When the pandemic began to spread globally in early 2020, governments took action by restricting travel and, in many cases, international trade. Lockdowns followed quickly, keeping vast numbers of workers home and out of work. Seeing this, investors panicked, driving share markets around the world into a historic collapse.
Since then, markets have recovered, but many investors have not. While experienced investors know how to manage market volatility, many others have made missteps, particularly regarding their KiwiSaver accounts. One year on many have locked in lasting losses.
Share Market Panic drove Defensive Behaviour
When stock prices began to go into free fall in March of 2020, many investors looked into their KiwiSaver accounts to see falling balances for the first time ever, after years of reliable growth. Fearing for their retirement funds, many panicked. Trustees Executors, which manages registry services for about 25% of all KiwiSaver money, observed an alarming spike in the rate at which people switched funds, moving from growth oriented funds to more conservative options.
At the same time, many reduced their contributions to KiwiSaver, both to boost liquidity during a time when many had reduced incomes, and because of a loss of faith in the value of their investments. This makes sense from a purely psychological perspective. When you’re hurting, your first instinct is to stop the bleeding. Markets, however, don’t operate on the same principles as we do.
Many Kiwis Missed the Recovery
After the plunge, markets began to recover in a series of massive rallies in late March and April 2020. By the end of August, prices had recovered. Those who switched from a growth fund to a conservative fund in March, however, didn’t get to see much of this reflected in their KiwiSaver accounts.
A low-risk conservative fund won’t be as affected by market volatility as a high-risk growth fund, but that can be a double-edged sword. Those who were already in a conservative fund before the crisis saw fewer losses, and similarly smaller gains during the recovery. Those who remained in their growth funds took major losses, and then mostly recovered those losses in the following months. Both of these groups came away mostly intact, or even with some gains.
Investors who switched to a conservative fund just after prices plummeted, though, got the worst of both worlds. They suffered immense losses to their initially higher risk investments, and only saw asymmetrically modest gains during the recovery, resulting in permanent losses. That’s because their growth fund exposed them to the initial losses, and the conservative funds then insulated them from the volatile growth that followed.
Good Advice and Financial Literacy are Critical for all Investors
In total, KiwiSaver investment returns fell by 122% in 2020, with a loss of $820 million according to the Financial Markets Authority (FMA). This represents a significant impact on the financial security of many Kiwis, especially with regard to their retirement. Moreover, it illustrates just how important it is to make good financial advice available to all investors, regardless how actively they manage their investments in normal circumstances.
While many KiwiSaver providers likely advised investors to keep their growth funds and wait for the recovery, it’s a natural reaction to want to take defensive action, even when that means ignoring sound advice.
Trustees Executors' clients were advised to stick to their plan, which everyone did. Where possible they were urged to add more to their portfolios while the market was down. It’s when there are tough times in markets the value of advice really shines through.
At Trustees Executors Private Wealth, we not only provide wealth management and financial advice, we also work hard to promote financial literacy among all our clients. This doesn’t just help customers to make sound financial decisions, it also ensures that they understand why we offer the advice we give.