Opinion: Crypto insomnia, phone habits and KiwiSaver

BY GRAHAM DUSTON

You may have heard about the wedding in Vancouver where a cellphone made an infamous, cameo appearance at the ceremony. It happened four years ago. The groom Russell Loren was watching, delighted, as his resplendent bride Taylor walked down the aisle to marry him. There was magic in the air. Well, there was until Loren pulled his phone from his pocket and started staring at it. Asked later why he did this, he replied, “Crypto never sleeps.” A video of the moment became an internet sensation.

This came to mind as I read the FMA’s recently-released, excellent report “Lockdown: a review of KiwiSaver member behaviour in response to Covid-19” (prepared by PwC).

Putting Loren’s woefully inappropriate timing aside, what the wedding incident illustrates is that he had up-to-theminute investment information at his fingertips, plus the means to act on it. This has been called the digitisation or gamification of financial services. It’s part of the investment landscape now. And it was at play among some KiwiSavers during the pandemic.

Covid-19’s sudden, unexpected arrival sent financial markets into a tailspin. This marked the first time KiwiSaver membership was truly “road tested” in a bear market, for although KiwiSaver was launched a year before the GFC struck in 2008, the impact of that financial shock on member behaviour was minimal. There were, I believe, a couple of reasons for this.

1. It was early days for KiwiSaver, most member balances were low, their growth due more to investor cash flow (including a dollar for dollar Member Tax Credit subsidy and a $1,000 kick start) than performance.

This meant that even if investment returns were negative 10, or even 20%, most investors had the same balance at the end of the year (or a slight negative) than at the start.

2. The digitisation and gamification of financial services and flow of information via the internet was only just beginning.

More than a decade on from the GFC, when KiwiSaver balances had burgeoned and were more subject to the impact of market performance, a real test arrived in the form of a pandemic-induced bear market. History, more than anything, showed us this was inevitable. Since 1990 we’ve experienced a chain of periods of extreme market volatility, each one tripped off by a different event – the 1990 invasion of Kuwait, the bond market crash in 1994, the emerging market crisis in 1998, the dot-com crash in 2000, the September 11 terrorist attack and the GFC in 2008. Covid-19 was simply the latest in this long line of market shake-ups.

The FMA report revealed that over the Covid-19 lockdown period nearly three times as many KiwiSaver members switched funds as did during the same period in 2019. Depressingly, only 9.1% of people who switched to a lower risk fund during Covid-19 switched back to a higher risk fund by August 2020. This effectively locked in their losses.

One very interesting revelation in the report was the fact that the number of younger members who switched during this time was disproportionately high.

Relevant to this finding is a recent study by behavioural economists at The University of Sydney. This research concluded that people aged 18-24 make more “welfare-decreasing decisions” when in the presence of people their own age. What’s this all about? It’s the confluence of three things, the first being investment markets that “never sleep”. The second is a younger cohort of investors for whom the constant checking and use of phones often amounts to an addiction. And the third is the arming of these hand-held tools with apps and financial services websites that provide users with gamified experiences.

Having the ability to manage their investments themselves 24/7, together with the social factor The University of Sydney research highlighted, appears to have led some young people to believe they must act, must make a call immediately, when market volatility strikes. The notion of patient accumulation of wealth, based on the knowledge that market bumps can be tolerated because the long-term trend is an upwards march, would seem to be in danger of becoming a forgotten concept.

This issue is of vital importance. We now know that over 200,000 New Zealanders will receive lower KiwiSaver balances in retirement because they made a poor decision, locking in their Covid-19 losses. Do we want the episode to repeat itself the next time a bear market arrives? I suspect that if it did, and affected a similar number of people, it would become a serious public policy issue.

There are a number of potential solutions to the problem. Most involve a change to business models and practices on the part of KiwiSaver providers.

I will leave you on this reassuring note: the Lorens are still together after that less-then-ideal start to married life.