Written by Tom Stanley, Investment Adviser, 28th February 2023
It was tempting to write a note this month that did a victory lap around how markets have rallied year to date – A move that has been a relief for KiwiSaver, investment, and retirement accounts alike – But, this move may be short lived, and talking short term gains would be focusing on the wrong thing.
As humans, we have a tendency to focus on all the wrong things. We fixate on things that don’t matter, and things that we can’t control. Of course, if it doesn’t matter, focusing on it is pointless; and if we can’t control it, focusing on it is futile. What would happen if instead of trying to focus on everything, we only focused on the things that really mattered that we can also control? For example, we can’t control the markets, but we can control how we react to the markets. We can’t fix global economic problems, but we can tackle our own financial issues.
I recently ran a series of Investment and KiwiSaver workshops at a workplace, and while I touched on a range of topics, what seemed to resonate the most is the idea of ‘Trusting the Process’. Now, process can mean many things, but in this note I want to shine a light on two concepts:
- On Getting Started – Compounding Returns.
- Contributions – Little Change, Big Nest Egg.
Before digging in, I want to set the scene with another anecdote care of Morgan Housel:
“Pension & Investment Age used to publish a list of the best-performing investment managers.
In 1981, Forbes realized that the top-ranked investor of the previous decade was a 72-year-old named Edgerton Welch. Virtually no one had heard of him.
Forbes paid him a visit. Welch said he had never heard of Benjamin Graham and had no formal investment education. When asked how he achieved his success, Welch pulled out a copy of ValueLine – a publication that ranks stocks by how cheap they are – and said he bought the ones ranked “1” (the cheapest) that Merrill Lynch or E.F. Hutton also liked. When any of those three changed their opinion, he sold.
Forbes wrote: “His secret isn’t the system but his own consistency.”
A lot of things work like that: Consistency beats intelligence, if only because it takes emotion out of the equation.
- On Getting Started – Compounding Returns
When talking investments and KiwiSaver at these presentations, I make sure to labour the point that ‘time is your friend’. Time allows us to look through shorter term volatile periods, and achieve higher longer term returns, but also time enables compounding – the issue is, compounding does not work in straight lines, and we tend to view the world of straight lines – Albert Einstein summarised this best:
So, what does understanding, and earning, compound interest look like?
The below snip from my KiwiSaver presentation looks at 3 imaginary people: Josh, Amy, and Steve – Each investing in the same fund with an 8% annual net return, each saving for retirement at age 65, each finishing with $1,000,000 in their retirement account – The only difference? When they started.
The story goes like this:
Josh – Starts @ age 15, invests $25,000, and reaches age 65 with $1,092,127.
The young and diligent paper boy (that I wasn’t) while living at home, Josh directs every dollar he earns from his paper run into an investment account, by age 20 Josh has put away $5,000 every year since he was 15. From 20, let’s assume he is living the fast life and letting his investments tick away for him.
Amy – Starts @ age 22, invests $50,000, and reaches age 65 with $1,070,944.
The university student who starts investing when starting her first job – investing and saving for a first home for her first 10 years of work, by 32 she has bought her first home and her focus has shifted to paying off the mortgage living life.
Steve – Starts @ age 30, invests $180,000, and reaches age 65 with $1,010,352.
The late starter who has saved up for a first home through KiwiSaver and actioned a first home withdrawal – starting again on his investment journey from age 30, Steve needs to contribute $5,000 every year through to age 65 meet his $1,000,000 goal.
In hindsight, it would have all been great to be the diligent paper boy, but even with an 8% net return your investments will double roughly every 10 years – See the rule of 72 – Compounding is a powerful thing that can be harnessed by all – even retirees.
2. Contributions – Little Change, Big Nest Egg.
I am a big believer in KiwiSaver as it is simple, automated, and efficient – By design it creates consistency with contributions coming out of each paycheck, without need for intervention.
When talking KiwiSaver, most people want to jump right in and discuss anything from fund selection, to fees, or even the pro’s and con’s of a fund managers investment philosophy – While these things do matter, the websites and tools available to investors gloss over the importance of having a clear Plan and Process driving their investment decisions – in the case of KiwiSaver the plan is clear ‘retirement from age 65’, but what about process?
Most KiwiSaver members default to contributing 3% of their paycheck as that is what employers are required to match. But one can easily change their KiwiSaver contributions by logging into myIR or reaching out to their payroll team. While your employer may not contribute more, KiwiSaver contributions can be 3%, 4%, 6%, 8% or 10% of your income – BUT, what do these numbers actually mean for the average Kiwi?
The above is a very simple scenario analysis that doesn’t account for pay rises, inflation, or other complexities, but the message is clear – a simple conversation with your payroll team now can change your fortunes in retirement. Moving straight to 10% contributions might be a leap, especially with expenses on the up for all, but incrementally increasing your contributions one year at a time might be doable and is something I encourage.
Now you may ask, Tom do you practice what you preach?
In short, Yes. While KiwiSaver may not be my primary retirement plan, I am contributing 10% of each paycheck into an ‘aggressive’ KiwiSaver fund knowing full well it should work out well in the long term (30+ years).
Well that’s it from me this month – and while the above commentary is leans into KiwiSaver examples, the principles remain relevant for all investors – If at any stage you want to talk to your ‘Process’, and what makes sense for your ‘Plan’, please book a meeting with the team.
At Amicus we’re Investors too, and we’re here to help.
If you would like to speak with any of our advisers, please click one of the links below and book a time.