Don't Switch Funds

John Berry

17 April, 2023

3 Minute Read

KiwiSaver is not normally a hot barbeque topic, but this summer people have noticed markets going down and they want guidance on how to respond.

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

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 on more risk. This will mean a bumpier ride at times in the short-term, but a better overall return in the long-term.

Conversely, if you’re close to retirement and will soon need to draw on your KiwiSaver, 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 help guide you on this.

If you’ve chosen the right risk profile fund then you have set a plan for your savings. 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 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. 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? 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 rebound.

If you and your employer contribute monthly to KiwiSaver then when the market falls you are buying cheaper. Buying more shares today at a cheaper price than yesterday is a good thing – and you have more shares when you are in a growth fund. 

It’s hard to watch your KiwiSaver balance go down.

If you know this distresses you then put strategies in place to avoid the angst. For a start don’t check your balance too often.

If you feel you must take action – then limit it to choosing between an active or passive KiwiSaver manager. A passive manager rides market ups and downs, meanwhile, an active manager, like Pathfinder can take steps for investors like holding more cash in a fund 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 have given up three months of returns. If your KiwiSaver investment horizon is for a decade or more, this is not a catastrophe.

So if this topic comes up at a BBQ or dinner party, as it has for me, you now have some general pointers to share that will get people thinking.  Here’s my investing rule for 2022 – if the growth fund profile truly is the right option for you, then common sense, logic and investing history say “stick to the plan”.

John Berry

John is committed to making ethical investment accessible to all NZ investors. Before co-founding Pathfinder in 2009 John worked in law firms and investment banks in Auckland, London and Sydney. He has a BCom/LLB(Hons) from Auckland University and is a board member of Men’s Health Trust. In 2023 John was awarded as the Sustainable Business Networks Sustainability Superstar.