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Way down we go

There have been some scary headlines. There will be more.

A few months ago I wrote about KiwiSaver comparing contributing to buying crumpets. Some in the media were saying how “unpleasant” it will be when prices fall, and KiwiSaver balances drop.

Well, thanks to the Coronavirus (Covid-19), we’re going down. Today is Friday 13 March and it will be given a name for future reference – something like Black Friday, probably.  Markets around the world have suffered a breathtaking drop – the Dow Jones Industrial Average suffered it’s biggest ever 1-day fall since the Black Monday crash of 1987. The greatest bull run in history has given rise to the most ferocious bear market ever. Everything is in freefall – oil, gold, shares, bonds and our Dollar. The terrifying speed, size and volume of the share market falls means there is little hope we’ve yet hit bottom.

And the scary headlines have started – EG Diana Clement: Who stole my KiwiSaver?

The Covid-19 virus is a ‘black swan’ event for the global market. You know it’s serious when the ubiquitous google ads are trying to sell you a face mask. Forbes has a good article about it. There can be little doubt that this event will affect the global economy as well as our local and regional economies. It will affect attendance at major events from festivals and concerts through to the Olympics. It will drag on major earners for NZ such as tourism, and will slow our exports. The dropping kiwi dollar will shield us a little, but the effects of this phenomenon will be significant.

So what to do about your KiwiSaver investments? Markets have already dropped and will probably fall further. So there’s little point trying to switch or withdraw to avoid losses. It’s too late to suddenly realise you are a “conservative investor”. There’s a significant difference between feeling uncomfortable as markets turn downward, and the fundamentals of timeframes and the long term goals and objectives that led to the selection of the fund you’re in right now.

Special note for first-home buyers: Your timeframe probably is or was 5 years or less. In other words a conservative fund was probably a better choice all along. That’s why the first question on a risk profiler is usually about timeframes. Most people reading this are not turning 65 in the next few years, so you’re going to be investing well beyond this event, and it would be silly to change course now. While it cannot be certain that this downturn will be short-lived – say less than two years (I think it will) – what is certain is that the fund profile that lost the money is also the one that will get it back when markets eventually bounce. Switching now to a conservative or cash fund not only crystallises the losses suffered, it will prevent them being recovered.

In the past we have had SARS, Bird Flu, and Dengue Fever. Then the 2009 Flu pandemic (H1N1/09), which killed 209,000 people (Covid-19 has so far caused nearly 5,000 deaths at time of writing). Since 2009 there was Cholera, MERS, Ebola, Measles, Zika and Measles again. Generally, markets have reacted strongly and swiftly, but the effects have been short lived and the recovery has always come sooner or later, before markets soldier on to new highs. This time it may take longer, but there is no reason to think markets will stay down forever.

Savers need to think differently about a downturn. Just like when those crumpets were on special, consider that you’re buying more while they’re cheap – if you can, try to continue or even increase your contributions through the downturn – at the very least don’t stop! The markets have served up a “sale”. Stay the course. Your contributions today are buying a lot more shares/units than a month ago.

If you want me to help look after your KiwiSaver please book an appointment.