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Why It Hurts When Your KiwiSaver Balance Drops

KiwiSaver balances around the country have dropped. It isn’t great to see your balance reducing. Even if you don’t plan on using your money for years, you probably still felt some impact, writes Claire Connell.

19 October 2021

Winter 2020

Many of us know that investment involves ups and downs. And we know that investment always involves some degree of risk.

But the coronavirus outbreak meant many KiwiSaver balances dropped dramatically, and quickly. Why does it hurt so much to watch?

It’s called loss aversion

Loss aversion is a theory about what causes people to make decisions, especially financial decisions. The theory says most people care more about losses than they do about equivalent or greater gains.

For example, imagine you’re given a choice. You can choose to flip a coin and if it’s heads you win $10 and if tails you lose $2. Or you can choose not to flip the coin.

Loss aversion means many people choose not to flip the coin because they’re more focused on losing the $2 than on the opportunity to get a much higher amount (the $10).

In real life, this means we pay much more attention to the pain we feel when our KiwiSaver balance drops, than we do to the satisfaction of our balances rising.

Most important, this feeling often means people make panicked, poor decisions about selling their investments or shifting them somewhere else to avoid future losses.

But it’s not a real loss

If your KiwiSaver balance has reduced lately, any losses are only locked in if you withdraw your money over that time, or move it to a more conservative fund. Until then, it’s what experts call a ‘paper loss’.

Many of us know that during a downturn, we shouldn’t touch our investments.

That’s even though at times we really want to move them or sell them.

But often the facts we know about investing aren’t as powerful as our emotional reaction to watching our balance fall. Often people sell their shares or change to a more conservative fund during a downturn, because they panic, or are scared.

If you’re a KiwiSaver investor, it’s important your money is in the right fund for your investment time frame and your confidence with investing.

Then, experts usually say it’s best to stick to this strategy, and keep calm and carry on through the downturns. Avoid any emotional decisions based on what you read online or in the media.

You’ve worked hard for that money

You might also be feeling quite negative because you’ve worked so hard to build up your KiwiSaver balance.

You may have put real effort into finding out how KiwiSaver works and how to use it best. You might be contributing a lot of money to it.

But seeing your returns go up and down over the years is all part of your investing journey. You accept the ups and downs of the share market, in return for hopefully better gains over the long term.

The markets will pick up again, but it will take time. If you’re feeling stuck, give your KiwiSaver provider or financial adviser a call.

They’re there to help you make sure your investment strategy is right for you.

This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. We recommend you speak with an independent financial adviser.

Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.

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