Sunday, 11 February 2018

KIWIS BEWARE!! New Zealand's pension scheme tries to calm its investors

I don’t recall this happening before. 

We've had volatility in the past and yet there have been no warnings like this.

Do they know something we're not supposed to know?

Kiwisaver in New Zealand (the nations’ pension scheme) has sent this out to reassure their investors

If you want to know if something is really happening wait for the official denial.

A harbinger of things to come?

First things first – it’s important to remember that it’s normal for markets to go up and down. Whilst it’s concerning for KiwiSaver members when markets fall, it’s all part of the natural cycle that markets go through.

This cycle is driven by a lot of factors, including economic data, politics and company performance. Investor emotion - namely fear and greed – can also be a big driver of markets in the short-term. Investors often react to negative headlines, and panic, selling their investments and causing prices and markets to fall. Once prices drop low enough, investors become greedy again, start buying and markets become more buoyant.

The fear KiwiSaver members might have around losing money on their investment is normal. And the urge to do something to combat that fear – like switching investment funds - is also normal. But the important thing to remember is not to panic.

Can my account balance go down?

How much your account is affected by market volatility depends on which of our investment funds you are invested in. While all investments have some degree of risk, they typically sit along a risk and return spectrum – generally speaking, the greater the risk, the higher your potential return.

So, if your money is in a conservative investment fund, which usually invests in lower-risk investments such as cash and bonds, with a smaller allocation to shares, chances are you won’t be affected as much when markets go down.

However, if your money is invested in a growth investment fund, which has a greater exposure to markets and, therefore, sits at the higher end of the risk and return spectrum, your KiwiSaver balance stands more chance of being impacted when share markets fluctuate.

A useful rule of thumb is that riskier assets such as shares will fall by up to a third every five to seven years and take five to seven years to regain their value. This means that shares can deliver no returns at all for significant periods of time, and investors should be prepared for this at any point. However, to compensate you for taking on all this risk, you can generally expect to be paid significantly higher returns over the long run.

So, should you change which fund your money is invested in simply because of a downturn in the market?

Well, as with any investment, that depends on a number of factors, including your investment timeframe, your tolerance for risk, and your general financial situation.... blah, blah, blah

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