A long-term investor buying more shares today at a cheaper price than yesterday is a good thing – and you have more shares when you’re in a growth fund.

It’s hard watching your KiwiSaver balance go down. If this distresses you then put strategies in place to avoid the angst. Don’t check your balance often, maybe de-couple it from your bank account.

If you feel you must take action, limit it to choosing between an active or passive KiwiSaver manager. A passive manager rides market ups and downs, meanwhile an active manager may take steps for investors like holding more cash or moving to more defensive shares.

It also helps to look at the bigger picture and keep market moves in perspective. For example, if your balance has gone down to where it was in October last year then you’ve given up three months of returns. But, if your KiwiSaver investment horizon is for a decade or more, this is not a catastrophe.

Back to the central question of whether to switch funds. To answer this we need an investing rule to help ride out the angst from shorter-term bumps.

How about this - if a growth fund is truly the right risk profile for you, then common sense, logic and investing history say stick to the plan and stay with growth.

This commentary is general information only – it is always a good idea to seek professional financial advice for your personal circumstances.

-John Berry is co-founder and chief executive of ethical fund manager and KiwiSaver provider Pathfinder Asset Management.

Originally published in Stuff 10/2/2022

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