COMMENT:

The theme of this year's Money Week is "Weathering life's storms", with a focus on the importance of emergency savings accounts, insurance, and the importance of wills.

It's also a timely opportunity to talk with KiwiSaver members, and savers in general, about how to react when investments rise and fall during the inevitable periods when financial markets get stormy.

ASB's quarterly KiwiSaver surveys regularly show that the majority of people are not confident in their knowledge of KiwiSaver and how it works.

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Compounding the issue is a lack of confidence in shares and managed funds.

Sharemarket dips like we saw earlier this year can rattle investors, even though periods of market volatility should be expected from time to time.

Within the latest ASB KiwiSaver survey, knowledge of KiwiSaver for the oldest age groups sampled is still lower than we'd like, but better than other age groups.

Specifically, in the Q2 2018 survey some 43 per cent of people over 50 indicated they had a strong knowledge of how KiwiSaver works. People under 50 are far less confident. Only around 20 per cent of people aged between 30 and 49 say they have a strong knowledge of KiwiSaver.

The under 30s at first blush seem a little more confident, with 30 per cent claiming to have a strong knowledge of how KiwiSaver works.

However, as the Financial Markets Authority recently pointed out, "many younger members of the 18-30 age group have never experienced a major fall in the value of investments in their adult lifetimes".

Over recent years return on KiwiSaver funds have generally been positive, particularly for growth-focused funds which have benefited from relatively high exposure to the strong performance from Australasian and international sharemarkets.

While this article and Money Week both have a stormy theme, investors don't necessarily see clouds on the horizon.

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In addition to the implicit investor confidence that it takes to push the local sharemarket to a record high recently, the ASB KiwiSaver Survey shows optimists far outweighed pessimists with regard to expected returns from KiwiSaver for the year ahead.

Some 32 per cent of respondents are expecting better returns over the next 12 months than the past 12 months, while only 8 per cent are expecting returns to be worse.

Regardless of whether markets go up, down or sideways over the year ahead, it is important to be prepared and appropriately positioned for the times when markets get rocky.

The first thing to remember is that it's normal for the value of investments to rise and fall. So people need to consider their personal tolerance for riding out these fluctuations.

Secondly, timeframes matter.

Generally speaking, younger investors can often ride out volatility, whereas those closer to retirement will tend to place greater weight on minimising risks to their capital.

Tolerance for risk and investment timeframes are personal, so all investors need to take the time to find out what is right for their own circumstances.

Advice could come from a person, but there are also web-based applications and tools to help you find out what KiwiSaver fund is the way to go.

A focus for Money Week is on the importance of emergency savings accounts. KiwiSaver can't be dipped into to pay for an emergency (except for most people over 65 of course), but more generally speaking, a savings buffer means you don't have to sell long-term investments at the wrong time in order to solve shorter-term problems.

Storms often surprise us, be it a weather event, a personal event, or a market correction. And that's when access to an emergency fund is an important part of a good financial plan.

Keep contributing in both good times and bad is another important message for KiwiSaver members. Good investors buy assets when they are cheap, and sell them when they are expensive. Freezing contributions and switching strategies when markets are down can inadvertently mean an investor is doing the opposite.

Growth-focused KiwiSaver funds that are largely invested in shares are designed for investors that generally have a timeframe of over 10 years until the invested funds are required. Over a ten-year timeframe, some ups and downs are a certainty.

Chopping and changing to avoid the downs is not generally seen as the way to go.

Savers need to get some advice to make sure they are in the right fund in the first place, understand the risks, and then focus on their savings goals, rather than trying to time the market every time a storm cloud appears to be coming.

For people with a very short-term horizon, there are also specific considerations. Their timeframe will influence the mix of growth assets like shares, and income assets like cash and bonds.

But again, an appropriate choice is usually a function of their investment timeframe and risk tolerance, rather than trying to time the market right, based on the gloom they might hear in the news.

For KiwiSaver Scheme providers, a challenge is connecting with investors to help them understand KiwiSaver, make sure they are maximising all the benefits, and help investors know how to react when investments rise and fall in stormy markets.

The ASB KiwiSaver survey shows that the majority of people say they read no more than half of the documentation that relates to their investments, which is a concern when confidence in how KiwiSaver works is so low.

Reasons given include the documents are too long, hard to understand, and not seen as relevant or useful in many cases.

The traditional investment documents such as product disclosure statements and fund fact sheets don't always cut the mustard for many investors. And fund updates from providers can struggle to cut through the inundation of emails people get these days.

Mobile apps are a development that is clearly making things easier. When KiwiSaver started, switching a fund typically involved filling in a form, some very manual processes, and waiting.

Finding out what fund you should switch into wasn't necessarily easier, especially with the previously mentioned aversion to product documentation.

- Chris Tennent-Brown is a senior wealth and insurance economist for ASB.