Timing the market

It is very tempting for KiwiSaver investors to switch from a growth to conservative fund to shield themselves from adverse market swings. But to understand why this provides protection, as well as potential lost returns, it is first crucial to understand what defines both a growth and conservative fund.

In the KiwiSaver world, growth funds are defined as multi-sector diversified funds that have a weighting of approximately 75% growth assets and 25% income assets. Conservative funds are also multi-sector and diversified, however their weighting is flipped on its head with an approximate holding of 25% growth assets and 75% income assets. You can then have ‘aggressive’ funds with an approximate 90/10 split, ‘balanced’ with a 50/50 split, ‘moderate’ with a 40/60 split and so on.

So now that we’ve established the difference in weighting, what defines a ‘growth’ and an ‘income’ asset. Growth assets consist of shares (equities) and property, with income assets consisting of bonds and cash. Within the growth asset section of a fund, there is typically a much higher allocation to shares than property. Within the income asset section of a fund, there is typically a much higher allocation to bonds than cash.

It’s time in the market, not timing the market that counts

Gains made in the share market are not evenly spread out. This can be quantified when comparing the ‘New Zealand share market average yearly returns’ against the ‘New Zealand share market average yearly returns excluding the top returning month of the year’.

New Zealand equity 1991 - 2019

If an investor missed the best returning month of each year, they’d have only generated a small premium above what they would have being invested in a term deposit. This premium is far greater when the investor takes advantage of these crucial months each year. Let’s quantify this difference by comparing an initial investment of $50,000 in 1991 into both New Zealand equities and New Zealand equities excluding the best month.

Investor balance variance 1991 -2019

The investor that missed out on that pivotal month each year wound up with $140,543, while the investor that took advantage of that month showed a balance of $841,808. The net difference is $701,265, which again highlights the importance of sticking the course and investing with your goals in mind.

Thanks to Consilium NZ limited (Consilium) for obtaining the data.

Data sources for the graphic are: NZX: 01/1991 to 06/1991 - NZX 10 Capital Appreciation Index; 07/1991 to 01/2001 - NZSE 40 Accum Index, gross of dividends; 02/2001 to 06/2006 - NZX 50 Index (gross), source: New Zealand Stock Exchange (NZX); 07/2006 to present - S&P/NZX 50 Index (gross, including imputation credits), source: S&P. Index is constructed with free float adjusted market capitalisation. Note that the above comparison doesn’t take into account PIR tax or any fees associated with investing in the index, however the overall trend is depicted.

Are you interested in understanding more about KiwiSaver, Investing or Financial advice in general? Please reach out to us today for a quick chat, or complete one of our quizzes below and we will be in touch to discuss your KiwiSaver or Investment options.

Compound Wealth are based in Mount Maunganui, Tauranga and offer KiwiSaver, Investment & Retirement Financial Advice to clients all over New Zealand.