The Behavioural Mistakes That Quietly Cost KiwiSaver Investors the Most (NZ)

Loss aversion, recency bias, herding, action bias and performance chasing are the behavioural mistakes that quietly cost KiwiSaver investors, with NZ evidence and a calmer response to each.

This article is general information only and is not personalised financial advice. It does not take into account your particular financial situation, goals or needs. Before acting, consider whether it's right for you and seek advice tailored to your circumstances.

The biggest threat to a KiwiSaver balance over a working life is usually not the fund, the fees or even the market. It is the investor's own reaction to the market. The fund is built to ride out bad years. The trouble starts when a member, watching the balance fall, decides to act.

We saw this clearly in New Zealand during the COVID-19 downturn. Of the 2.4 million KiwiSaver members the Financial Markets Authority and PwC studied, 3.9% switched funds over February to April 2020, around 88,112 switches in a few weeks. ¹ Of those who switched, 70.5% moved to a lower-risk fund, ² and most of them stayed there: only 9.1% had switched back to a higher-risk fund by August 2020. ³ In other words, the great majority of switchers sold after the fall and then sat in the safer fund through the recovery, locking in the loss.

This article walks through five behavioural traps behind moves like that, why each one feels sensible at the time, and a calmer response to each.

TL;DR: During the 2020 downturn, 70.5% of KiwiSaver members who switched moved to a lower-risk fund, ² and only 9.1% switched back, ³ meaning most locked in losses and missed the rebound. The five traps below, loss aversion, recency bias, herding, action bias and performance chasing, drive that pattern. The better response is usually to do less, not more.

Why do smart people make poor investing decisions?

Being intelligent or financially literate does not make you immune. These mistakes come from mental shortcuts that served humans well for most of history but work against a long-term investor. A falling balance reads to the brain as a threat, and the instinct is to act, even when doing nothing would serve you better.

The five traps below are not signs of being a bad investor. They are normal, and they are predictable, which is also what makes them manageable. The point of naming them is not to feel clever about other people; it is to recognise the feeling in yourself when it arrives, usually on a bad day in the market, and to have a plan for that moment.

Here is the whole article in one table.

What are the five behavioural traps, and the better response to each?

Source: Smiths Financial. Behavioural patterns illustrated by NZ data and guidance from the FMA, ¹²³ Sorted and Te Ara Ahunga Ora. ⁴⁵⁶⁹

Loss aversion: why a 20% drop hurts more than a 20% gain feels good

People tend to feel the pain of a loss roughly twice as strongly as the pleasure of an equivalent gain. A balance falling from $50,000 to $40,000 hurts far more than the same balance rising from $40,000 to $50,000 pleases. That imbalance is loss aversion, and it is the engine behind most panic-switching.

The NZ evidence fits this exactly. When markets fell in early 2020, the members who switched overwhelmingly moved to safety: 70.5% went to a lower-risk fund and only 18.5% moved to a higher-risk one. ² That is the urge to stop the pain made visible. The problem is that switching to a lower-risk fund after a fall does not avoid the loss, it realises it, converting a paper drop into a permanent one and then leaving you in the wrong fund for the recovery.

Te Ara Ahunga Ora, the Retirement Commission, makes the same point plainly: switching or withdrawing during a downturn risks locking in losses and missing the recovery, and timing the market is near impossible. ⁴ Loss aversion is strongest precisely when acting on it does the most damage.

The better response is to settle the question of risk before a fall, not during one. Choose a fund whose normal ups and downs you can sit through, and treat the bad days as the cost of the long-term return, not a signal to act. We cover the mechanics of this in what to do in a KiwiSaver market crash.

Recency bias: why last year's top fund tempts you to switch

Recency bias is the habit of giving the recent past too much weight, as if whatever just happened will keep happening. After a strong year for one fund or asset class, it feels obvious that it will continue. After a weak year, it feels obvious it will keep sinking. Neither is reliable.

This is why the FMA tells consumers directly that past performance is not a reliable guide to future returns, and that you should not pick a KiwiSaver fund on last year's results. ⁶ A single year, good or bad, tells you very little about a fund's long-run merit. Markets and fund rankings move in cycles, and the table that looks compelling today often looks dated within a year or two.

