A journey to Venice or Rome can make a special purchase even more memorable. Photo / Bloomberg
OPINION:
Q: I recently lost some very special family jewellery and have received an insurance payout for it of around $10,500.
For sentimental reasons, I'd love to wait until we can be in Italy to spend this money on new jewellery. This could realistically be three to 10 years away, and $10,500 is likely to buy a lot less by the time I get there.
How would you suggest I invest the money in the meantime so it retains its buying power? I'm less concerned with gaining value than I am in retaining value.
A: I can see where you're coming from. It's sickening to lose inherited jewellery. I had some stolen years ago, and still feel bad about it. Somehow, replacing it with items bought in a local shop wouldn't be quite the same as making a special purchase in, say, Venice.
While your situation is unusual, the issue behind your question is a common one: how to invest in a low-risk way that will earn returns equal to or higher than inflation. That means your money will buy at least as much when you withdraw it as it will buy now.
In your case we're talking about inflation in both New Zealand — so your money doesn't lose value in the meantime — and Italy — where we hope the price of jewellery doesn't rise much.
Currently inflation in Italy is lower than New Zealand's shocking rate of 5.9 per cent. But who knows what will happen over the next three to 10 years in either country? And it might be longer than that before you can safely travel to Italy.
For argument's sake, let's say inflation in both countries averages about 3 per cent over the next few years.
Where can you invest safely to earn 3 per cent a year or more, after tax and any fees?
A glance at the term deposit table beside this column shows us that some banks are paying round 3 per cent for three-year deposits. And you can find similar rates for five-year deposits. But then you get into worries about how long you want to tie up your money, in case you decide quickly to be Italy-bound. Also, you'll receive less after tax.
Some finance companies offer considerably higher interest, but they are riskier. Personally, if I want to increase my risk in the hope of getting a higher return, I prefer to use a managed fund.
At the lowest-volatility end of the managed fund spectrum are cash funds. Their returns tend to be a bit higher than term deposits, but the returns are not guaranteed. You have to go with the market flow.
To find a cash fund, go to the Smart Investor tool on sorted.org.nz. "Compare" managed funds, click on Defensive Funds, and look for funds with "cash" in their name. I suggest you aim for a fund with lower fees. For more info, do a search for "cash funds" on www.maryholm.com.
Another option, of course, is a fund with somewhat higher risk. You wouldn't want to go all the way to a growth or aggressive fund if you might spend the money in less than 10 years. There's too big a chance you'll be hit by a market downturn.
But you could use a conservative or middle-risk balanced fund. Your return over the years will probably be higher than in a cash fund, but only "probably". Could you cope with having somewhat less in your Venice wallet if luck runs against you in the markets? Your call.
Q: I have $85,000 saved so far for a house deposit and would like some advice on where best to keep this while I save for another five years.
I have had it in the bank and realise I am losing money with inflation. Would it be best to have this in a high-interest savings account which still might only be about 1.5 per cent, or to put it in an investment fund such as Simplicity or Milford, even though the market is risky? Or is there a better option?
A: Well done on your savings so far, and your plans. Perseverance wins in the end.
Yours is a much more common example of the issue discussed above. But in your case it's actually house price inflation that matters, and that has been crazy in recent years.
You can't possibly hope to get returns on your savings that are anywhere near that rate. But hang about. It seems likely house price growth will slow, and it could even turn negative.
In the meantime, earning a return that's higher than ordinary CPI (Consumers Price Index) inflation is a good goal. Check out the options in the Q&A above and see what feels comfortable for you.
Q: I am fully supportive of your approach, in a recent column, to retired people making best use of their funds to have a good life.
One additional thought: why not leave a portion of your estate to the grandchildren? They are much more likely to be appreciative of a small lump sum in their twenties or thirties than their parents in their fifties or sixties. My parents did it and I have followed suit.
Better still, if you have significantly more than you actually need, give a bit away now!
