If your KiwiSaver fund or investment has high volatility that means its value goes up and down frequently. High volatility may sound like something scary to avoid but it can be a good thing. That’s because volatile investments often have higher returns.
The problem with highly volatile investments is, if you need to sell the investments or use your KiwiSaver to access money right away and it has just dipped in value, you could lose money. Ouch.
The secret to solving the volatility problem is time
Holding volatile investments for a longer time means you can ride out all of the dips in value and make the most of the long term upward trend. In other words, by holding for longer you reduce the risk that volatility presents and increase the benefits. Let’s look at a fictitious example to illustrate the point:
|
Year |
Return percentage |
Investment value |
|
1 |
7% |
$10,725 |
|
2 |
-9% |
$9,802 |
|
3 |
3% |
$10,100 |
|
4 |
12% |
$11,388 |
|
5 |
12% |
$12,840 |
|
6 |
-3% |
$12,461 |
|
7 |
9% |
$13,634 |
|
8 |
19% |
$16,487 |
|
9 |
12% |
$18,589 |
|
10 |
11% |
$20,751 |
If you’d only held this investment for two years you’d have lost money. If you’d held it for three years you’d barely have made any returns at all.
But once you hold onto the investment for 10+ years, the value of your investment has doubled without any extra contributions. Even if the value of the investment were to dip again, chances are you would have still made a handsome return.
Generally you’ll have 3-5 options when choosing a fund with your KiwiSaver provider (some have more but they all tend to fall into the same categories).
As a general rule, aggressive or growth KiwiSaver funds tend to be more volatile while conservative or defensive funds are less and balanced funds sit somewhere in the middle.
It’s a good idea to keep in mind when you’ll need to sell your investment and choose accordingly. Here’s what Sorted recommends:
Defensive funds generally have low to moderate returns and low volatility/risk as a result, which can make them a great option for short term investing.
Conservative funds are similar to defensive funds but they tend to be slightly more volatile, with slightly higher returns.
Balanced funds tend to be more volatile than conservative funds with higher returns over time, which means they should be held for slightly longer.
Growth funds tend to hold mainly growth assets like shares . They tend to be volatile with high returns and may only be suited for long-term investments.
Aggressive funds seek to maximise long-term returns by investing in shares. This means they can be very volatile and may only be suited for long term investments.
While time is important, it’s not the only thing you’ll need to think about when choosing an investment. You should also consider your goals, your appetite for risk and more.
That’s why before you choose your KiwiSaver fund it’s a great idea to get advice - either from your fund provider or an independent financial adviser.
*Example is calculated assuming continuous compounding and no additional contributions.
This ‘Why choosing a KiwiSaver fund is all about time?’ blog is general information only. The views and opinions expressed do not necessarily reflect those of the FSC. It is not intended to constitute legal or financial advice and does not take your individual circumstances and financial situation into account. We encourage you to seek assistance from a trusted registered financial adviser, legal or other professional advice.
The names of any third parties are additional resources that you access at your own risk and the FSC takes no responsibility for any third-party content.
The FSC and its employees make no express or implied representations or give any warranties regarding this blog, and we accept no responsibility for any loss, damage, cost or expense (whether direct or indirect) incurred by you as a result of any error, omission or misrepresentation in this blog.
July 2024.