Transfers highlight low financial literacy
Share markets were generally negative in September, which caused a friend of my teenage son, upon checking his KiwiSaver balance, to conclude that his provider was stealing his money. He could see no other reason why his balance would have decreased.
We can smile at the young man’s assumption. After all, market movements, up and down, are a normal event, bearing in mind that they go up more often than they go down. But his assumption highlights the more serious issue of our financial literacy. And that if there are knowledge gaps, whether investors are costing themselves returns unnecessarily.
It has been reported that up to 50,000 KiwiSaver investors moved $1.4 billion into cash and conservative funds in March 2020 as the COVID-19 pandemic took hold. Some will have been new funds being invested, but much more will have been the result of investors reacting to the pandemic and moving to a more conservative allocation fearing further losses if they remained in their more growth-oriented funds.
Moving would make sense if their KiwiSaver balance was disappearing permanently, never to be seen again. But, given that the average KiwiSaver fund is very well diversified and managed, that’s unlikely. If our house falls in value, we view that as temporary. Why not take the same approach with our KiwiSaver?
In reality investors acted from fear and uncertainty. Many will have years left before they retire and few investors will have been under any real pressure to make the changes they did. Other than psychological.
Share markets fell steeply but they also recovered relatively quickly. The big question then is whether those same investors moved back to their original growth mix to ride up the recovery. If they did, then they may well have earned a positive return year to date. However, I suspect that’s not what the majority did. Investors typically wait for the market to recover and then get back in.
It’s interesting that if a local retail shop has a sale it’s a good time to buy. When share markets (or other markets) are having a sale many investors want to leave and then step back in when prices have gone back up.
In moving to cash or a more conservative position, a loss was potentially locked in where one would not otherwise have existed. Yes, perhaps they were exposed to more volatility than they realised, and a more conservative investment is the correct place for them – but the timing of that change is important.
More work remains to be done to educate investors on the importance of taking a longer term view. Investment decision-making based on fear, instead of knowledge, has often destroyed wealth and not built it. The result of knowledge may not be total comfort with negative movements in the market but at least understanding will help provide the patience which will lead to investment success.
We can smile at the young man’s assumption. After all, market movements, up and down, are a normal event, bearing in mind that they go up more often than they go down. But his assumption highlights the more serious issue of our financial literacy. And that if there are knowledge gaps, whether investors are costing themselves returns unnecessarily.
It has been reported that up to 50,000 KiwiSaver investors moved $1.4 billion into cash and conservative funds in March 2020 as the COVID-19 pandemic took hold. Some will have been new funds being invested, but much more will have been the result of investors reacting to the pandemic and moving to a more conservative allocation fearing further losses if they remained in their more growth-oriented funds.
Moving would make sense if their KiwiSaver balance was disappearing permanently, never to be seen again. But, given that the average KiwiSaver fund is very well diversified and managed, that’s unlikely. If our house falls in value, we view that as temporary. Why not take the same approach with our KiwiSaver?
In reality investors acted from fear and uncertainty. Many will have years left before they retire and few investors will have been under any real pressure to make the changes they did. Other than psychological.
Share markets fell steeply but they also recovered relatively quickly. The big question then is whether those same investors moved back to their original growth mix to ride up the recovery. If they did, then they may well have earned a positive return year to date. However, I suspect that’s not what the majority did. Investors typically wait for the market to recover and then get back in.
It’s interesting that if a local retail shop has a sale it’s a good time to buy. When share markets (or other markets) are having a sale many investors want to leave and then step back in when prices have gone back up.
In moving to cash or a more conservative position, a loss was potentially locked in where one would not otherwise have existed. Yes, perhaps they were exposed to more volatility than they realised, and a more conservative investment is the correct place for them – but the timing of that change is important.
More work remains to be done to educate investors on the importance of taking a longer term view. Investment decision-making based on fear, instead of knowledge, has often destroyed wealth and not built it. The result of knowledge may not be total comfort with negative movements in the market but at least understanding will help provide the patience which will lead to investment success.
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Stephen McFarlane is an adviser with NZ Funds Private Wealth in Timaru. The opinions expressed in this column are his own. A copy of Stephen’s Disclosure Statements are available on request, free of charge.
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First published in the Timaru Courier on 8 October 2020, as 'Transfers highlight low financial literacy.'
