What does ‘locking in your losses’ mean?
09 Aug, 2020
I don’t talk about KiwiSaver that often, mainly because it’s pretty widely covered in elaborate detail elsewhere. When I think of my KiwiSaver I think about the (probably made-up story) that the best investors are those who have forgotten about their investment or are dead! Why? Because they chose a good investment in the first place and then they just leave it alone and don’t meddle with it over the years. I make payments into my fund each month, check the balance on the last day of each month so I can update my net worth, count down the years until I can access it (19), but otherwise, I pay it no attention.
In mid-March, I happened to have RNZ on in the background when one of their guests mentioned that they got such a fright at the drop in their KiwiSaver balance that they immediately switched from a Growth fund into a Conservative fund in an effort to stop themselves losing money.
I remember stopping what I was doing and smacking myself on the head in a Homer Simpson ‘DUH’ moment and saying out loud to myself “Noooo. What did she do that for? And why did she have to say it on the radio where other people might think it’s a good idea to do the same?” The presenter never debated the point and on they went on with their interview.
And sure enough, just a few weeks later at the end of March, I received an email from someone who said: “I was listening to RNZ one afternoon in mid-March when one of their guests…”
As I feared, this woman had panicked and also immediately switched her KiwiSaver from Growth to Conservative. Why oh why could she not have happened to turn on RNZ when Mary Hom was talking with Jesse Mulligan instead? I just wanted to hug her!
Both the guest on the radio and the emailer had both panicked and having watched their KiwiSaver fund balance drop dramatically it seemed logical to them to stem the bleeding and switch funds. But what both of these investors managed to do was a simple, yet damaging, thing called ‘locking in your losses’.
I was interested to know how many readers of my blog changed their KiwiSaver fund around the time of the crash. So I ran a quick anonymous and extremely unscientific poll when I first put this blog post up and simply asked “Did you change KiwiSaver funds”? I had 332 responses in total. 313 people stayed put and just 19 changed funds, meaning that 5.7% of people changed funds in the midst of the sharemarket drop. Interesting huh! What did I take from this? That the majority of people have a good understanding of how their KiwiSaver fund works and just settled in and stayed the course, the others, for whatever reason, changed funds. It tells me that I still have work to do in helping people decide when times are calm what the right fund type is for them. That way when the markets drop, as they undoubtedly will again, you feel confident that you can just stay the course.
How does locking in your losses work?
I thought I would use my own KiwiSaver to show you exactly how locking in your losses works.
Of all of the 23 KiwiSaver providers out there touting 270 funds, personally I invest in Simplicity Growth Fund*. It is the highest risk fund this provider has which has most of its investments in growth assets such as shares. I chose this fund because my investor profile is “aggressive”:
I am only 46
I have investments outside of KiwiSaver
I have no debt
I still have 19 years to go before I can access this money
Until I turn 65, it has to stay locked in a KiwiSaver scheme of some kind (unless of course a government starts meddling and coming up with more reasons why I could access it, something I wish they would stop doing). A fund of this type is for investors who are in it for the long-term (9 years +) because that gives it time to maximise returns and minimise losses. A KiwiSaver fund of this type is expected to fluctuate up and down over time.
* I’m not being paid to mention any provider, I just know that it’s handy when others actually share what they are investing in instead of beating around the bush!
In February 2020 my KiwiSaver balance was at its highest point to date after a steady climb over the last three years that I’ve been in the fund. Its balance was about $83,000. Since moving from an ANZ Growth fund into this one in early 2017 I have invested between $100 - $150 each month without fail (a mix of voluntary contributions and employer contributions).
My units were worthless, but I still had the same amount
Just to use some round numbers let’s say I owned 83,000 units in the fund, at $1 each, giving me that total value of $83,000. In March the share market quickly dropped and my balance went down to about $68,000. But I STILL had 83,000 units, but now they were worth .82c each, instead of $1, giving me a total balance of $68,000.
Graph showing my Simplicity KiwiSaver Growth Fund Returns
So, the number of units I held in the fund never changed, it was just the price per unit that changed (in actual fact the amount of units I owned went up just slightly as I carried on with my normal contributions during the crash where I bought my new units at this discounted price of .82c). The loss in my investment only changed on paper. If I had switched to a Conservative fund at this moment, I would have made those losses real, I would have sold all my units, which just two weeks prior were worth $1, for .82c. I would have ‘locked in my losses’ to the tune of about $15,000, I would have accepted that my $83,000 is now only $68,000 and that is what a lot of people who had the jitters did. Including the people mentioned above.
But I held my ground, didn’t react and reminded myself that a Growth Fund is more volatile. Prior to this it had only ever gently increased in value over time but I knew that what goes up, sometimes comes down too - in this case in a big old hurry! Normal and expected. Even though I knew and understood this, I don’t like watching my balance drop either so I turned off my computer and didn’t pay it any attention. And sure enough, as the weeks and months went on the market recovered much of that lost ground. Currently, at time of writing (early August) my balance sits at around $82,000, almost back to where it was.
Had I moved my $68,000 to a conservative fund then I would have missed out on this recovery and to get back into it I would have to pay more for those units I sold at a loss. Ouch.