The better response is to judge a fund the way you would judge a long-term decision: over multiple years, against its stated mandate and risk level, and after fees and tax. Returns are not guaranteed. The value of investments can go down as well as up and you may get back less than you invested. Past performance is not a reliable indicator of future performance. If you want to understand what those numbers actually mean, our guide to KiwiSaver returns explained breaks them down.

Herding: why doing what everyone else does feels safe but isn't

Herding is the pull to do what everyone else seems to be doing, because moving with the crowd feels safer than standing apart. When friends, social media or the news are all talking about selling, switching or piling into something, the social pressure to follow is real.

The COVID-19 episode shows the cost. Tens of thousands of members switched in a short window, ¹ and younger members and those in some bank-run schemes switched at higher rates than others. ¹ A crowd moving in the same direction does not make the move correct; it often just means the same emotion is hitting many people at once. The members who held their nerve were not braver so much as anchored to their own plan.

The better response is to anchor decisions to your own timeframe and goals rather than the prevailing mood. What suits a 25-year-old with 40 years to retirement is different from what suits someone planning to buy a first home in two years, regardless of what the crowd is doing this month. Sorted's guidance is consistent on this: set the right fund for your goals and timeframe, then ride out the ups and downs rather than reacting to each move. ⁵

Action bias: why 'do something' beats 'do nothing' in our heads but not our balance

Action bias is the preference for doing something over doing nothing, even when doing nothing is the better choice. In many parts of life, taking action helps. With a diversified long-term fund during a wobble, it usually does not, yet sitting still feels passive and uncomfortable, as though you are ignoring a problem.

The 2020 data is, in large part, a study in action bias: a wave of switching in response to short-term volatility, ¹ most of it into safety and most of it not reversed. ²³ The members who "did something" by switching to a lower-risk fund largely locked in losses, while those who did nothing let the fund do its job. Doing nothing was the active, correct decision; it just did not feel like one.

The better response is to treat "do nothing" as a deliberate choice rather than a failure to act. If you genuinely need to make a change, for example your timeframe has shortened because you are nearing a first-home purchase or retirement, that is a planned decision, not a reaction to a headline. A useful rule is to separate the trigger (a falling market) from the decision (your timeframe), and only act on the second.

Performance chasing: why last year's winner often disappoints

Performance chasing is recency bias turned into a transaction: you see last year's top-ranked fund and switch into it, expecting the run to continue. It rarely does so on cue, and you often arrive just as the cycle turns, having sold a fund that is about to recover to buy one that is about to cool.

Sorted lists this explicitly as a bad reason to switch funds, alongside reacting to short-term underperformance, panic-switching after a market drop, and switching too often. ⁹ The recommendation is the opposite of constant chasing: review your fund about once a year and switch only for a sound, lasting reason. ⁹ Frequent switching also tends to mean you are repeatedly selling after falls and buying after rises, the wrong way round.

The better response is to compare funds on what actually drives long-run outcomes, cost, mandate, risk level and fit with your timeframe, rather than last year's position on a table. NZ providers such as Simplicity, Milford, Generate, Booster, Fisher Funds and Kernel each run growth funds with different fees and styles; the right one depends on your situation, not on who topped the rankings most recently. Smiths Financial works with a panel of selected providers, listed in our disclosure; not every provider in the market is shown here. Always read the relevant Product Disclosure Statement.

Overconfidence and timing the market

A related trap underlies several of the above: overconfidence, the belief that you can read the market and step out before falls and back in before rises. The honest position, and the one the Retirement Commission states, is that timing the market is near impossible. ⁴ Even professional investors struggle to do it consistently, and a single mistimed exit can cost more than years of patient holding.

The most reliable evidence in NZ is the 9.1% switch-back figure: of those who moved to safety in early 2020, only 9.1% had returned to a higher-risk fund by August. ³ The recovery happened while most switchers were still sitting in the wrong place. That is the practical cost of trying to time the market, missed rebounds, not just missed peaks.

