Will you switch KiwiSaver plan during a market correction?

[I wrote this back in 5th Oct 2016]

I’ve got into a discussion with a colleague about changing KiwiSaver plan. He is in his 30s and he decided to switch his growth plan to a defensive scheme. The reason was he thinks there is a market correction coming in late 2016 or first half of 2017, by switching to the defensive scheme, he can avoid a drop in his investment. He will switch back to growth once we are out of the correction.

I do agree there is a market correction coming and defensive scheme will do better in a down market compared to growth plan.

Let’s use Superlife income (defensive scheme) and Superlife60 (growth) as an example.

superlifeincome2015.PNGsuperlife60.PNG

During 2008 GFC, most markets were down by A LOT. Superlife income returning about 6% to 8% during 2008-2009 and Superlife60 was returning -8% to -14% at the same time. So if you start your Kiwisaver in 07 in Superlife 60 (returning 4.8%), then switch to Superlife Income at 08, 09 (6% and 8%), switch back to Superlife 60 at 2010 (15%). You will be doing average 8.45% p.a. while Superlife 60 doing -0.55% in those four years.

By looking at the math, it’s all great, but the main question is HOW DO YOU KNOW WHEN TO SWITCH? We are trying to time the market. The return looks great when we do it retrospectively but in reality, it took lots of time, resource and knowledge to time the market and people who are experts in that area still don’t get it right. If we switch too early, we may miss out on the last bit of gain. On the other hand, if we change too late, we will take the hit of initial crash.

I am personally not sure about this. I was trying to time the market back at 2014, and I was wrong. The conventional wisdom was to ignore the ups and downs of the market and keep it in a growth fund. You will ride it out eventually. However, somewhere in my mind I still think I can get a better return by switching. Not to a defensive scheme but a balanced scheme to smooth it out.

[Now, back to March 2017]

I ended up keeping the growth fund and it turns out great. The return on those months is far better than the defensive fund. The main reason was due to the poor performance of income asset in the last quarter 2016.

However, is not about growth fund did better than the defensive fund. In fact, I’ll still be happy if the defensive fund did better because the performance for my KiwiSaver in a single quarter only have a tiny impact on the lifetime of my fund. The lesson I learn was to stick to right fund for me, just sit back and let it growth.

Compare ETF cost between SuperLife and SmartShares

In case you don’t know, I am in the camp of passive low-cost investing. So most of my investment are in ETF and index fund.

Currently, the easiest way to buy and hold ETF in New Zealand is with SmartShares and SuperLife. Both companies are owned by NZX and they are selling basically the same ETF product. However, the cost of the ETF are different with those 2 companies and I’ve put together a table to compare it.

In general, Superlife offers lower fund management fee. However, they do charge a $12/year admin fee which makes Superlife more expensive when you are starting out. So you should start with Smartshare and once your hold reaches the “When to Switch” amount, you can move your fund to Superlife to enjoy the lower cost and the better user interface.

My table is based on you have only 1 fund in SuperLife. If you have multiple funds with SuperLife, that $12 Admin fee will be shared by those funds and you can divide the “Switch to SuperLife” amount by the numbers of funds you’ve got.

Here is an example:

You are holding $15000 Global Bond ETF and $12000 Aust Property ETF with Smartshare. Both of them alone did not pass the “When to switch” limit. However, if you switch both of them to Superlife, the “When to switch” will be divided by the numbers of funds, which is 2, and the new “when to switch” amount will be $24000/2 = $12000. So you should switch both of them over to save fees.