Question: I am worried about the situation in Ukraine. I have been watching my KiwiSaver go down in value. What should I do? I am 66 years old and I am invested in a conservative fund. I am no longer working and this is my retirement nest egg.
Answer: The
situation in Ukraine has been developing over the past few weeks, with the prospect of hostilities causing jitters in financial markets. Rising inflation and higher interest rates boosted uncertainty.
When Russia invaded Ukraine, sharemarkets around the world fell sharply while commodity prices — including oil — rose.
Markets do not like uncertainty and they usually fall in response to the threat of war. However, once hostilities are underway markets factor in the situation and share prices typically rebound.
The conflict in Ukraine will have various economic and political consequences. Economic sanctions may provoke a retaliatory response from Russia.
There will be an impact on commodity prices, particularly oil. A rise in the price of oil drives inflation but reduces discretionary spending. One possible outcome is that central banks may not increase interest rates as rapidly or as high. While news and images of the conflict are distressing, the impact on the global economy is unlikely to be significant.
There are many companies and sectors that will not be affected by the conflict at all. Active fund managers will take the opportunity to buy more shares at cheaper prices. We saw a similar drop in share markets in 2014 when Russia annexed Crimea. After the initial fall, sharemarkets recovered.
Did you decide to invest your retirement savings in your KiwiSaver fund to achieve a higher return than bank term deposits? Your KiwiSaver is diversified across a range of bonds, property and share market investments. You can find out more by looking up your fund in the Sorted Fundfinder tool, or reading the information sent to you by your KiwiSaver provider.
Investment markets have had a good run over the past few years, and many KiwiSaver investors are not used to seeing their savings go down in value. Are you in the right fund for your risk tolerance? According to the Sorted risk profile questionnaire, a conservative investor can experience annual returns in the range of -5.5per cent to 7.4per cent after fees, taxes and inflation.
Would you be comfortable with a drop of -5.5per cent over 12 months? It may be wise to put some of your savings into a cash fund (or bank term deposit) and treat your KiwiSaver as a longer-term investment.
Once an investor has chosen their investment in line with their risk profile, they must stay the course and not be tempted to cash up every time the market falls. Cashing up will simply crystalise their losses.
A far better strategy is to top up investments when markets fall, to take advantage of the lower prices. That way you will feel that you are in control, and it will give you a better outcome in the long term. KiwiSaver investors who are contributing regularly will get the benefit of lower prices at times like this.
- • Shelley Hanna is a financial adviser with Peak Portfolio Management Ltd, which holds a licence FSP702451 issued by the Financial Markets Authority to provide financial advice services. Disclosure information is available at peak.net.nz or call 06 8703838. The information provided in this article is of a general nature and should not be relied on as a recommendation to invest in a financial product. Send your KiwiSaver questions to
shelley.hanna@peak.net.nz