Maybe Having Your Kiwisaver Account With Your Bank Is Risky

Apparently one of the main reasons why people are switching Kiwisaver providers is because they want to see their Kiwisaver account balance when they log into their online banking. Maybe getting less regular updates about your Kiwisaver performance will increase long-term returns because of the costs of switching Kiwisaver provider.

When you think about Kiwisaver, and its goal as a long-term investment to help you in your retirement, is it really a good idea to be constantly checking the performance of a long-term investment vehicle?

Our brains are wired to be far more risk-averse than we should be. We also prefer avoiding losses at any cost – we sell low and buy high more often than we think we would. In short, we’re terrible investors almost always better off investing in an index fund unless we dedicate a substantial amount of time and effort to investing activities.

Past performance is no guarantee of future performance. In fact, just on a coin-flipping basis, there will always be some Kiwisaver funds that will outperform their competition and see a substantial inflow of funds the year after the stellar performance.

Having your Kiwisaver account with your bank is risky – you’re unlikely to possess the information with which to constantly assess the ups and downs of that account balance and therefore will experience strong reactions to the viscissitudes of that balance that stares at you in the face when you pay your bills or make transfers to your other savings accounts.

It is also a violation of the idea of diversification. Having all of your eggs in one basket is what cost finance company silly buggers so much. One of the things that I haven’t found any discussion of is how Kiwisaver cash funds would be treated in an open bank resolution situation.

As counter-intuitive as it might sound, maybe setting and forgetting about your Kiwisaver is the optimal strategy in the long-run. If you’ve already chosen a provider with low fees then the error costs from choosing a high fee-poor performer will be lower anyway.

You have no direct control over the performance of your Kiwisaver account so getting all worried and worked up about it isn’t the right choice. The United States’ experience with 401(k) retirement accounts has shown that constant changing of providers hurts long-term returns more than simply sticking with the default choice offered in the plan!

Having your Kiwisaver account balance right in your online banking login is just putting more stress and worry on your shoulders. When more than 2.2 million Kiwisaver members are chopping and changing their Kiwisaver provider so frequently, it’s clear that many of them haven’t read enough about finance and economics.

Disclaimer: I am not an Authorised Financial Advisor. You should contact your financial advisor, accountant or solicitor for personalised advice based on the specifics of your situation and objectives before making any investment decisions.

P.S If you don’t do so, the economist in me tells me that you should internalise the costs of your mistakes but sadly that’s not how regulation works these days. Mummy and daddy taxpayer & regulator are here to protect you from sub-optimal decision making.

P.P.S I wrote a post a while back about how to learn more about finance. It is negligent for anyone to fail to educate themselves given the enormous amount of free knowledge available on the internet these days. Try educating yourself instead of watching the rugby or some cooking show.

P.P.P.S If you are using Kiwisaver as a vehicle to get money for your first home, maybe you should think about the opportunity cost of buying a home. What’s an opportunity cost? It’s what you give up to get something. Renting is almost always cheaper than buying. A housing expense is a housing expense. There’s no such thing as “throwing money away” – if you didn’t value a roof over your head you’d live on the street.

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