Preparing your KiwiSaver for a market fall - Diana Clement

Never say never when it comes to predicting market falls. Photo / 123rf

Is your KiwiSaver balance about to drop? The answer is “never say never” when it comes to market falls.

Most KiwiSaver funds have had positive returns over the first quarter of this year. According to Morningstar, which tracks KiwiSaver funds, that ranged from 2 per cent for conservative funds up to 8.8 per cent for aggressive funds.

With that in mind, it might sound odd to be talking about fund values falling. However, headlines around the world are screaming: “Will the stock market crash?”, “Wall Street cruel summer”, “Stock market set up for a panic”.

The reality is a fall in KiwiSaver balances is inevitable. Eventually. Stock market “corrections”, as they’re known in the industry, are part of the natural lifecycle of investing. Stock market investments such as KiwiSaver overshoot and undershoot, but the trend line is up over time.

Since 1960, stock markets in the United States, which impact our own, have fallen by 20 per cent or more on 10 occasions, says Mark Lister, investment director for Craigs Investment Partners. On average, statistically that means we’re never more than six years away from the next big fall. In addition. there have been more than 30 smaller falls since 1960, said Lister.

Think of it this way, says Lister: “If you’re a 45-year-old and you’re investing in your KiwiSaver for retirement... statistically over 20 years you will probably see three times where that KiwiSaver balance will fall more than 20 per cent.

“There’s always [a correction] around the corner because of the nature of markets. At any given point in time, you’re one, three, five years away from a 20 per cent decline, and the smaller declines come even more frequently than that. So people should always be expecting that to happen sooner or later.”

No one knows if that next correction will be a 5 per cent or 10 per cent fall, or a true bear market (crash) of the magnitude of Black Monday in 1987, the Asian crisis, Dotcom crash, GFC, or Covid downturn, which for small investors seemingly came out of nowhere, and left some feeling that the sky had fallen in.

Whatever the size of the next correction, the sight of KiwiSaver balances or other investments falling makes the human brain go all caveman. People panic and run as if they are being chased by a sabre-tooth tiger or woolly mammoth.

“[The human brain] freaks out and it starts to catastrophise,” says Lister. People think they’ve made a horrible mistake by investing and should just cut their losses now and run for the hills.

That’s what happened to thousands of investors in the early days of the pandemic, when KiwiSaver balances collapsed almost overnight. KiwiSaver members switched in droves from growth to conservative funds, which locked in their losses.

A classic example was an investor who later complained to Financial Services Complaints Limited, a financial ombudsman service, after switching to conservative when her balance fell from $90,000 to $74,000. Had she simply held on, her balance would have recovered weeks later. Her complaint against her KiwiSaver provider for not warning her was not upheld.

Being prepared in advance is the way to survive a downturn.

• Talk to a professional. Preferably in advance, but also when markets fall. This is when advisers can be worth their weight in gold. Some KiwiSaver providers offer free financial advice.
• Ensure you’re in the right fund. People should consider in the good times, like now, if their investments are fit for their objectives and timeframe, says Lister. For some, that means being in a less volatile fund if they can’t withstand psychologically even temporary falls.
• Don’t panic. Once markets have already fallen, investors don’t want to lock in losses. The alternative is to ride it out and wait for the rebound.
• Avoid selling or switching to conservative. Aggressive, growth and balanced funds are likely to fall further than conservative. But they will regain ground more quickly and grow. Jumping off the roller coaster hurts a lot more than waiting until it comes to a stop.

Lastly, when markets fall, consider buying more of whatever you’re invested in. The down times are when shrewd investors make money by buying at a discount and gaining on the upside. The only proviso is that individual shares or niche funds may not rebound. A diversified fund can cover one bad investment.