With KiwiSaver and investment balances dropping since the start of the year, there may be the temptation to reduce or even stop your contributions. Why would you keep putting money into something that was going backwards after all?
Before making any changes, it’s important to understand what’s happening.
When you put money into your KiwiSaver, that money is used to buy “units” of the KiwiSaver Fund. Each unit owns a bit of everything that the KiwiSaver Fund owns.
For simplicity’s sake, let’s say that the KiwiSaver funds consists of a number of units, each costing $10. When you put money into KiwiSaver, you buy a certain number of units, so a $50 contribution, would buy you 5 units.
If the markets fall in value, like they have done recently, it’s the falling price of the units that sees your balance fall.
Those 5 units you bought previously at $10 each, are now only worth $8, so your $50 investment becomes $40.
This is the important bit….
If units are now worth $8, and you contribute your $50, you buy 6.25 units. This is 1.25 MORE units than you were able to buy last month.
When the markets fall in value, and your contributions remains the same, you are able to buy MORE units than you could buy previously. From two lots of $50 contributions, you now own 11.25 units.
Let’s say the markets then go up again, and unit prices increase to $10 again. Your 11.25 units are now worth $112.50.
Stopping or reducing contributions just because the market is down, is like going to a store that has a big sale on and walking away from it as you’d rather come back when everything is full price! You just wouldn’t do that!
Investing is a funny thing where we seem to be happier investing when everything is doing really well (everything is full price or higher), and reluctant to invest when the markets have fallen and there’s uncertainly (when there’s a sale on). With investing, it’s so important to remember WHY you are investing. If you plans haven’t changed, your time frame hasn’t changed, and your financial circumstances haven’t changed, then your investment strategy shouldn’t change either.
This is general advice only and does not take account of individual circumstances. If something has changed for you, you should seek personalised advice before making any changes. Investment markets can go up and down, and just because they’re down, it doesn’t mean they can’t go down more. So, what you buy on “sale” may still fall in value before it recovers again, and this could take time. Please get in touch if you would like advice.