KiwiSaver members told: Don't get spooked

Advisers whose clients are worried about the possibility of a market correction should encourage them to stick with the KiwiSaver fund they are in, new research shows.

Tuesday, July 28th 2015, 6:00AM

by Susan Edmunds

Actuarial firm MJW has released a report looking at the impact of a market correction on KiwiSaver funds.

It says booming stock markets over recent years have sparked concerns of a major market correction in the near future.

"A risk identified is that members in a growth option or similar will suffer a significant negative return, causing them to switch to a more conservative option and then sit in this fund in future, suffering further reduced returns as a result."

The firm compared two hypothetical funds: a growth fund with 80% in growth assets and a conservative fund with 20% in growth assets.

It used employee members earning $70,000, who started saving in 2007.

It assumed a market correction starting October 1, resulting in 27% losses for the growth fund and 9% for the conservative.

In that situation, the correction reduced the growth fund by $14,000 to $43,000 and the conservative balance by $2000 to $47,000.

"While the growth KiwiSaver member emerges from this correction in a worse position, the momentum it had already built up in the years leading up to it means its position is not markedly worse off than the conservative member who was shielded from the brunt of the loss," the report said.

The growth fund's balance would then overtake conservative again in 2019 and accelerate away as time went on.

MJW said members who chose a more aggressive investment style should be focused on the long term and wait out any correction that occurred.

Actuary Mark Weaver said investors who were worried about the possibility of a downturn should be told it was better to stay where they were because timing the market accurately would be next to impossible. "If you switch and markets do fall, when do you switch back?"

He said growth investors could lose money in the short term but would still come out ahead in the long run.

Tags: KiwiSaver