Here's why you shouldn't pile everything in to KiwiSaver

Christmas dinner is served. Come to the table, there's a big turkey waiting. Hang on, where's the rest of it? No veggies, no cranberry sauce, no pudding. That would feel odd wouldn't it?

I get that same feeling when I watch people save for retirement using KiwiSaver. Don't get me wrong, we should all be in it and I'm proud we are. It's a fantastic first step.

But pre-KiwiSaver, if someone had shown me an investment portfolio built over 30 or 40 years, consisting of one fund manager, my face would have fallen off.

There's a greater chance of turkeys landing my roof next week, than a one-manager investment strategy getting off the ground. In my career, I've never met anyone who has done this. Until now.

The turkey did land. It got called KiwiSaver and we all piled in.

It's not a complete Christmas dinner. 

Most full-time working New Zealanders are going to accumulate six-figure sums into KiwiSaver. Those in professional jobs will hit seven figures.

You need to know the risks and how to navigate these.

1. One KiwiSaver manager: not a good idea.

It flies in the face of risk management. A portfolio needs depth and this comes from your manager diversifying and buying shares in many companies. But you also need breadth. This comes from different asset classes such as shares, bonds, property, commodities.

One manager is not Santa. They are not best of breed in all fields and it's imperative to get diversity across them. Managers have different styles and suffer from style shift, style drift and herding behaviour. A house-view can infiltrate a range of funds even when they're run by different people.

Favoured stocks or unusual companies will often seep across the fund range. When hiccups occur, and markets drop, there's limited insulation.

What should you do?

Smart savers put 3 per cent into KiwiSaver to get their 3 per cent employer contribution and the $521 annual donation from the government. They then save another 7 per cent (or whatever is affordable) into a portfolio that spreads risk over a variety of managers. This adds depth and breadth, giving access to a full range of funds and managers, including those that aren't available within KiwiSaver. Advice is essential.

2. One KiwiSaver fund: not a good idea.

The concentration of risk is too high in a single fund. Your manager might hold 100 shares, or it might only be 50. For perspective, my own portfolio has 9000 holdings. If investors don't know how to grasp one version of diversification from another, they're blind to the risks.

What should you do?

Most KiwiSaver managers will have a range of funds – balanced, growth or even specialist areas such as property. You can spread your savings over their inhouse range. If you're not going to save anywhere else, this is the only way of diversifying a little more.

3. No KiwiSaver access: not a good idea.

KiwiSaver locks up your money until age 65. Getting access is more difficult than escaping out of a straight jacket. You need to be a first-home buyer, seriously ill or practically bankrupt. Yet the shares we invest in have daily liquidity – at worst liquidity within five days. So why do we agree to this lock-up? We have no choice, as we all want the employer contributions and free Government money each year. The lock-up is also a feature of KiwiSaver so those amongst us with fidgety fingers don't go spending it before retirement.

What should you do?

Again, only invest the minimum in KiwiSaver to get the free stuff. Beyond that have your own personal plan via a financial adviser. That way if you fancy early retirement, it's your choice not the Government's. If you want to fund a business later in life, that's your choice. If you want to dip in and take a pre-retirement holiday, that's your choice. There is no sane reason for having your choices removed.

4. Index vs active: which is best?

One is not better than the other and having 100 per cent of your savings in either is risky. Ideally you'd have some of each. While index lovers will wax lyrical about the cheap fees and active managers failing to outperform, they also have a lot of hidden risks. Concentration in the largest companies can be high and their performance will drive returns. This concentration worsens diversification. In a major market downturn you can expect indices to get knocked for six. Active mangers have more chance to respond to what's occurring.

What should you do?

Again – invest outside KiwiSaver to capture what you are missing.

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.