A layperson's guide to switching funds
With Coronavirus battering the markets and fund balances in sharp decline, fear and panic have taken over.
For many first time investors or those who have never lived through what is sometimes referred to as a "black swan" event, the feeling is uncomfortable, to say the least. Admittedly, these are unprecedented times and no one has a fix on when the global situation will start to improve.
Ironically, the suffering we see playing out is, in many cases, being made worse by some investors' reactions to it.
In recent weeks, across the KiwiSaver and investment landscape, we have seen a surge of switches from long-term high returning Growth Funds to more low-to-moderate returning Conservative Funds. For those close to retirement or drawing down on their nest eggs imminently, and those who did so ahead of the biggest declines, they may, in fact, have been spared. Others not so much.
The following information is meant to help our members understand the implications of switching funds and related processing times.
The rationale for knee-jerk switches may seem logical on the surface but they are fundamentally irrational and emotional, two qualities that don't serve investors well.
Investors in growth funds, most heavily exposed to the share market, are feeling the fire of the blazing markets most intensely. They're fleeing from Growth into Conservative funds thinking this will ease their pain. But like jumping from a burning building, the landing is not a soft one.
When you switch from a Growth fund, into Conservative while prices are actively plummeting, you crystalise your losses. That is losses on paper become realised. While Conservative funds may appear to be a safe refuge from the burning fire, the long-term implications are often more painful.
History has shown that markets eventually do recover. It's not a matter of if but when. And while there may be signals of recovery, the time of the greatest pick-up usually catches most investors out.
Effectively, those who rushed into Conservative funds for protection, wake up one day to find the markets have rallied big time, and their old Growth fund (once a wounded soldier) is back up on its feet and fighting like a war hero. At this stage, switching back to the fund you fled, at the point in which it recovers, is more costly.
Having crystallised your losses, you compound the wounds by paying more to buy into the market you left, when the prices have risen.
Research from Vanguard, Simplicity's international asset manager, has found that investors who try to 'time the market' moving in and out during good and bad times, can end up sabotaging their overall returns by about 1.5% per year.
There is a well-worn cliche about investing that bears repeating because it is so poorly heeded:
It is time in the market, not timing the market, that will bear fruit for the patient investors.
While there are some circumstances when moving to a low-risk fund, even amid the crisis, might be a sensible move, for the vast majority of KiwiSaver members who are invested for long durations, it is an act of self-sabotage.
Recent events have exposed the more seasoned, sophisticated investors, from the inexperienced and ill-educated.
Nobel prize-winning economist Paul Samuelson famously described investing as an activity best endured with the patience of watching paint dry or grass growing. He suggests thrill-seeking investors would be better off taking their $800 and going to Vegas.
What is paramount for all investors, regardless of experience and age, is that you're in the best fund to suit your circumstances, your appetite for risk and your time horizon.
During the recent good times, with markets raging like prize-winning bulls, many people have been blindly chasing returns with no appreciation of the risk in doing so.
Understandably, share markets have been hard to resist. The Simplicity Growth Fund, for example, has produced double-digit returns in the past 12 months and the NZ Share Fund (outside of KiwiSaver) was up to close to 30% before the crash.
While a correction was long overdue, this current trainwreck, wrought by the wildfire spread of Coronavirus, could not have been anticipated.
Where to from here?
If you switch funds and you are now second-guessing that move, here's what you need to understand.
Please review and understand the fund you're looking to re-invest into, its risk rating, and your own personal reasons for being in that fund.
All our funds, both KiwiSaver and Investment Funds, have Fund Updates that cover the risk, returns and top holdings. The Product Disclosure Statements (which you can find here for KiwiSaver and here for our Investment Funds) are also highly recommended as part of your research. If you skimmed or ignored them the first time, read them now.
If you still don't understand what fund is best for you, try Sorted.org.nz's risk profiler here.
Simplicity employees cannot give you personalised financial advice. If you're still confused, please seek an authorised financial advisor who comes well recommended and who charges you a fee, and is not commission-based. That should avoid any bias on their part.
Once you switch, it takes four full working days for that to be visible in the member log in area.
A switch will appear under your Transactions as a withdrawal on your account.
The pricing you receive for the new fund is struck on the following day after you request the switch. The calculations take two working days because the assets you hold take time to value once you sell them. Remember all our diversified funds have more than 3,000 investments spread across 23 countries.
Be aware that any taxes owing will be collected at the time of the switch. See our FAQ on how your investments are taxed here.
See also our full explainer on unit pricing here.
Deposits and withdrawal requests all observe similar unit pricing protocol.
Once a switch is in progress, you can't make another. You can only do so after the switch is complete, which is four working days from the time of your first request.
Remember that switching funds frequently is a costly exercise and you're not likely to get the price you want when you want it because of processing times explained above.
Understand what you're invested in and why and the recommended time frames for that particular fund.
The suggested time frames (which you can find in the Product Disclosure Statement) are there for a reason. They give the investor the minimum expected time frames to maximise returns and minimise losses in accordance with the composition of their assets.
The Simplicity Growth Fund is 9+years plus.
The Balanced Fund 6+years.
The Conservative Fund 3+ years.