A: You make some good points. A gift of $10,000 to someone in their twenties may be valued more than $100,000 to someone in their fifties.
And giving money away while you are still alive — as opposed to leaving it in a will — can be satisfying.
I should add that not every retired person is in a position to "have a good life". But I don't like seeing people doing without in retirement just so they can leave a legacy to adult children who are better off than their parents.
Q: I have $200,000 that I was about to add to my Kiwi Wealth Balanced KiwiSaver fund. Given the volatility at the moment, would this still be the right move, or better to hold off for a few months? I'll want to access the funds in seven to 10 years.
A: I wouldn't wait in the hope that sharemarket volatility will calm down. You will be buying units in the fund. If recent volatility has pushed down unit prices, that's a plus. Sure, the prices might drop further yet. But they might rise, and you'll be sorry you missed out.
All that "current market" stuff aside, what's the general rule about depositing a lump sum?
The academics say that if you're going into a fund that holds lots of shares, it's best to deposit all the money straight away. This is because share funds, on average, earn higher returns than bank accounts or term deposits — where you are probably holding the money now. Get into the probably-higher returns as soon as possible.
But there are two "howevers":
• Your fund is not heavily dominated by shares. The Smart Investor tool tells us that currently about 55 per cent of its investments are shares. About 36 per cent are bonds, and there are small other holdings. So the average returns, over time, will be lower. The "get in now" imperative is less.
• It's horrid if you deposit all of your money at a time that turns out to be bad when you look back on it. Psychologically, it's easier to divide the money into, say, three lots of about $67,000. Deposit one lot now, one lot in a month, and the rest in two months — regardless of what the markets are doing. That way, at least one or two of the deposits will turn out to be okay, timing-wise. You've spread your risk. If you do that, though, don't muck around. Follow the academics' rule to that extent.
Footnote: Are you sure you won't want to use this money before you turn 65? If you would prefer to maintain access to it, you might want to deposit it in a similar non-KiwiSaver fund.
Q: I'd add one recommendation to the list of 45 money rules in your column last week: only borrow money to invest/buy something if it is reasonable to expect it to appreciate. That encapsulates a number of the points in the list.
Cars don't appreciate, trips to Fiji don't appreciate, etc.
A: An excellent addition to the list. Generally it's fine to borrow to invest in property, which almost always grows in value over the long term. Ditto with diversified shares or a share fund, although borrowing for share investments is pretty risky.
It's also usually fine to borrow to pay for tertiary education. In most cases the qualification means you earn a higher income. The value of you has appreciated!
The same may apply to some collectibles if you know what you're doing, including possibly vintage cars.
But most other purchases lose value. I hate to see someone borrow unnecessarily for an ordinary car, and then watch them paying off way more than the purchase price because of interest, while the value of the car is falling.
By the way, a day or two after last week's column was published, I received an email from fellow Herald personal finance columnist Diana Clement.
"I had the oddest message from a reader," she says. "He said your 45 Rules were copied from one of my articles from 2011. How on earth he figured that out, I have no idea. I simply don't even remember writing it, let alone drawing the parallel. But it turns out he's quite right." Lo and behold, many of last week's rules are verbatim from Diana's article of 11 years ago.
"The irony is that I read those rules in your column and thought: 'that's good'," she says. "It was the sort of advice that I would give!"
I should point out that the writer of last week's letter said the rules were "accumulated over the years from various commentators". Presumably he had forgotten just how many came from Diana in 2011. Anyway, she now gets credit for them.
The same reader has also added three more rules — which weren't in Diana's article. They are:
• Insure what you cannot afford to lose or replace.
• Pay yourself first — the fundamental rule in running your own business. If you cannot do this, get out.
• Relying on capital gain for an investment property while being negative cashflow is risky — especially if you don't have insurance.
I can't argue with any of those. "Pay yourself first" is often used in a different context for wage earners. The idea is to transfer money out of your pay deposit into savings before you pay any bills. Make savings a top priority.
Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.
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