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                       Keep emotions out of investing

Q.        My partner and I are both in our 20’s and have been in KiwiSaver for a few years now.  My balance is close to $10,000 and his is $5,000.  We are both in growth funds but with different fund managers.  I have to log in to their website to check my balance which I do about once a month.  My partner has an app on his phone and sees his balance every day.  When the Chinese market fell last month, he shifted all his money into a cash fund so that he would not lose money.  He then went back into his growth fund about two weeks later.  He says he saved about $200 by doing this.  Is this a good idea?

A.       I am delighted to hear that people your age are taking such a keen interest in your KiwiSaver accounts. Not only the balance, but where you are invested. 
 
Some people I speak to believe that all KiwiSaver money is in one big fund, while others don’t really regard it as an investment at all. Fund managers are required to send out information but many investors do not read what they are sent.   For those that prefer other ways of learning, look for YouTube clips on your fund manager’s website or go to the Sorted FundFinder website.
 
While it is good to see young people taking such an interest in their KiwiSaver, be careful of letting human emotion get in the way of your longer term objectives. Let me tell you the story of investors in the Fidelity Magellan Fund. Over the years 1977-1990 the fund was run by legendary manager Peter Lynch. During those years the fund delivered an astonishing 29% average annual return. Despite Lynch’s remarkable performance, Fidelity found that the average investor actually lost money during those 13 years. How is this possible? According to Fidelity, investors would sell out of the fund during periods of poor performance, and go back in after periods of success. This ‘performance chasing’ behaviour is something that affects the great majority of investors and is one of the reasons that most investors never experience the investment returns they expect. 

Fund managers themselves are not immune to these emotions. They are aware that their investors don’t want to see their hard earned savings go down in value, and may try to soften the worst of the falls to keep their investors on board.   But they can also take advantage of market falls to buy more shares at a cheaper price, and use options and hedging. A good manager will communicate these strategies to their investors, so that they will stay the course through all the ups and downs.
 
For most people, KiwiSaver is a long term investment, and anyone in a growth fund should be looking at an investment horizon of 10 years or more. This means that you can ride the ups and downs without jumping in and out of the market. The risk of jumping out of the market is that you will be too scared to jump back in, and miss the best of the recovery.
 
Given that your partner has a low balance in his KiwiSaver, his intervention is unlikely to cost him too much at this stage. With time and experience he will probably learn that taking action every time the market drops is counterproductive. He is paying a fee to the fund manager to make decisions about how best to deal with volatility, and he should trust them to do their job. He may occasionally get the timing right, but in the long run it is a strategy that doesn’t pay off.

As published in the HB Today 21 September 2015
 
Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 06-8703838 or go to www.peak.net.nz. The information contained in this article is of a general nature and is not personalised. Send your KiwiSaver questions to shelley.hanna@peak.net.nz