Mary Holm: Play it cool with that hot tip on market moves

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OPINION:

Q: I received a supposed "hot tip" yesterday from a person who claims that — probably between now and Christmas and heavily impacted by whatever happens in the post-US presidential election period — the world is set for an inevitable and unavoidable financial crisis that will negatively impact all investment portfolios.

So, no matter whether we have chosen a conservative or aggressive investment strategy, and no matter how competent our fund manager, our KiwiSaver funds are going to show a sharp drop in value.

Is now the time to withdraw our eggs from the KiwiSaver basket and put them into a 1 per cent or less term deposit — essentially to wait until the dust settles?

A: First of all, unless you are 65 or over, you can't withdraw your KiwiSaver money for this sort of reason. But you can move it into a lower-risk fund. Should you?

Your hot tipper might be right and they might be wrong. In these complicated times, market volatility does seem more likely than usual.

But whether the next serious downturn is this year, or next year, or a decade away is anybody's guess. If you move your money to a low-risk alternative now, you might miss lots of gains in the meantime.

Research shows that people who try to time markets usually end up considerably worse off than those who find their appropriate risk level and stick with it. This is particularly true for amateurs like you and me, but also for most professional investors.

Having said that, anyone who was feeling a bit panicky while reading your letter — not just concerned, but panicky — might want to take that as a signal that your investments are too risky for you.

You are the ones in danger of moving to lower risk after the markets have dropped. You might even have done so earlier this year, and perhaps moved back to higher risk when the markets recovered, losing lots in the process.

Even if you held out earlier this year, a longer-running downturn might be harder for you. This year's recovery was extraordinarily fast. Sometimes it takes a few years before the markets have regained all they lost.

If you couldn't cope with a downturn of a few years — either psychologically or because you plan to withdraw the money for a first home or in retirement — move to lower risk now.

It's a good idea to make that move in two or three tranches, perhaps a month apart, so you don't end up moving the lot right before an upturn. But please don't wait until the market hits the skids and then move — making your losses real.

And once you've made the move, do not move back into higher risk later, when things seem calmer.

Everyone else — those with stronger stomachs for ups and downs and no near-term spending plans — should ignore our hot tipper and concentrate on the higher growth that higher-risk investing always brings over the years, despite the downturns along the way.

Chasing returns

Q: I turn 65 shortly. I'm not in paid employment, own my own home debt-free and have savings in the bank generating a small income in fixed-term investments. By small I mean under $20,000 a year.

My bank suggested that I put that money into my KiwiSaver — that the interest I would receive there would be better. Any thoughts?

A: Clearly, tying up the money in KiwiSaver until you turn 65 is not a problem. But it's the same old story: you can't earn a higher return without taking more risk.

If your KiwiSaver fund is at the lowest-risk level, a defensive fund, you may earn a bit more than in term deposits, but not much more. If you are in a slightly riskier conservative fund — or you decide to move to that — you should earn somewhat more on average, although not necessarily every year. Your returns will be a bit up and down.

With each step up into riskier funds — balanced, then growth, then aggressive — your average annual return should be higher, but with a rockier ride, including losses in some years.

So, do you want to increase your volatility but also your average returns? I suggest you work through the "Find the right type of fund for you" tool in the KiwiSaver Fund Finder on sorted.org.nz. If you're not currently in the best type for you, switch to it.

Then, if you're happy for all your savings to be at that risk level, move your term investments into your KiwiSaver account.

Look before leaping

Q: Have you heard or know anything about a company that seems to change its name from time to time — Skyway, Swig and NEEW-New Economic Evolution of the World?

I have some family members fully involved and believe they are now millionaires.

Any insight into these companies you could offer would be appreciated.

A: Sorry to be the bearer of bad news, but I don't like your relatives' chances of turning their dreams into big cash.

I had never heard of any of those companies before. But an internet search on NEEW finds the company listed in "Warnings and Alerts" on the Financial Markets Authority website.

"We believe NEEW and the websites have the hallmarks of a scam," says the FMA.

It adds, "In July 2019 and July 2018 the FMA warned members of the public in New Zealand about Skyway offering financial services to New Zealand residents through social media and other New Zealand residents without being a registered financial service provider in New Zealand.

"Skyway and RSW Investment Group Ltd are not registered as financial service providers in New Zealand and are therefore not permitted to provide financial services to New Zealand residents."

Back in July 2019, the FMA said, "It is understood that SWIG has been promoting the sale of investments including education packages that include a component of cryptocurrency (tokens) associated with SkyWay. The business has promoted itself on social media and held seminars in Auckland, Palmerston North, Rotorua, and other provincial areas.

