KiwiSaver members have seen many periods of market volatility through the almost 20 years of the scheme's existence, but could they handle a longer downturn?
By Susan Edmunds for RNZ
Share prices fell in 2021 on the back of conflict in the Ukraine, in 2020, when Covid hit, and during the global financial crisis (GFC). The GFC was the most extended downturn of the main three, but at that point, most KiwiSaver members' balances were low enough that their contributions concealed the effect on investment balances.
Commentators said a longer downturn could be harder for KiwiSaver members to withstand, now that balances are higher. There are concerns that AI-fuelled stock price growth could go into reverse, which could hit those investors hard.
University of Auckland senior finance lecturer Gertjan Verdickt said investors tended to be loss-averse.
"People hate losing 1% way more than they love winning 1%, so from that standpoint, there will be a lot of people that will panic, if there are troubles in paradise, especially if they are longer than expected."
Koura Wealth founder Rupert Carlyon said investors had leant into the theory of "markets will bounce" in the past five years.
"I do think people will be surprised, if we go through a 2007/8-style event, where it was a slow drift down for almost 18 months, before we bottomed. People will be shocked."
He said it would be up to providers to make sure people understood things were "as good as they will ever be".
Kernel founder Dean Anderson said the past five years had brought remarkably strong returns.
"I am conscious that investors start to form expectations that a double-digit annual return should be expected. This isn't saying that markets are overvalued today, but more there is an important message of reminding investors what a 10, 20, 30-year average return expectation should be.
"We can support that by showing how powerful a 6%, 7%, 8% return is, when compounded over that sort of time frame. For KiwiSaver investors, I do think we are much better today at not switching risk profiles based on events - rather they are matching it to their investment horizon.
"We have seen that by the rise in the money sitting in high growth funds, intended for 10,15, 20-plus [years], versus balanced or other risk profiles. Because KiwiSaver is such a structured and disciplined product, I think it will be one of the best places to learn about markets and investing.
"Also, with contribution rates increasing, it would mask any lower market returns and could reduce the frequency of seeing your actual KiwiSaver balance fall nominally and that's what matters in the long-term for investors."
Pie Funds chief executive Ana-Marie Lockyer said a prolonged market downturn would test confidence and should prompt more people to question whether they should make changes.
"The key message is that KiwiSaver is a long-term investment. Markets move in cycles and periods of weaker returns are a normal part of investing.
"History shows that those who stay invested and contribute consistently, including when markets fall, are generally better placed to benefit when markets recover than those who try to time the market.
"As KiwiSaver balances grow and more New Zealanders approach retirement, we'll naturally see greater interest in short-term market movements. That makes investor education and appropriate fund selection even more important, ensuring people's investment strategy matches both their timeframe and their tolerance for risk."
AUT professor of finance Aaron Gilbert said many New Zealanders were not tracking their KiwiSaver balances.
"Normally, we would encourage greater engagement, but during a market downturn, that lack of attention can actually be beneficial. People are less likely to react emotionally to day-to-day market movements.
"It is one of those interesting situations where we would like people to be more engaged with their KiwiSaver, but not so engaged that they feel compelled to act every time markets become volatile. It is also worth remembering that, even if KiwiSaver balances decline, KiwiSaver remains one of the best long-term investment vehicles available, because of the employer contributions and government contribution.
"Investing has always been a long-term exercise. Ideally, we are investing over decades, not years.
"If markets remain weak for a couple of years, those regular KiwiSaver contributions are effectively buying assets at lower prices. When markets eventually recover - as they have after previous major downturns - those additional units purchased during the downturn can significantly boost long-term returns.
"Ultimately, the key message is that it is not your balance today that matters most, but your balance at retirement.
"History tells us that enduring periods of volatility is the price investors pay for the higher expected long-term returns that growth assets have historically delivered."
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