If you’re investing for the long haul, as most KiwiSavers are, it pays to ignore short term market movements and invest for long term growth.
The trouble is, fighting your emotions while investing isn’t easy. Loss aversion tells us that humans are hard wired to hate losses twice as much as we enjoy gains, and this fear of losses can lead investors to make bad decisions that seriously impact their long term returns.
A perfect example of loss aversion in action is what happened during August and September 2015 when share markets around the world sold off sharply.
It was reported the rate of KiwiSaver Fund switches from growth funds to conservative funds were up significantly at the peak of the market volatility.
What’s worse, the majority of these switches were said to have been made by younger KiwiSaver members.
This is concerning because young KiwiSavers (who aren’t planning to withdraw for a 1st home purchase in the next couple of years) have very long investment time horizons and generally speaking, should be investing in growth funds, not in cash or conservative funds. This is because although conservative funds should be less volatile, they should also underperform growth funds over long time periods, as evidenced in the Morningstar data below:
The problem with trying to ‘time’ the market is that markets can move up and down very quickly.
How will the people that were spooked and switched into a conservative fund know when to switch back to a growth fund? And once they finally realise it, will they have missed out on the recovery returns?
As we showed in one of our previous posts, deviating from your long term investment strategy, even for a short period of time, can seriously dent your long term returns. For example, if you had a hypothetical investment in the S&P 500 index over the previous 20 years and managed to miss the 5 best trading days, the final value of your portfolio would have decreased by 41 percent. That’s huge!
Hindsight is always 20/20 and battling your emotions when the value of your Fund is going backwards is very tough. But if you’re investing for the long haul it pays to look past all the short term noise and focus on contributing regularly and investing for growth. In retirement, your KiwiSaver will likely become your source of income, so you want to get it right.
Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.
 Data from Bloomberg. Ending value of hypothetical investment of $100,000 in the S&P 500 index (TR, lcl ccy) from 8/09/1995-9/09/2015 missing 5 best trading days in terms of returns.