KiwiSaver members invested in growth funds would see balances recover relatively quickly following a major market correction, according to new modeling by actuarial consulting firm Melville Jessup Weaver (MJW).
Under the stress-test, MJW tracked the fortunes of two stereotypical growth and conservative KiwiSaver portfolios through a hypothetical market crash starting October 1 this year and subsequent recovery.
“Using our example, at 30 September 2015 we see the Growth Fund member balance at around $57,000 while the Conservative Balance is at $49,000,” the MJW study says.
Post market crash, the MJW modeling puts the growth balance down $14,000 to $43,000 and the conservative portfolio down just $2,000 to $47,000.
“The fall is less than one might have expected due to two factors: firstly the fall in markets is spread over a six-month period and secondly over this six-month period contributions continue to be paid into the funds,” the study says.
While a significant market fall would leave the hypothetical growth member marginally worse off than a conservative investor in nominal terms, the MJW model maps out a reversal of the situation within four years.
Assuming steady contributions and ongoing annual returns of 5.1 per cent and 3 per cent respectively for the growth and conservative investor, by 2019 the growth member would once again be ahead.
“By 1 October 2025, the growth member’s balance has increased to $137,000 versus $123,000 for the conservative,” the study says. “By 1 October 2035, the growth and conservative member balances are $313,000 and $244,000 respectively.”
MJW principal, Mark Weaver, said given that many asset classes are currently fully-valued, investors are naturally worried about an impending market correction.
However, Weaver said the modeling shows KiwiSaver members should look-through the potential effects of a crash to the long-term prospects for their chosen investment strategy.
He said nervous growth investors might be contemplating a switch to ‘safer’ conservative options but that could be counter-productive to their long-term goals.
The MJW study says while KiwiSaver investors might get the “best outcome” by switching from growth to conservative prior to a correction, and then back into growth as normality resumed, the strategy is “impractical” to implement.
“In practice however, no one can really say for certain if and when a correction while occur, and if it does, it is similarly difficult to judge the point at which things will return to ‘normal’,” the MJW analysis says.
“… While there is always a temptation to ‘cut your losses’, members who have selected a more aggressive investment style must be focused on the long-term and need to wait out any correction that occurs in order to achieve the best result.”