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We’ve had a good run, my generation. Since 1980 there have been 6 recessions, all of which have lasted less than 10 months and, up until 2020, most of us had not experienced any real market shock or widespread financial loss. Even then, the market rebounded surprisingly quickly, but it’s fair to say that these past two years have been a roller coaster, and like all adrenaline rides some people have found this more unpleasant than others.
In times like this, where uncertainty has been our constant companion and the media have highlighted disaster after disaster, most people find themselves making decisions more based on emotion than logic.
In all honesty, even in the good times, most financial decisions are driven by emotion.
Anyone who has looked at their KiwiSaver recently has likely seen their balance dip, or drop, depending on what fund you’re in. Our current environment is even more unusual in that even conservative investments have taken a hit, worrying people who were either advised or chose themselves to be in a conservative fund, most often because they need the money in the near future or are particularly risk-averse individuals.
In the last few months more clients have queried whether now is the right time to invest, particularly people who haven’t been in the stock market at all. Many people don’t realise but most of us actually are exposed to the share market in some way, whether you’re investing directly through a platform like Sharesies, invested in a Managed Fund or, most commonly, in KiwiSaver.
For those who have been watching their KiwiSaver since 2020, if they resisted the urge to change funds at the start (which sadly many people did do out of fear and lack of good advice) they are now coming to terms with the volatility and are happy to stay the course. But for those being advised to jump into the market for the first time, in the middle of a huge downturn? Let’s breakdown why that’s actually a great idea – if you understand how it works and why you’re investing in a market that seems to be tumbling down around us.
Last year I wrote about how KiwiSaver is like a chocolate bar, but actually, your KiwiSaver and other investments are like house plants. Let me explain.
Many people will liken investing in a Bear market (where the value of stocks across the index has dropped dramatically) to shopping at a sale. If that were an accurate analogy, it would be like buying your chocolate bars, clothes or car at 50% off – a great bargain and a good way to save some money on a purchase you’d be making either way…but not a way to grow your wealth.
I’ve eaten my chocolate, worn my clothes and my car has halved in value the moment I drove it off the lot, so nothing I bought at the lower price has actually increased in value, unlike buying shares when the market is down.
When you invest in KiwiSaver or a managed fund, you’re actually buying individual units of that fund at a certain price. Imagine if you will that your KiwiSaver is actually a plant collection, each of those units is a little house plant, and right now the price of each plant, or unit, is $5. But over time, as each of those plants grow and are worth more, the value of your plant collection goes up without you doing anything.
Our story starts in January, when you’re a bit bored and you see a cute little String of Turtles plant, and you buy 10 of them because they are on sale for $5 each (which is a bargain because 6 months ago you saw them for $25.) The next fortnight you buy another 10 at about the same price. The following fortnight the price has gone up and they are now costing $7 each, but that’s still a good deal, and you know they are going to grow and probably be worth quite a lot in the future, so you spend another $50 which gets you 7 plants instead of 10. You do this every fortnight , spending $50 on plants and buying as many as you can that day. Through the year the prices slowly increase because suddenly everyone you know is buying plants and posting pictures of their variegated Monstera plants. By the time it’s December and you’re buying your plants, they’re costing $50 a pop, which seems crazy so you’re only getting one plant when you shop, but is also great for you, because through the year you’ve bought heaps of plants (making you an epic plant mum, with a very crowded flat!) and they are each now worth $50, even the ones that only cost you $5 back in January.
If you hadn’t bought any more plants after that first sale, you still would have $500 worth of plants that you only paid $50 for in January, making a huge gain of $450 that year. Beyond that, because you continued to purchase more and more plants while they were cheap you have built up an impressive collection, which now that prices have risen is worth thousands and you’re ready to sell a few on TradeMe.
Think of your KiwiSaver as your own plant baby collection – right now prices are low because people are feeling pessimistic, the world is in upheaval, inflation is rampant and we just don’t know what might happen next…but what we do know is that the market recovers, given time.
We also know that if you continue to invest, your recovery time from a loss will be shorter than if you simply stop contributing.
Like a rollercoaster, the market is cyclical, and a downturn has always historically been followed by a rise. Whether you can handle the steep plummets and the heady heights, or whether you prefer a gentler journey is determined by what fund you’re invested in. Regardless of your fund choice however, the market always recovers, it’s just a matter of how long you’re left feeling queasy for after the dip.
The best plan of attack right now is to get your KiwiSaver units while they’re cheap, so that when you come to use them for a home or your retirement you have grown your collection and they are worth far more than they were today.
If you’re unsure of your answers to any of those three or think you have it nailed but still feel like throwing up when you see your KiwiSaver balance, give us a call and we can talk you through it.
Let’s help you make sure when it comes to buying a home or even retiring, you’re not having to sell your beloved Variegated Minima plant, when you could be cashing in your KiwiSaver instead.
Elizabeth
Elizabeth Tsikanovski (FSP693611) is a Financial Adviser with Velocity Financial (FSP95466). No investment decision should be taken based on the information in this blog alone. Please see Elizabeth’s disclosure statement on our website.