It’s a fair question – and the answer comes down to the purpose of KiwiSaver, the role of asset allocation and the dangers of concentrating your bets in a single country.
KiwiSaver’s purpose
KiwiSaver’s main goal is to help New Zealanders grow their retirement savings steadily over decades. The most important driver of that is asset allocation – deciding how much of your portfolio goes into different types of investments like shares, bonds and cash.
History is clear on this point. Over the long run, shares (or “equities”) have been the top-performing asset class. Research by Jeremy Siegel, covering the period from 1802 to 2023, shows that after adjusting for inflation, equities returned an average of 6.8% per year. That’s well ahead of bonds (3.5%), cash-like instruments (2.5%), and gold (0.6%).
Shares also have qualities that other asset classes don’t. They represent ownership in companies that can reinvest profits to grow – or return those profits to shareholders through dividends. Over time, company earnings tend to grow alongside the broader economy, which also gives equities a natural hedge against inflation.
So yes, equities are essential for long-term growth. But knowing that isn’t the same as knowing which equities to own.
The S&P500 is not “the” sharemarket
The S&P500 is designed to measure the performance of large US companies. It doesn’t include smaller US companies, nor does it give you exposure to other regions. Lately, large caps have outperformed, but historically, small caps have delivered stronger returns over longer stretches.
If the pendulum swings back – as it often does – a narrow focus on large US stocks could mean missing out. And the S&P500 is just one country’s market. Even the strongest performers can go through long periods where they lag the rest of the world.
No country stays on top forever
The US has been dominant for a long run, but history is full of market leadership changes. In the 1980s and 1990s, Sweden was the world’s best-performing sharemarket – by an even greater margin than the US has managed in the 2010s and 2020s.
On the flipside, Japan was a superstar in the 1980s, only to endure decades of stagnation after its property bubble burst. Investors heavily concentrated in Japan in the late 1980s faced years – even decades – of disappointing returns.
These examples highlight why chasing the latest winner can be risky. Markets move in cycles and what’s on top today may not be tomorrow.
Real benefit of going global: lower risk, similar returns
Spreading your investments around the world doesn’t just protect you from a single country’s downturns – it can also smooth out the ride. Nobel Prize-winning economist Harry Markowitz famously called diversification “the only free lunch in investing” because it can lower risk without sacrificing returns.
One study found that a truly global portfolio can be about half as volatile as a portfolio made up only of US stocks – even when both have the same number of holdings. That’s a huge drop in risk.
And when you look at returns over the longest periods available, the advantage is still there. From 1900 to 2018, global shares slightly outperformed US shares on a risk-adjusted basis (measured by the Sharpe Ratio). In other words, you got roughly the same reward for less bumpiness along the way.
Don’t invest with the rear-view mirror
It’s tempting to think the best-performing market in recent years will keep leading indefinitely. But investing success rarely comes from simply picking whatever has done best lately. If it were that easy, everyone would be rich.
Yes, the US market has delivered fantastic returns recently – and KiwiSaver funds with US exposure have benefited. But concentrating solely on the S&P500 would go against one of the most fundamental investment principles: diversification.
A globally diversified benchmark spreads risk across sectors, countries and company sizes. It gives you exposure to the next wave of growth, wherever it happens, while cushioning against the possibility that today’s star market hits a rough patch.
The bottom line
The S&P500 is a great index for what it measures – large US companies – but it’s not the whole investing universe. KiwiSaver’s role is to help members grow their savings steadily over decades – and that means looking beyond just one country’s market, no matter how strong it’s been.
By sticking with a global benchmark and maintaining a balanced asset mix, we give members a better shot at steady, resilient returns over the long haul – which is exactly what KiwiSaver is designed to deliver.
Generate is a Kiwi-owned investment manager helping over 170,000 New Zealanders grow their long-term savings through KiwiSaver and Managed Funds.
To see Generate’s product Disclosure Statement, go to generatekiwisaver.co.nz/pds. The issuer is Generate Investment Management Limited. Past performance is not indicative of future performance.
