An important message to KiwiSaver Investors

As the phenomenon that is KiwiSaver grows in numbers (2.3 million) and in value its appeal becomes more attractive to self interested organisations and individuals. An industry of predation is well advanced. For some political parties KiwiSaver has become an attractive financial instrument with which to potentially manipulate monetary and fiscal policy. We can’t do a lot about what politicians and their party ideologies will do but we can assist clients through change and this will be constant with KiwiSaver. It is a product with a government mandate.

Certainty isn’t a condition which exists in nature. All successful investing in general, and three-decade retirement investing in particular, is an exercise in the practise of rationality under uncertainty. The test of rationality being ‘historical probability’. And that’s the point for this blog.  Advice from experience and qualification is important.

What are the critical decisions around KiwiSaver and why can’t a bank teller or product salesperson give good service?

Like insurance, the true test of the ‘advice’ and product benefits for KiwiSaver will be determined at retirement. In other words – at claim time. At which point it’s too late to amend strategy.

Asset allocation determines 94% of investment outcomes, but investor behaviour determines 100%, it can override the best of investment portfolios. Investments allocated appropriately in a well diversified portfolio and not tampered with by human over reaction – we know the historical probability of return, through all types of disasters, events and market adjustments over the last 100 years. Depressions, World Wars, Oil crises, Global financial crisis.

Equities (shares) have outperformed bonds and cash in all cases over 20 year time frames. Not just by a small amount but by nearly three times when tax and inflation is calculated. (Stocks for the Long Run – Jeremy J Siegel – professor finance –University of Pennsylvania)

Defensive and Conservative funds predominantly invest in cash and bonds.

But the largest risk for investors is themselves and this is our real concern.  How we humans react to bad news. If KiwiSaver accounts are viewed by investors and considered as being like bank accounts (because you can look at your balance every day - online) – inevitably reactions will mean euphoria (when markets go up) or panic (when markets go down). Which is the fund managers reason for providing less volatile funds (cash and bonds – defensive and conservative). From a bank or fund managers perspective it doesn’t matter to them which fund you are in – as long as you are in ‘their’ fund. From an advisers  perspective the logic is more – it doesn’t matter which supplier you are with – but it does matter which ‘type’ of fund. Markets are volatile by their very nature, but volatility does not mean loss. The real risk is in not having sufficient in your fund at retirement to last (in conjunction with government super) for a three decade retirement with the retention of purchasing power. (prices go up by over 2.5 times over this time frame at a 3% inflation rate).

Retirement planning is a critical consideration for long term lifestyle needs and regular review should be fundamental to ensuring alignment with a plan which is date specific and dollar-specific.

For pre retirees, the objective of this plan is in determining the rate of return necessary to accumulate the required pool of capital by the planned retirement date (assuming historical returns). For those in retirement, it involves graphing the historical total return of a portfolio against a projection of the client’s annually increasing cost of living (assuming trend line inflation).

In both cases, the larger strategic objective is the same: to create a scenario – firmly supported by historical probability – in which the money outlives the people, rather than the people outliving their money.

We don’t think a bank officer or a product salesperson will take the time to work through these scenarios with you, even if they had the experience or qualifications. On the other hand advice to clients and on-going annual review – are important considerations, when countering euphoria (lets put everything into technology stocks) or maintaining calm in down markets (lets reduce the chances of our funds losing further value by transferring to cash so we can sleep at night).

The message – take advice and review annually with a professional.