KiwiSaver is a long-term scheme. Government contributions, contribution rates, withdrawal rules and tax (PIR) settings are set by the Government and can change. Figures are correct as at 10 May 2025. The behavioural cost of under-engaging matters too, not only over-reacting: of members who received the government contribution in the year ending 30 June 2025, 77% received the full $521.43, ⁸ which means a meaningful share did not contribute enough to claim the maximum. (To receive the full $521.43 that year you needed to contribute at least $1,042.86 of your own money. ⁷) Both over-reacting on bad days and quietly under-contributing leave money on the table. Check current rules at ird.govt.nz, kiwisaver.govt.nz and sorted.org.nz.

How an adviser is really a behaviour coach, and what that is worth

A lot of an adviser's value is not in picking a magic fund. It is in being the calm second voice on the day a member is tempted to switch after a fall, the person who helps separate the trigger from the decision. Set the right fund once, then help you hold it through the falls that test everyone.

That is harder than it sounds, because the pressure to act peaks exactly when acting is most damaging. An adviser who knows your timeframe and goals can frame a market drop as expected rather than alarming, and can tell the difference between a planned change (your timeframe really has shifted) and a reaction (the market just fell). We explore the broader value of this in the cost of not getting financial advice, and the everyday slip-ups in common KiwiSaver mistakes.

None of this guarantees a better return, and a calm approach still means living through real falls along the way. Returns are not guaranteed and can go down as well as up. But avoiding the five traps above removes a large, self-inflicted drag that has nothing to do with markets and everything to do with how we are wired.

Frequently asked questions

What is the most common behavioural mistake KiwiSaver investors make? Switching to a lower-risk fund after markets fall. In the 2020 downturn, 70.5% of members who switched moved to a lower-risk fund, ² and only 9.1% switched back, ³ so most realised a loss and then missed the recovery. The underlying driver is loss aversion, feeling a fall more sharply than an equivalent gain.

Should I switch funds when the market drops? Not as a reaction to the drop itself. A change can make sense if your timeframe has genuinely changed, for example you are close to a first-home purchase or retirement. Switching purely because markets fell tends to lock in losses and risk missing the rebound. This is general information, not advice for your situation.

Is picking last year's top-performing fund a good strategy? On its own, no. The FMA states that past performance is not a reliable guide to future returns. ⁶ Last year's winner often cools, and you may arrive just as the cycle turns. Compare funds on cost, mandate, risk level and fit with your timeframe over multiple years, not a single ranking.

Can anyone reliably time the market? It is extremely difficult. The Retirement Commission notes that timing the market is near impossible. ⁴ The NZ data shows most members who stepped out in early 2020 had not stepped back in before the recovery, ³ which is the real cost, missed rebounds rather than missed peaks.

How does an adviser actually help with this? Largely by being a steady second opinion at the moments when emotion is highest. An adviser who knows your goals can help you tell a planned change from a panicked reaction, set a fund you can hold, and avoid the self-inflicted drag of switching at the wrong time. It does not guarantee a better return.

This article is general information only and is not personalised financial advice. It does not take into account your particular financial situation, goals or needs. Before acting, consider whether it's right for you and seek advice tailored to your circumstances. KiwiSaver and managed funds are investments: the value can go down as well as up, returns are not guaranteed, and past performance is not a reliable indicator of future performance. Smiths Financial is a trading name of Craig Smith Business Services Ltd (FSP712931), which holds a Class 2 financial advice provider licence issued by the Financial Markets Authority to provide financial advice on personal risk insurance, health insurance, general insurance, KiwiSaver and managed funds. Our advisers, Henry Smith (Financial Adviser) and Craig Smith (Principal Adviser), are bound by the Code of Professional Conduct for Financial Advice Services and the duty to give priority to clients' interests. Craig Smith Business Services Ltd is a member of the Financial Dispute Resolution Service (FDRS), a free and independent dispute resolution scheme. We're generally paid by commission from the insurer or provider when you take out a product through us; this doesn't change the price you pay, and we manage conflicts in line with our duty to prioritise your interests. Our publicly available disclosure information is available free of charge on request and on the FMA Financial Service Providers Register at fsp-register.companiesoffice.govt.nz. Written by Henry Smith, Financial Adviser; reviewed by Craig Smith, Principal Adviser. Last reviewed 10 May 2025.