Martin Hawes asks: do you find market volatility 'interesting' or 'worrying'? Your tolerance for risk must pass the 'sleep test' and you may need to review the type of KiwiSaver fund you are in

Martin Hawes asks: do you find market volatility 'interesting' or 'worrying'? Your tolerance for risk must pass the 'sleep test' and you may need to review the type of KiwiSaver fund you are in

By Martin Hawes

Have you been a bit bothered by your KiwiSaver account lately? Had a look at your balance and cried “yikes”? Or, maybe, just plain cried?

You have company. The recent volatility of sharemarkets around the world has been such that returns are poor and there are plenty of people worried.

Of course, this begs another question: what should you do about it?

Well, that’s not an easy question. Ideally, of course, we would all have perfect prescience or, at least, a fully functioning crystal ball and use our perfect knowledge of the future to sell down before the volatility started. Sadly, no one has either the crystal ball or perfect prescience.

Even without the absence of a window into the future, we have to ask another question: do we think the current volatility is the start of a major event or is it a short-term correction? In the event that you think it is the start of another dire economic event, you should sell out now to mitigate the fearful damage that might be about to come. If you really think that investment Armageddon is about to hit, now is the time to bail.

However, I do not think that economic Armageddon is likely: in fact, I think that the volatility that we have had is another example of the regular market corrections that come along to remind us that investing is never a one-way bet. My view is that this is the kind of thing that we should expect and that you should face these inevitabilities with the probability that the volatility will soon be over.

If you share that view and found the volatility interesting but not worrying, the thing to do is nothing. I have strongly encouraged KiwiSaver members everywhere to hold their nerve and sit tight. For those in higher risk funds especially, this volatility is the price they pay for their higher returns.

However, if you have found that the recent volatility has been too nerve-wracking for you, you do eventually need to do something – you are in the wrong fund and need to shift. But not right now - this is no time to reduce risk.

To go from (say) a growth fund to a balanced fund – means that you will decrease the amount that you have in shares. In effect, the move to a less risky fund is to sell shares and, with the markets down, that may not be the right thing to do.

Instead of selling into this market weakness, you could consider waiting until the volatility has reduced and then move to your less risky fund.

If the recent volatility has had you worried, it would be a good idea to use one of the online investment profile tools (we have one here) and see how your money could be invested.

Then, when the markets have settled, move to the fund that has the right level of risk for you.

KiwiSaver is a long-term investment for most and that would normally suggest that you should have a fund with a higher level of shares. Nevertheless, the amount in shares ought not to be so great that you do not pass the “sleep test” – i.e. you are worried about your KiwiSaver account to the extent that you cannot sleep.

Remember that this kind of volatility is to be expected periodically and you need a fund with an amount of risk that lets you sleep when there is volatility. Everyone is happy when the markets are going well – it is when the markets fall that we find who has had too much risk.

If you do need to reset the amount that you have in your KiwiSaver account, remember how you felt during the last time of volatility – and answer the questions honestly so that you have the right amount of risk for good times and bad.


Martin Hawes is the Chair of the Summer KiwiSaver Investment Committee. The Summer KiwiSaver Scheme is managed by Forsyth Barr. He is an Authorised Financial Adviser. More deatils here: www.martinhawes.com. This article is general in nature and not personalised advice.

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12 Comments

I’m in a managed growth fund. Has dropped by $5k and I couldn’t care less. Will be staying the course come hell or high water. Still a few decades away from retirement, so short term volatility is just fine by me. Where there is risk, there is opportunity.

I'm in a growth fund & will be retiring next year. I'm going to guts it out. I don't need it straight away so will consider my options in the new year. It's only when you get to 65 do you realise that it's still a long way to 75.

That's probably what you thought about 65 when you were 55, and yet, here you are!
Aging is like a toilet roll; the closer you get to the end, the faster it goes.

Cash Fund from the beginning of KS.
Why risk your retirement savings?, when most of the ‘income’ is from employer contributions and Goct tax credit.

Got outta growth into cash months ago, about April I recall. I’ll be back into growth eventually...... but not yet, the decline has a long way to go.

ditto...

The advice to wait until "the markets settle" is based upon the assumption that the financial system is stable. Really? And that the stable position is above what it is now. Really?
The use of the word volatility as it is so many times in the above opinion piece is designed to convince people that this drop is only a local minima. Personally I have no idea if this is correct or not.
By the way, I think that exchange rates are a factor which may affect returns in some funds. So the exchange rate is another complication to add into the mix.

"Volatility" is being used as a euphemism(by fund managers) for market crash; just as "average" now means "bad".Good comment from "Uninterested"

Does anyone know by what percentage people’s KiwiSave funds have dropped recently?
Shares and equities have always been risky that is why people prefer housing. Safe as houses as they say!
You have control and a say with houses, you have got nothing with shares etc.
,

I've lost 11% of my total gain since the beginning of November.

About 10% loss since September, neutral over the last year.

As usual The Boy talks nonsense. Equities are still up 30 per cent over last two years. Have dropped from 40 per cent up. Christchurch City has dropped in value in last two years and that is without taking inflation into account. That is hardly an intelligent investment. He has let his family down as he has taken the easy lazy local scene to invest in. And now our fantastic new coalition government is implementing new laws to make it harder for rental investors. You in fact have more control with equities.