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In 2020 sharemarkets dived as pandemic panic gripped investors. Markets are once again dealing painful blows to people’s KiwiSaver balances.
OPINION: To live is to learn.
To invest is similarly a life-long learning experience, sometimes a brutal one.
Just ask anyone in KiwiSaver, which these days, is just about everyone aged 18 to 65, as well as a good many over 65s.
After what felt like plain-sailing, KiwiSavers have spent two and a bit years learning some big lessons.
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Sam Knowles, the former chief executive of Kiwibank, once told me that you learn more in a crisis than in those happy times when it seems the good times will roll on forever.
The lesson of the March 2020 Covid sharemarket crash, which was followed by a boom as central banks cut interest rates, and unemployment didn’t spike, was to hold tight and keep investing through a crisis.
This is a lesson that is easier to accept when you are in your 20s, 30s, 40s, and even 50s, but it starts getting harder to swallow when you are in your 60s, or 70s.
The life and times of the KiwiSaver superannuation savings scheme, which was first launched in 2007.
This is because of a KiwiSaver risk rarely mentioned.
It’s called sequencing risk.
This is the risk that something happens at a bad time for you.
An investment market crash when you are 30 is not as big a deal to a person, as it is if it strikes them when they are in their late 60s, or 70s, and living off their capital.
That 30-something can just sigh, carry on investing and living off their work income.
That late 60-something has far tougher choices to make, and will probably end up tightening their belt considerably, or continuing to work longer than they had hoped.
Sequencing risk is written large across many walks of people’s money lives. Just ask women who forged their early careers in the 1950s, 60s and 70s in an era of misogyny.
Or compare the ease of buying a house for an employed young couple in the early 2000s, and an employed young couple these days.
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In the early 2000s, New Zealand was on a roll, and houses were still affordable.
This is sequencing risk at work, or if you want luck, which successful people often like to pretend was never a factor in their wealth.
It’s hard to cope with sequencing risk.
Strategies people use include making sure your investments are diversified (spread over cash, property, bonds and shares), and gradually reducing the risk of their investments as they get older.
Lifestages-style KiwiSaver schemes, like AMP’s Lifesteps automatically do this for KiwiSavers, but you have to choose to be in them, otherwise, each year each KiwiSaver has to decide if they are in the most risk-appropriate fund.
But this is no complete protection, as KiwiSaver conservative fund investors will tell you.
They make a good case that they were given the impression that conservative funds should not drop more than growth funds, but that’s what has happened in many KiwiSaver schemes.
To invest is to take risk.
It’s nice to pretend there are risk-free investments, but there aren’t.
As well as being lucky, the single best defense against sequencing risk is to go hard in the good times, especially when you are young, and I mean go hard in your career and in your money life.
Paying off that home loan faster when rates are low, reduces your exposure when loan rates rise.
Saving and investing harder in the economic booms, and not imagining they will last forever, is also a defense, if you are wealthier.
GOLDEN RULES
Save/invest a serious portion of your income Don’t do minimum repayments on your home loan Have an investment plan
