The greatest transfer of wealth will be from ignorant people to smart people

I often ask myself if we learnt anything from the GFC a decade ago? The latest Morningstar report on KiwiSaver came out the other day and there is now $51.7 billion invested with various KiwiSaver providers. There are over 3 million individual accounts and these people have heavy exposure to both local and international shares.

I don’t believe all of these investors understand the KiwiSaver beast and I think there is going to be a day that proves my concerns are valid. Human nature makes us all react to fear. With investments, fear of losing is greater than the thrill of winning. For the past ten years, the sales pitch around KiwiSaver has been “you can see your daily balance on your phone”. This is great when things are on the up and up but not so cool when the prices are falling. For the past few years, a monkey could have run most KiwiSaver funds and made money.

I’m reading the old platitudes rolled out by fund managers and regulators. Things like, “don’t try and time the market, it’s important to be in the market, get your risk tolerance right.” These are all valid points, but experience has shown me that people are emotional beings and when things go south, they make decisions with the heart not the head, and they just won’t listen.

Here’s an example:

Just think, your KiwiSaver balance is $50,000 – you are feeling great and every time you look at your online banking app on your phone,  you know you are  in line to meet your retirement goals. You are in a balanced fund so you are comfortable you have things in hand. You feel great. It’s worked for the past 10 years, so why worry?

Let me tell you why. Tomorrow you wake up to the news that the DOW Jones is down 25%, the NZX and ASX are following suit. The papers are full of bad news. You look at your KiwiSaver account balance and it’s down to $40,000. You are a bit concerned but you remember the FMA has been telling you it will be okay. The next day the DOW Jones bounces and you KiwiSaver account follows suit and the balance comes up to $45,000. You blood pressure recovers and you start to feel better.

Two days later that DOW drops again, your KiwiSaver drops to $38,000. You have a sick feeling in your stomach. You know in real terms you have lost $12,000.  You try to phone your provider but there are hundreds of other investors doing the same.  You get that cold feeling that things are only going to get worse. What if it drops another $5,000? You start to question the glib one liners coming out of the FMA and the managed fund industry. You go online and start to do some research and find that the cash accounts in KiwiSaver have only dropped a couple of percent.

You feel you need to do something.

This is the day that thousands of KiwiSaver investors will make the same terrible mistake. They will hit the transfer button on either their phone or computer and move to a defensive cash based fund.

They will realise their losses and by transferring, the fund managers will be forced to sell shares both locally and internationally. Worst still is this will happen on a falling market. Compounding this even more is the size of the total KiwiSaver, and the amount invested in our local share market.

There aren’t enough qualified independent advisers to influence this action after the event.  I don’t  believe for a minute that market briefing, emails or newsletters or hand wringing by the regulator, will alter this behaviour. We are just human.

 Smart investors will line up to buy great shares in awesome companies at hugely discounted prices. The question you need to ask yourself is which side of the table will you sit on? The panicked seller or the smart buyer?

My advice? Get advice now! Make tactical decisions and have a plan for when the markets change. The markets will fall and this scenario will pay out, it’s just a matter of when.

Reach out! Call me now and let’s make sure you’re ahead of the game.

John Barber
WealthDesign – a life well planned