Tag Archive for "KiwiSaver"

Rethinking Investment

In my last post, made a few months ago now, I argued in favour of passive index-based funds when choosing a KiwiSaver provider (i.e. a fund that tries to track a particular sub-market rather than one where people actively trade to maximise returns). This was on the grounds that they not only generate a better return when fees are taken into account, but that they often do better than the actively managed accounts on gross return as well. I’m still happy with that analysis.

However, I also argued that when investing for the long term the best returns have tended to come from investments in growth funds such as stock market index trackers rather than the more predictable cash and bonds; the idea being that while individual stocks may be risky the overall market has grown steadily.

Obviously this theory relies on the idea of the ever-growing economy caused by increasing production and consumption. I like to believe that this is possible, that the world will keep getting richer. The belief comforts me while I read books that describe the end of life as we know it through the effects of climate change, peak oil, or whatever other catastrophe looks good on the dustjacket.

I don’t know which outcome will come to pass in my lifetime or even which of them is the most likely. But I think there’s enough chance that I’ll live in a civilisation that will muddle through and growth-based funds will do well enough that they’re still the best choice. You could say that they track the success or otherwise of our civilisation.

However, at the moment I’ve chosen a cash-generating cash and bond index fund because I do think we’re in for a recession in the next few years. In this case I would expect stock market returns to fall in value or at least lag behind the high interest rates that are currently available. Why buy into it now when you could wait a few years?

I’ll tell you whether I’m right or not after it happens.


So, as part of signing up for a new job I’m also signing up for KiwiSaver. I’ve managed to put off learning about this for a while now but last night I finally put the time in to do a bit more reading. I knew the scheme is reputed to be generous and is generally seen to be well worth it for the individual but I needed to choose a provider and a scheme.

As my government-enforced retirement age of 65 is some years off I have chosen a growth-oriented scheme with a concentration in the share market. My understanding is that, over the long term, share markets have historically given the best returns. Of course this won’t go so well if we have an economic collapse triggered by climate change or runaway gray-goo or whatever and slide into a post-technological world – but my retirement plans are going to be in trouble if that happens anyway.

More importantly, I have chosen a ‘passive’ fund. This is one where they don’t have smart managers who wheel and deal to choose the best stocks/investments at any given time. Instead they just invest in shares/securities so that the fund tracks well-known indexes like the NZX 50. Therefore if the stock market as a whole goes up you’re winning, and vice-versa. It’s easier to manage so fees are a lot less.

Now, the interesting thing about ‘dumb’ passive funds is that they typically out-perform the ‘smart’ active funds. All that wheeling and dealing costs money (in transaction and management costs) and any increased returns are typically eaten by that. Indeed, I seem to recall that actively managed funds typically perform worse than passive funds, even *before* transaction and management costs are taken into account. Most people aren’t Warren Buffett and are apparently pretty crap at investing. Of course, the managers still get paid their lovely salaries so at least they’re happy about it.

The only major flaw in KiwiSaver (from my selfish perspective) is that the government doesn’t guarantee the investments – but also doesn’t let you spread your risk by splitting your KiwiSaver contributions between 2 or more companies. So, it looks like all my eggs will be going into the scheme run by the ASB.