Market volatility
Written by Chief Editor, Kiwi Wealth News
Market volatility is normal
First things first – it’s important to remember that it’s normal for markets to go up and down. Whilst it’s concerning for KiwiSaver members when markets fall, it’s all part of the natural cycle that markets go through.
This cycle is driven by a lot of factors, including economic data, politics and company performance. Investor emotion - namely fear and greed – can also be a big driver of markets in the short-term. Investors often react to negative headlines, and panic, selling their investments and causing prices and markets to fall. Once prices drop low enough, investors become greedy again, start buying and markets become more buoyant.
The fear KiwiSaver members might have around losing money on their investment is normal. And the urge to do something to combat that fear – like switching investment funds - is also normal. But the important thing to remember is not to panic.
Can my account balance go down?
How much your account is affected by market volatility depends on which of our investment funds you are invested in. While all investments have some degree of risk, they typically sit along a risk and return spectrum – generally speaking, the greater the risk, the higher your potential return.
So, if your money is in a conservative investment fund, which usually invests in lower-risk investments such as cash and bonds, with a smaller allocation to shares, chances are you won’t be affected as much when markets go down.
However, if your money is invested in a growth investment fund, which has a greater exposure to markets and, therefore, sits at the higher end of the risk and return spectrum, your KiwiSaver balance stands more chance of being impacted when share markets fluctuate.
A useful rule of thumb is that riskier assets such as shares will fall by up to a third every five to seven years and take five to seven years to regain their value. This means that shares can deliver no returns at all for significant periods of time, and investors should be prepared for this at any point. However, to compensate you for taking on all this risk, you can generally expect to be paid significantly higher returns over the long run.
So, should you change which fund your money is invested in simply because of a downturn in the market?
Well, as with any investment, that depends on a number of factors, including your investment timeframe, your tolerance for risk, and your general financial situation.
Investment timeframe
Generally speaking, the more time you have, the more risk you can think about taking. Time gives you the space to make back your losses and benefit from compounding returns. A 20-year-old can generally take more investment risk than a 50-year-old, so if you have a long time to go until retirement (i.e. more than 10 years), you might want to consider an investment fund that has a higher exposure to shares.
While there are exceptions to this - such as for people who are looking to withdraw money to buy a first home (if you are eligible) – once you’ve determined how long you have left until you need to access the money in your KiwiSaver account, you will know your investment timeframe. And this can help you understand your tolerance for taking on investment risk.
Risk tolerance
Your risk tolerance is how comfortable you are watching market volatility potentially affect the money in your account. With market upswings, you could see your account grow in size, but, as with the recent market downturns, you could also watch the money in your KiwiSaver account shrink too.
If you have a longer investment timeframe, then it may allow you to take on a higher level of risk, because you have time to ride out the ups and downs that come with high risk assets such as shares.
Full financial situation
Another factor to consider is what your entire financial situation looks like. What other assets will you have at retirement? To what extent are you relying on KiwiSaver to fund your retirement? If you will be relying heavily on your KiwiSaver account to fund your retirement, then it makes sense to take less risk – but again, you need to consider your investment timeframe and risk tolerance before you make this decision.
Changing your investment direction
If you find yourself wanting to change your investment fund when markets fall, you should bear in mind that moving to a lower risk investment fund – say switching from Growth to Conservative – will likely lock in any losses you’ve already experienced because you’ll be selling out of shares when prices are lower. And it could also mean that you might miss out on when the markets take an upturn again.
The important thing is to make sure you are comfortable with the level of risk you are taking, in the time you have available. If the market ups and downs are keeping you awake at night, then perhaps it’s time to rethink which of the investment funds you choose to invest in.
Remember though, that this information is just general. It doesn’t take into consideration your personal circumstances and shouldn’t be considered a recommendation to invest in any particular investment fund. It’s also important to bear in mind that your KiwiSaver investments and returns are not guaranteed by anyone.
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