Periods of market volatility often include some of the best days in the market – and missing those can significantly reduce your long-term returns. That’s why it’s important to stay the course and avoid making knee-jerk decisions, whether you're investing through Generate KiwiSaver Scheme or a Managed Fund.
Market ups and downs are a natural part of investing. If you’ve ever had a KiwiSaver advice session, you’ve probably heard that before. But it hits differently when you see your own balance drop – even if history shows it can bounce back just as quickly. The key is not to let short-term dips derail your long-term goals.
Go against your knee-jerk reaction
A panicked reaction is human nature - many investors respond by selling off their shares when the market declines. But because KiwiSaver is a long-term investment that you can’t exit (except in special circumstances), you might start thinking about whether you should switch to a more conservative fund - or even change providers - to try to stem the tide of losses.
However, this is almost always the exact opposite of what you should do. History shows, time and time again, that markets generally rebound after periods of volatility and loss. This has been the case even though World Wars, the Great Depression, the 2008 Global Financial Crisis and the 2020 Covid-19 Pandemic.
Keep it simple
The smart thing to do is also the most straightforward – stay the course and ride out the market downturn. ‘Time in the market’ is your best strategy because staying invested can lead to better long-term outcomes.
The more complicated thing to do is to ‘try to time the market,’ which is incredibly risky and difficult even for professional experts. Even if you managed to pull off this strategy and avoid some losses, the biggest risk is that you could also miss the market’s best days.
When are the market’s best days?
No one can perfectly predict when the best days of the market will occur, but they often go hand in hand with periods of volatility. This makes sense when you think of volatility in terms of sudden, sharp movements, whether they are up or down.
Because these days are so unpredictable, timing the market rarely succeeds. On the other hand, the effect of being out of the market and missing the best days can be huge.
The damaging effect of missing the best days
This graph, based on the all-stock S&P 500 portfolio, illustrates the 25-year period between August 1999 and July 2024 (6,200 trading days).
It defines ‘best days’ as having a single-day increase of 4% or more. There were 40 of these days over the last 25 years, and they often occurred during periods of volatility.
Being out of the market for just 10 of those best days would have significantly decreased long-term total returns.
It shows how moving to cash (temporarily exiting the market) for each of the 10 best days in the 25-year span gave an annualised total return that was 3.31 points lower (more than 50 percent!) compared to simply remaining invested. This is represented by the difference between the top dark-green line and the second mid-green line.
Put in dollar terms, a $100,000 portfolio that missed the 10 best days since August 1999 would be worth less than half of one that stayed in the market continuously until July 2024 - $662,870 versus $303,820.
The analysis also shows that more time out of the market, the worse the results. Missing the best 40 or 50 days in the last 25 years actually resulted in a negative return, as you can see on both the red lines.
Key takeaways
When markets go down, it’s hard to resist the urge to change course – even when you know, in theory, the benefits of a long-term, stable investment approach. But when it comes to your KiwiSaver investment, reacting to short-term volatility by switching your fund type (for example, from aggressive to conservative) can do more harm than good.
That’s why it helps to look at the numbers in black and white – like the graph above. It’s a clear reminder that market ups and downs are normal, and history shows us that markets recover over time. Staying the course means giving your investment the time it needs to grow.
If you’re worried – especially if you’re nearing retirement or planning a first-home withdrawal – talk to a Generate adviser. They can help you create a KiwiSaver plan that suits your timeline, without making reactive fund changes that could set you back.