Article by Mike Taylor, originally published in the NZ Herald
The sky is falling next Tuesday. Or in 18 months. Or maybe it's falling now.
KiwiSaver members are hearing many competing views about what's happening to the market and what's going to happen and most of it is like hurricane coverage.
Where is it headed, where will it hit hardest, how long will it stay, whose house is blowing away?
With so much speculation about the health of the markets, whether this downturn is just a jolt or something more lasting, what should a KiwiSaver member do?
And what should members ask their KiwiSaver provider about how they plan for a crisis?
First, are you in the right fund?
Your KiwiSaver provider may advise you against switching out of your fund to a less risky option. They'll have said something about investing for the long-term and if markets fall, don't crystallise your losses at the bottom.
They may also have said: whatever you do, don't check out of KiwiSaver altogether by suspending or stopping your contributions.
All of this makes sense, provided you're in an appropriate fund for your goals and circumstances. It's true you shouldn't panic.
But while it's on your mind, and even with the market wobbling in the background, why not take the opportunity to look carefully at your fund and make sure it sits well with you, who you are and where you're headed?
Check out the mix of growth and income in your fund. Growth comes with more risk but can also achieve greater gains.
Ask yourself, does that trade-off feel ok to you? Do you feel comfortable taking on more risk to achieve your retirement goals? Are you suited to the swells and dips (how are you feeling now – a bit queasy but OK? Or is your concern a bit deeper)?
You may prefer more certainty.
However forewarned bumps and losses are, for some people they hurt too much. If that's you, consider a less growth-heavy mix, such as a well-structured balanced fund. Here, your money is at least partly shielded in crises, by your fund comprising income-producing assets which typically do better in downturns.
And if you are still a long way from retirement, the portion of your investment in growth (which typically does well in the period AFTER a downturn) has more time to recover from market shocks, if they come.
Secondly, is your fund's manager up to the job?
So, you've swallowed any lingering anxiety and you're sticking by your fund, and your provider. But will he or she reward you by calmly doing the right thing in a crisis?
It's a good idea to find out if your manager is active or passive. Active management is where someone is looking closely at shares or other securities, like bonds, and making educated guesses about which will do better than the market.
Passive management is when a fund manager tracks a major market index as closely as possible, and typically is cheaper than active management.
If this info isn't easy to come by, or your manager can't give you a simple answer, it's probably a sign you should consider going elsewhere.
What's the difference? Well, some say passive management is bad in crises because as the major markets plummet, passive management can do nothing but follow them down. The same commentators are confident in active managers' ability to spot the incoming storm and get out of the way.
There's no doubt that flexibility to act is an advantage and genuine skill and discipline helps active managers prepare for and implement the right strategy, in time for the crisis.
The fees can be higher – you're paying for this skill! – but if you have a good active manager whose fees don't completely consume your returns, you will probably will do better than if in a passively managed fund. Note some managers combine experienced active management and low fees – JUNO KiwiSaver Scheme is one.
We say genuine skill, however, because crystal balls and cast-iron discipline under pressure are not standard issue for active managers.
Nobody knows when or where the category five hurricane is touching land (or whether what's happening now will become one).
And no investment manager knows how they will really act in a crisis, especially if they've not been through one before. Plus, when the storm is raging, investing actively is hard.
So, having said all that, passive management is not bad, but you need to be in the right fund and not paying too much in fees.
And you need to trust your manager is robust (e.g. they won't do something silly with the mix of growth and income assets in your fund, in poor conditions).
For all managers, you need evidence of their ability, willingness and – ideally – history of doing the right things at the right time to protect your money (and grow it when opportunity presents itself). Here's what to ask, to assess their storm-worthiness.
Four questions for your manager:
1. Thinking: Show me evidence you're thinking carefully about what markets might do? (Take a look at the information in their newsletters and on their website. Is it waffly and vague? Or convincing and consistent? Clue: look for the latter.)
2. Tools: Tell me what tools you can use to anticipate and respond to market problems? For example, can you switch to cash or otherwise change your asset allocation? How large can those adjustments be?
3. Actions: Show me what you've already done, and are doing now, to prepare for a big correction or recession? (This might be nothing, but they should be able to explain – ideally backed by experience – why they think that will work best for their members.)
4. Experience: Show me evidence your members came through OK in previous recessions like 2008, although this might be hard as KiwiSaver only started in 2007 and many of today's providers have only launched in recent years. What happened to your funds this February when markets fell? What's happening right now? Are you comfortable with this?
We don't know if what's happening now is a proper hurricane or a squall. And we don't know when the next bad weather might sweep through markets. But either way, your KiwiSaver provider should be your beacon in the storm – not the albatross around your neck. Now's a good time to check your fund is shipshape, just in case.