If you’ve looked at your KiwiSaver balance recently, you might have seen something you’re not used to – it’s gone down, maybe for the first time since you’ve been a member.

Even if you were part of KiwiSaver when it was affected by the 2008 Global Financial Crisis (GFC), balances were much smaller then. Should you worry?

Why does this happen?

KiwiSaver balances go up and down because KiwiSaver is an investment, not a savings account.

That means your money has been put to work in financial markets, such as shares and bonds, by professional investors; not into an interest-bearing account like a term deposit.

Investing in financial markets carries risk. Risk means two things: you can lose money, because financial markets go down as well as up. And risk means it’s not 100 per cent guaranteed that your investment will meet your goals, either for your retirement or to help buy your first home.

You might ask why anyone would accept uncertainty or the possibility they might lose money. It’s because, over time, if you take risk you should be rewarded for it with returns which are greater, potentially much greater, than what you could get from a term deposit.

This matters because, for a lot of people, a big goal like retirement needs a lot of money. And unless you have a very large sum at the start, the low return you’d get from a term deposit isn’t going to do it for you. So, you need to take some risk.

Should you worry?

As a KiwiSaver member, short-term drops in your balance may matter only if you have just a short time to meet your goals, or if you find it hard to face bumps in your balance.

Any individual market, like shares, tends to go up over time. And, if you’re invested in more than one type of market, say shares and bonds, you’ll find that they go up and down at different times and for different reasons. The movement of one helps to offset the movement of the other, which generally means the value of your investment increases over time. This is the reason you diversify, by not putting all your eggs in one basket.

In the short term, movements can be all upwards or downwards. The past couple of months of 2018 was mostly down in shares, for example.

The effect on your KiwiSaver investment is real. But look at it in context. Markets don’t go down forever. Eventually they’ll recover.

What can you do?

All investments can be adapted to your need to take risk, and your ability to handle it.

The need for risk is a mix of how much money you need, and how soon.

As you get closer to taking out your KiwiSaver money – for a home or retirement – you may want to take less risk. That’s because you have less time to make up any dips in what you’ve accumulated. Financial advisers can help you make a good decision about what’s best for you and your personal situation.

Regardless of how much risk you need to take, some people can find dips too hard to take. You’ll find it easier to take on less risk, or you’ll have to make your investing goal more modest.

Which funds are less risky?

How do you choose less risk? In KiwiSaver, it means choosing a Balanced, Conservative or even a Defensive fund, rather than a Growth or Aggressive Fund.

Fund types are defined by how much of your balance is invested in growth assets, mostly shares but also investments such as property. Over time – think five to 10 years or more – growth assets have historically gone up in value. But within shorter periods, they can go up and down quite a lot.

The more shares you have, the more likely your investment will go up and down, and the higher the risk.

You only want low risk? Then look for funds where the manager expects to invest in only a low percentage of shares and other growth assets.

There are two other things you can do to help your investment.

1. Look at your fees

Risk might reduce your returns, but fees definitely do. Your KiwiSaver provider should be able to explain to you what you’re paying in fees, and why they think it’s reasonable. The higher the fee, the better their argument should be.

Second, some managers claim to be good at managing risk. These will be ‘active’ managers, who can fine-tune your portfolio to help reduce harm or maximise benefit from market activity. If they’re good at this, and they don’t charge too much, this will reduce the risk in your investment and should help you get better returns.

But some managers aren’t as good as they claim to be. Look at how well they’ve done in the past to check this. You’ll often hear that past performance does not guarantee future performance, and it’s true.

Good past performance when markets are good can just be luck, or the manager ‘coasting’ on what the market’s doing. But if their past performance has been bad when the market was humming along, you may need to be cautious, or avoid them.

2. Keep in check with your KiwiSaver

If you’ve chosen a fund with the right amount of risk to suit your goals and how nervous you feel about risk, if you’re not paying too much in fees, and if you’re comfortable your manager can walk the talk on how they deal with risk, then yes, you can relax. There’s no need to panic just because markets go through a rough patch and that shows up in your balance.

But don’t entirely put your feet up. Check in with your KiwiSaver account at least once a year to make sure you’re still on track to reach your goals and that your manager is still doing what you expect.

It’s also a good time to see what the other options are, as providers come and go, and ones that stick around can adjust their models too.

The 1-2-3-4 of KiwiSaver

1. Choose a fund with a risk level that suits your goals and your ability to handle ups and downs in your balance
2. Make sure you don’t pay too much in fees.
3. If your manager claims to be able to manage risk actively, check those claims thoroughly.
4. Now relax – but take a look at your investment and your manager at least once a year, especially if you’re getting close to taking out your KiwiSaver money.

Published 25 February 2019

Story by Paul Gregory

Paul Gregory is the Head of Investments at Pie Funds Management Limited. Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read the Product Disclosure Statement at junokiwisaver.co.nz. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. We recommend you speak with a financial adviser.

This article does not contain any financial advice and has not taken into account any particular person’s circumstances. Before relying on it, we recommend you speak with a financial adviser. This story reflects the views of the contributor only. Content comes from sources that we consider are accurate, but we do not guarantee that the content is accurate.