Why it hurts when your KiwiSaver balance drops

The coronavirus outbreak has meant KiwiSaver balances dropped around the country. Many of us are feeling the effects – it isn’t great to see your balance dropping. Even if you don’t plan on using your money in years, you probably still felt some impact.

It’s called loss aversion

Loss aversion is a theory about what causes people to make decisions, especially financial decisions, and which 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 are more worried about losing the $2 than focused on the equal 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 (read more about fund types here). Until then, it’s what experts call a ‘paper loss’.

Emotion is high

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.

So, when the balance drops, it’s normal to not feel that great.

But, so far anyway, you’ve probably only lost a part of your returns your money has made, not your initial capital, or your own money.

And 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.

But I wanted to buy a house

Some of you might have been about to buy your first home with KiwiSaver money. But now you might have seen your balance drop a lot, and you may not have a large enough deposit for what you planned on borrowing.

If you’re feeling stuck, give your KiwiSaver provider a call. They’re there to help you make sure your investment strategy is right for you. Or, you could call a financial adviser. 

Published 18 March 2020

Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read our Product Disclosure Statement. 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. All content is correct at time of publication date.