"The FMA understands that Skyway has been focusing on New Zealand consumers, in particular, the Pasifika community.

"The FMA advises consumers to only deal with businesses or people that have been granted a licence or have been authorised by the FMA. This means free dispute resolution services are accessible if things go wrong."

The watchdog adds, "If you have invested with NEEW or Skyway or had contact with parties connected to it, we would like to hear from you. Please contact our helpline on 0800 434 567." I suggest you phone them.

I can only repeat what I said in last week's column. Before investing in anything, an important and easy first step is to do an internet search on the company.

Mortgage deals

Q: My partner and I have just bought our first house. We are looking to get a mortgage for $700,000.

We've had 12-month fixed-rate offers of 2.2 per cent from HSBC with a $1600 cash back, or 2.45 per cent from Westpac with a $4200 cash back. How do we figure out what option will be better in the long run?

We are currently with Westpac. What benefits or disadvantages (if any) are there from holding your mortgage with your everyday/savings bank? Thanks!

A: Let's start with some simple calculations for the first year: at HSBC, $700,000 at 2.2 per cent interest comes to $15,400. Subtract the $1600 cash back and you are paying a total of $13,800.

At Westpac, $700,000 at 2.45 per cent comes to $17,150. Subtract $4200 and the total is $12,950.

Westpac looks like the better deal for a year.

But these calculations aren't absolutely accurate. You will also be paying roughly $16,000 off the principal in the course of the year.

For the mathematically inclined, where does that number come from? At HSBC, on a 30-year $700,000 loan at 2.2 per cent, your monthly payments are $2658, according to a mortgage calculator. That comes to $31,896 a year — which is $16,496 more than the $15,400 interest above. The difference is money paid off the principal during the year. At Westpac, the same calculation comes to $15,826.

With the principal reducing slightly each month, the interest will be slightly less.

However, a maths expert tells me that will have much the same minor effect on both banks' numbers, so you shouldn't worry about it. Phew!

But there's another important issue. The cash back comes with some hooks. Usually you have to stay with that lender for two or three years, or the money will be clawed back.

So, while Westpac seems better over one year, you are probably stuck with them for a few years. And given their interest rate is currently higher than HSBC's, there's probably a more than even chance it will continue to be higher.

But who knows what future mortgage rates will be? So, to pick a long-term winner, we fall back on whether it's better to stick with your own bank.

The only real advantage I can think of kicks in if you decide to make some of your loan floating. Why do that, when floating interest rates are higher? It gives you flexibility to pay lump sums off your loan, and you never know when you might get an inheritance, redundancy pay or win Lotto.

Also, at Westpac you can have an offset floating loan, which allows you to offset the balances in your other accounts against your mortgage balance. In effect, you earn the mortgage interest rate on those other accounts. That might tip the balance for you.

Low interest

Q: I read with some interest the article last week regarding the experience the correspondent had with the Co-operative bank.

I had a similar experience at a Kiwibank branch in early May.

I had a rather large amount to invest on term deposit, and because Kiwibank were offering a better rate than my bank I approached them to invest. I spoke to a very obliging gentleman who told me what I needed to bring into the bank. I did so the next day, only to be told by both ladies behind the counter to make an appointment as they were far too busy to attend to me right now.

There was not another soul in the bank, and both ladies were gazing into space. I am elderly and live some 20 minutes away from the bank, which I pointed out.

I said I would be obliged if they could deal with me now. I was not asking to borrow money but to invest some with them. It all fell on deaf ears and I was sent on my way.

Guess who will never darken the doors of Kiwibank again.

A: It seems Covid-19 can take some of the blame for this.

"In May we were still in Covid alert level 3 and our branches were operating with reduced hours, controlled entry, and at [that branch] there were no meeting room appointments due to these spaces not being large enough to maintain social distancing," says a Kiwibank spokesperson.

"Over this time our team was particularly cautious around the safety and wellbeing of seniors, and where possible customer requests were done over the phone or redirected to [a larger] branch where there are larger offices. Now we are in Covid alert level 1 these restrictions have been lifted.

"Regarding the advice by the 'obliging gentleman', we apologise if our requirements under Covid level 3 were not made clear at that time." It also seems that the people at the bank did not communicate well with you.

The spokeswoman adds, "More generally, if a banking specialist is not available right away, the standard approach is to explain why, encourage the customer to have a coffee or finish their shopping and return at an agreed time, usually the same day.

"Currently we are piloting a new appointment booking system which is scheduled to go national-wide next month." Hopefully that will help.

- 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 are personal, and 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.