KEY POINTS:
With only two exceptions, everybody who joins KiwiSaver should opt for an aggressive fund - one that has a high proportion of shares and property. Although such a fund will show a great deal of volatility, it will provide better returns.
Given the length of time that many people are likely to be saving, higher returns will translate into a great deal of money, yet I hear of people who have joined KiwiSaver but have opted for conservative funds.
They have done this because they have been frightened by the negative noise of the markets - every investment commentator is saying you should look for the safest investments possible and, while that is good advice for most investments, it is not usually right for KiwiSaver investments.
There are two reasons why it is different.
First, with KiwiSaver you are in effect dollar-cost averaging, drip-feeding money into the markets regularly, buying some units cheaply and others quite expensively.
Whether the markets are going up or down, you need to keep the money going in.
At present, as markets are down, you are doing what you should do - buying in gloom and getting cheap units.
Second, most KiwiSavers are in it for such a long period of time that shares and property are almost certain to perform best.
Provided you are in KiwiSaver for 10 years or more, you should be able to go into a fund with a high proportion of shares and property feeling comfortable that you will do well.
The only people who should go into more-conservative funds are those who will be able to cash in all or part of their KiwiSaver monies within 10 years.
This applies to two groups - young people who are saving through KiwiSaver for a deposit on their own house, and older people who plan to retire within the next 10 years.
On reaching an age where you are 10 years from planned retirement you should start to move to less-aggressive funds so that in the three or four years before your retirement you are in the least-volatile funds.
It would be a tragedy if people continued to be rattled out of the aggressive funds because of the wall of noise coming out of the markets.
It is never easy to stand up against negative noise, however it makes no sense to me to switch to a conservative fund at just the time when shares and property have become cheaper.
There will be a few other exceptions, but the rule of thumb is that if you are likely to need your KiwiSaver money within 10 years you should opt for a conservative fund.
If beyond 10 years, go aggressive.
If you keep on drip-feeding money into an aggressive KiwiSaver fund for at least the next 10 years you will do well.
Each week best-selling financial author Martin Hawes will share his strategies to help you grow your wealth. You can email finance questions to info@wealthcoaches.net or andrea.milner@heraldonsunday.co.nz
