Q. I joined KiwiSaver in July 2007 and have been contributing 4 per cent of my salary into a growth fund. I am 43 years old. With employer and government contributions I am pleased to see that my balance is now more than $20,000. I am worried about the euro crisis and don't want to lose any money if it leads to a market crash during 2012. Should I move out of growth into a cash fund?
A. Your question indicates that you are nervous about investment markets and a growth fund may be too volatile for you. You should complete a risk profile questionnaire. Find one online or visit an authorised financial adviser. Once you have established where you fall in the risk spectrum, invest in a fund that matches your profile. However, at age 43 this is unlikely to be cash.
Possibly the worst strategy anyone can adopt is to shift from one fund to another on the expectation that markets are going to outperform or crash. This may work once or twice but eventually you will get it so wrong that you will lose all the gains you have made. Numerous studies (most notably by research firm Dalmar) have been done on investor behaviour and the conclusion is that the average investor almost always does worse than the average investment.
The job of a fund manager is to interpret the markets and invest accordingly. While they are also human, they have advantages over the layman as they work in specialised teams with access to the latest information. Perhaps most importantly, they all want to perform better than their peers.
If they are bearish about Europe they may increase their weightings to other geographic regions, or hedge against sharemarket falls. If their fund doesn't do well in the short term it may outperform in the long term. With more than 20 years to go to age 65, you need to be invested with a fund manager in whom you have confidence and then trust the manager's judgement.
Moving into a cash fund may be a good option for investors nearing 65 or those who want to apply for a First Home Withdrawal. But do not expect a KiwiSaver cash fund to do as well as a 12-month term deposit, even though most of the funds will be with the bank for years rather than months.
Term deposits are often used by banks to poach customers from other banks, hence the higher rates and prominent advertising on pavement blackboards.
Investors in a KiwiSaver cash fund will have chosen it for peace of mind, not potential high returns. They are unlikely to chop and change so there is no good reason for banks to increase the return and hurt their pockets in the process.
The cash fund of the largest KiwiSaver provider, ASB, tracks the 90-day bank bill rate, which is closely related to the official cash rate (OCR). This fund has averaged 2.83 per cent in the three years to 30 November 2011, which is less than CPI inflation which is around 4.6 per cent. For long-term investors, a more diversified fund should achieve higher returns.
Shelley Hanna is an authorised financial adviser (FSP12241). Her free disclosure statement is available on request by calling 8703838. The information in this article is of a general nature and is not intended to provide specific or personalised advice. If readers have any KiwiSaver questions, please go to www.peak.net.nz or email email@example.com.