Nobody has a crystal ball, so while the past can provide some indication of what an investor might expect, there are no guarantees.
All KiwiSaver funds invest in financial assets. In simple terms, these are generally cash, bonds, shares, property, and other funds, which in their turn invest in financial assets themselves.
Depending on the mix, a fund is said to be more or less risky.
Sorted, the website of the Commission for Financial Literacy and Retirement Income, has a fund finder, which every KiwiSaver should have a play with at least once, and preferably every few years.
It asks just three questions, and using your answer, indicates which broad type of fund you should be in.
The first is how long you are investing for. The second is about your willingness to tolerate the risks of up and downs in share markets during your investment. The third is about the scale of losses you are willing to take, and the size of gains you hope to make.
The results of the Sorted calculator are the result of long consultation with the investment industry, and provide a view on what to expect from each type of fund.
Defensive (mostly styled cash and conservative) funds (and including the "default" funds into which the taxman bumps KiwiSavers unable to make their own choice) are for people with a short time to retirement (0-3 years) with a low tolerance for losing even a cent. The expected annual return is 0 per cent to 5 per cent.
This is a low rate of return. Inflation has to be subtracted to give a "real" rate of return. And just because you are 63, does not necessarily mean this is the type of fund for you. Everybody's circumstances differ.
Balanced funds (these hold more shares than conservative funds, but still have good chunks of cash and bonds) are for people with four to nine years until retirement, who can tolerate an annual loss of up to 10 per cent, but are really aiming for positive gains as high as 20 per cent.
Investing in this type of fund, over the longer term, should be more profitable. There may be times when the returns are negative.
Growth funds (mostly shares) and aggressive funds (often funds focused on a single market, like Australian shares, or single asset class, like property) are for those investing for 10 or more years, and who can tolerate higher losses. These types of funds require a level of intestinal fortitude to invest in. When sharemarkets take their periodic dives down, so will investors' balances. Generally, markets do bounce back, but nerves have to hold.
Use the Sorted calculator as a starting point to help you begin to understand whether you are in the right fund.
- Sunday Star Times