Volatility is a new experience for KiwiSaver investors who have known nothing but stable markets in recent years. There will be plenty of opportunity over the next two or three years for nervous investors to make bad choices about how their funds are invested.
There are two key principles for managing volatility. The first principle is, your investment in shares must be diversified to reduce risk. The second principle is, you must match your investment strategy to your investment time frame. When investors lose money by investing in shares it is because one of these investment principles has been violated. If you are in KiwiSaver, diversification is covered off by your fund manager – no worries there. However, your choice of investment option is critical.
Many KiwiSaver investors haven’t thought through what their investment time frame is. It is probably not the time at which you retire. For young KiwiSavers planning to purchase a first home, the investment time frame is the time at which they expect to withdraw their funds to use as a deposit. The shorter that time frame, the less exposure to shares they should have in their KiwiSaver fund. For most other investors, KiwiSaver funds will be spent at some time during retirement, but not necessarily at retirement. Given that the average 65-year-old lives to around 90, this means at least some of the funds will be invested for many years after retiring.
For investors with a long time-frame, short term volatility is nothing to worry about. In times of volatility, always review your investment goals and investment time frame. Make sure you have access to funds in stable investments such as bank deposits to cover your short-term spending, so you can ride out the changes in volatile investments. Then sit back and relax