You see, I fully accept the ups and downs in the value of my investments and that I can achieve higher returns over the long term by being in a fund like this. I have time on my side to enjoy those gains and to recover from any drops. My KiwiSaver fund makes up just a part of my overall investments and I feel entirely comfortable with all the fabulous gains it's made over the last couple of years and sometimes, accepting a fall in value goes hand in hand with the climb.
My KiwiSaver fund (and Jonny’s) sits within our diversified portfolio, which sounds fancy, but put simply is this:
Cash in the bank for daily living
An emergency fund for something unexpected
Investments into Index Funds/ETF’s outside of KiwiSaver
KiwiSaver where I invest the minimum to get the annual government contributions
At the moment, given I am many years out from retirement I’m happy to take a riskier approach with a growth KiwiSaver fund and as our need for this money draws nearer, then I might consider changing the fund, but as for now, it’s all good. I’m in exactly the right fund for me.
Get ready for the next market drop
The reason I write this blog post right now, when the market has recovered most of its lost ground is because when the market has another big drop, which it WILL have, I don’t want you to write to me saying “oh crap, I switched funds and now I regret it”. I want you to work it out right now if you are in the right KiwiSaver fund so NEXT TIME a drop happens you feel more chilled out about it.
So, today I have a one minute homework assignment for you and it’s to work out if you are in the right KiwiSaver fund for your situation. Head to www.sorted.org.nz/tools/investor-kickstarter and answer their nine simple questions and work out:
What type of investor you are - your investor profile
Find the right mix of investments to put your money in
And work out what sort of results you can expect
Whether you are just beginning your KiwiSaver journey, in the middle or ready to retire this will give you a good steer on what type of investor you are.
Using this information you can then choose a KiwiSaver fund accordingly. You might choose to change to a different fund with the same provider, you may change providers altogether. Either way, it’s easy to switch and you should not put it off. If you choose to switch it’s a quick form to fill out and then the providers do ALL the work for you, so it’s not worth procrastinating over, just get on with it already!
Selecting the provider of the KiwiSaver fund is difficult. The annoying thing is the search and working out who on earth to choose. Chances are you are not an investment professional, I’m certainly not one, so I too found it hard to make a call, so once again I’ll detail my experience and you can use that information in your own search.
When I chose my current fund Simplicity Growth (after moving away from ANZ Growth) I went looking with the following in mind:
Low fee provider - my fund has a $20 annual fee plus $3.10 for every $1,000 invested (fee of 0.31%). When I changed there was a lot of debate going on about the high and hidden fees that providers were charging. Things have changed a lot since then with fees being more transparent (thanks in large part to providers like Simplicity I should add). A high fee can gobble up tens of thousands over the life of your investment, so fees are important y'all.
I wanted a Growth fund because of my stage in life - I don’t need it for a long time
I knew I could handle volatility if it meant long term gains
I wanted it to be all online with no human advisors calling me in for meetings and giving me a bum steer
Ethically invested to a point (ethical investing is a minefield - pun intended)
Hands off investment - I don’t want to tinker or choose my investment mix, I just wanted a diversified mix. This fund has over 3,000 investments in 23 countries
Use both of the funds I’ve mentioned (Simplicity and ANZ), plus your own provider and plug them into the Sorted Fund Finder as it’s an excellent tool for helping you compare funds and just start to familiarise yourself with the options out there.
Don’t overthink it
My last thought is to remind you not to overthink it, don’t agonise over your decision, just do some research, find a few comparisons and then get on with it. Because although you don’t want to be chopping and changing funds, at the end of the day, you can change if you feel your circumstances have also changed. But you need to be invested and investing regularly - so don’t wait too long. I think that KiwiSaver is going to be more of a lifesaver for many New Zealanders in retirement than we currently give it credit for and I want you to get to 65 and have a stash of cash available so you can supplement your superannuation (which may or may not be there when I turn 65)!!
There is a market crash coming
The fact remains our KiwiSaver funds have had a merry old time over the last number of years, so it’s good to be invested. And if you position yourself well now, then NEXT time the market tanks, you will be like me, in the right fund and you will have peace of mind that you don’t need to react, in fact you don’t need to do anything at all.
The good news is that the woman who wrote to me and told me she had switched from a long term high returning Growth fund to a low-to-moderate returning Conservative fund did go and do a bit of investigating. We all “learn by doing” so I really respect her for learning from this mistake. And while disappointed that she switched at exactly the wrong time she was philosophical about it and had decided that the best thing to do was take it on the chin and select a type of fund she felt happy about. She did a bit of homework, thought through each question that the Sorted Investor Kickstarter asked and decided that her investor profile matched her up with a Balanced fund so that was what she was considering moving into when I last heard from her. I’m sure that she is now confident that NEXT time she needs to do nothing, just stay put and ride it out and when she hears a sound bite on the radio I’m sure it won’t have the same impact twice.
If you are looking for a little more information, I have shared this post before, but it’s a good one worth sharing again. It is very to the point, which I like and it doesn’t beat around the bush: A layperson's guide to switching funds
And finally, next time the market drops, if you know you are prone to stress, just don’t look. My own figures above say “about” and “approximately” because while the market was dropping back in March I actually didn’t even log in to check my balance. The only reason I ended up doing so was because people kept asking me if I was panicking yet and I thought I had better see what all the fuss was about!
