kiwisaver, volatility, investing

COVID-19 and 5 KiwiSaver mistakes

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As the economy experiences a downturn, so do the financial markets and so does KiwiSaver. This causes unease and discomfort among investors which leads to some questionable decisions. 

Here are National Capital’s top 5 recommendations that KiwiSaver investors should implement during COVID-19:

1. Don't panic switch your fund

Considered switching your KiwiSaver to a conservative fund to avoid further losses? You're not alone. This is by far the most common mistake and unfortunately it will cost you more than it will save you. 

Investing in funds with a higher asset allocation in growth assets means that you are exposing your investments to ‘riskier’ assets with higher volatility. However, these assets are only risky to your investment if you are in the wrong fund for your situation. 

Volatility isn’t necessarily a bad thing if you have the capacity to withstand it. The long-term trend of the stock market is increasing so short-term volatility is pretty much irrelevant if you have a long-term investment horizon. After-all the markets make the most significant gains after a fall, but you’ve got to be in it to win it. Staying in your fund will mean that you will be able to take advantage of the rapid growth after a fall. 

2. Don’t blame your provider

Fund managers will actively be taking steps to protect your investment against the market conditions. They are experienced investors and can make informed decisions regarding your KiwiSaver. This article explains what Milford Asset Management is doing to protect their growth fund. 

However, your provider can’t control the market! If the broad market falls, there is very little any KiwiSaver provider can do to stop that. Just make sure you know what your KiwiSaver provider is doing to mitigate the damage as much as possible, and make full use of the eventual recovery in the markets.  

3. Don’t withdraw

With a looming recession, the future is now more uncertain than ever. Some investors may be considering withdrawing their funds for hardship reasons but this decision should not be taken lightly as you are losing out on far more than the face value of the withdrawal. 

Withdrawing your money before you need it means you will miss out on thousands of dollars worth of returns and this will be exacerbated by the nature of compounding interest. It will adversely impact your future financial situation much more than it will help your present one. It is important to note that withdrawing for hardship is necessary for certain situations however, it should only be considered as a last resort. 

National Capital ran the numbers for a theoretical 50 year old investor and found that they would miss out on $41,500 by the time they retire if they withdrew $20,000 today. This cooking the books podcast discusses the benefits and repercussions of draining your KiwiSaver for hardship.

4. Don’t stop contributing to KiwiSaver

For the majority of our lives, KiwiSaver is a long-term investment meaning we will not withdraw funds for well over a decade. It may seem logical to stop contributing to KiwiSaver in order to protect your new contributions from declining in value, but unfortunately, that’s not how investing works. 

It is well known in the investing world that time in the markets is more important than timing the markets. Sticking to your regular investment plan means that while you are in the market at the ‘worst times’, you are still contributing at the 'best times' too.

5. Don’t repeat your mistakes

If you have made any of these faux-pas don’t worry, investing is complex and can be confusing at the best of times. We are only human and the best thing to do is to learn from our mistakes. 

Seeking advice about your KiwiSaver could save you thousands of dollars in the future. At National Capital, we offer that advice through a KiwiSaver HealthCheck to ensure that investors are in the right fund and with the best provider to suit their needs.

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