Should I make a change?
It’s uncertain times for many New Zealanders as the Covid-19 pandemic continues to impact the economy, jobs, sharemarkets, investments and incomes. Taking control of your finances in turbulent times can seem overwhelming. Where do you start?
If like many Kiwis you have a KiwiSaver account, you might be asking if now’s the time to change your fund: should I be in growth, conservative or balanced? Is it time to ‘switch up’ and make a change?
It’s worth asking yourself four things to help you decide the best course of action for you.
One. What’s my investment timeframe?
Are you retiring tomorrow or is retirement years away? The key thing to consider when deciding which type of fund to be in is knowing how long you have to invest. As a general rule of thumb:
- If you need your money out within the next five years look at a Conservative fund.
- If you don’t need your investment for ten or more years look at a Growth fund.
- If you need your investment in five-ten years, consider a Balanced fund.
Two. What’s my risk tolerance?
Risk tolerance may sound like jargon but it’s worth understanding. If you have say a $10,000 investment and knowing returns on this investment could rise and fall over a single year, you need to decide which potential return you'd be happy with:
- return of $150
- return between -$30 and $530
- return between -$150 and $650
- return between -$260 and $1,160
- Or return between -$580 and $1480
Each type of fund has a different potential return based on the level of risk. Growth funds generally return more over the long-term but have a higher level of risk, so can also have more periods of negative returns. By knowing the level of risk, you are willing to accept, you can make informed decisions you can live with which will help with Tip 3.
Three. Will a change in fund lock in my losses?
Time in the market, not timing the market is key.
When markets face downturn as they have during Covid-19, the value of your KiwiSaver account is likely to decrease. Changing fund type to a lower risk fund in the middle of times when the markets are down is actually likely to lock in any losses. Why? By changing you’re leaving a fund that holds more assets which have much higher potential for growth such as shares, to enter a fund with more assets such as cash that generally produce a lower return over the long-term.
If you try to switch back again when markets recover, unless you’ve timed the market perfectly - you may end up with fewer growth assets (like shares) in your KiwiSaver account than you had previously.
Whether or not you switch back, if you are left with fewer growth assets than you had to begin with, by changing fund you’re stuck with your losses by ‘locking them in'.
Four. Have I used a tool to help decide?
Most KiwiSaver scheme providers offer tools that can help you understand what fund type could be right for you. If you’re with Kiwi Wealth, you can access our freshly updated Fund Finder by logging into myKiwiWealth, selecting your KiwiSaver account and clicking “Check you’re in the right fund”.
This information is provided in a general nature only and should not be construed as or relied on as financial advice. This is not a recommendation to invest in a particular financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any investment decisions.
Past performance is not a reliable indicator of future performance. The value of your investment may go up and down.