The share market is going down, so the value of your KiwiSaver has dropped.
Let’s talk about how KiwiSaver funds work, and what a falling share market means for your KiwiSaver balance.
The value of your KiwiSaver fund is determined by the type of fund that you have chosen with your KiwiSaver Provider.
As the fund is made up of a number of investments your KiwiSaver investment does not like having $ in the bank. Your KiwiSaver value is determined by the number of units that you have acquired by contributing to your KiwiSaver. What?? Ok, let’s go back a step – and I apologise upfront, there is no easy way to describe this.
KiwiSaver investments are made up of a combination of income assets (cash and bonds) and growth assets (property, equities and infrastructure). The combination of income and growth assets will depend on the KiwiSaver Provider Fund(s) that you have decided to invest in.
????As an aside, if you are still in a default fund you need to talk to us urgently, so we can make sure that you are in the right fund to match your risk profile and to maximise your retirement savings.
Equity investments are when your savings are invested in a company by purchasing shares of the company that are being traded on a stock exchange. Your KiwiSaver is a PIE Fund. PIE being a Portfolio Investment Entity. The PIE Fund purchases and sells a variety of shares to help make up the fund. Fund Managers invest in the New Zealand and international stock markets. The Product Disclosure Statement provided by your KiwiSaver Provider will tell you the percentage of your funds that are in the various investment categories, such as NZ equities, and International equities. The share values go up or down as the markets respond to a companies performance, or in response to factors that will affect a company’s performance. Because the share values can go up or down this means that your KiwiSaver funds are not guaranteed.
Ok, so back to understanding how the value of your KiwiSaver is determined.
Your KiwiSaver contributions (and those of your Employer if you are an employee) purchase units of the fund you are invested in. The combination of equities that your Fund Manager has purchased and how they are performing will determine the unit value. If the shares that your fund manager has invested in drops in value the unit value will drop, and this effectively drops the value of your KiwiSaver investment.
Well that was kinda technical so let’s use an example.
Let’s say your KiwiSaver is made up of a mix of moderate 20% and growth 80% funds.
The moderate fund has a unit value of 1.9529 and your growth fund has a unit value of 2.3551. If you make a contribution $100, this will purchase you 10.24 Moderate fund units and 33.97 growth fund units. If the growth fund has a number of shares that drop in value then the growth fund unit value will drop, so you will be able to purchase more units with the same.
If the unit value for the growth fund unit drops to 2.156 then your $80 of the $100 you were investing will purchase 37.1 units. The more units you purchase when the unit value is low, when the unit value increases due to positive market forces, then the value of your KiwiSaver will go up faster as you have more shares.
So what do we mean by telling you all of this, and how can you use this information to get the best out of your KiwiSaver?
Buy some KiwiSaver units! ????
This is a good time to make a voluntary contribution – which basically means that the money you put in buys more units while the share prices are lower, and when the market bounces back you will reap the benefits of those extra units you purchased. If you don’t know how to make a voluntary contribution, get in touch and we can help you with that. We might as well try and make the best out of this share market downturn!
We are always here to talk your situation through – please get in touch if you are feeling stressed about your finances, and we can work with you to find a solution.