The ups and downs of the Nasdaq stock index illustrate the volatile nature of tech investments. Photo / Getty Images
OPINION
Q: I had a diversified share portfolio of around 25 different companies that did very well over about 10 years. Some investments went to zero, but others more than doubled. I cashed up 20 of the 25 stocks last year to buy a house, keeping my five favourite tech stocks. I’m now ready to start reinvesting and wonder where to from here. Do I leave my five galloping tech stocks where they are and start saving into an index fund? Do I cash up the five and go all in on indexing? Or do I build a diversified portfolio back up again?
I am 53 and also have KiwiSaver ticking away for me.
A: If you keep the five tech shares – especially if they make up a significant portion of your total savings – you’re playing with fire.
While investing in five shares beats just one or two, you’re still seriously undiversified. What’s more, they’re in the same industry. What’s even more, it’s the tech industry.
Sure, tech shares have “galloped” lately. An NZ Super Fund spokesperson said in this column last week that over the last five years shares in Nvidia have grown 1095 per cent, Tesla shares have grown 808 per cent and Apple shares have grown 340 per cent.
The stunning growth is reminding many of what happened around the turn of this century. From 1995 to 2000, the value of all the shares in the Nasdaq index, which is heavily weighted towards technology shares, rose almost seven-fold – and some shares by much more. Tech shares were the talk of the markets.
Then the Dotcom Bubble burst. From March 2000 to October 2002, the Nasdaq index plunged 75 per cent. Horrors!
I’m not saying that will happen again. I don’t know. But tech shares are volatile. If I were you, I would sell them while you’re ahead.
Right after you sell, you’ll probably be annoyed to watch the prices rise further. You would be extraordinarily lucky if you sold at the top of the market. But you’d be more annoyed if you hang about and prices plunge – which can happen suddenly – before you sell. In the long run, chances are you’ll be glad you got out.
So what should you do with the money?
If you’ve recently bought a house, you’ve probably got a mortgage. It’s a good idea to put most of your savings beyond KiwiSaver into reducing that debt, especially with current high interest rates. Paying down a 6 per cent mortgage improves your wealth as much as earning 6 per cent – after fees and tax – in an investment. And it’s risk-free.
But it’s also wise to do some saving alongside that. It gives you money for emergencies, and you learn about markets.
Where? I prefer a low-fee index fund over a portfolio of shares, largely because it’s easier. But if you enjoy choosing shares, go for it – as long as you hold at least 25 or so, in a variety of industries
PS. If you can’t bear to part with your five favourites, by all means keep tiny holdings in them, for a bit of fun.
Q: I was just wondering about your views on the impact of tax changes regarding mortgage interest on residential investment properties.
With 100 per cent of that interest becoming tax deductible from April 2025 and the prospect of lowering interest rates, is now a good time to revisit purchasing an investment property to diversify my investments (which are currently limited to a family home, KiwiSaver and other managed and index funds)?
A: The tax change will certainly make rental property more profitable. So yes, this might be a good time to buy – as long as you plan to keep the property for, say, a decade or more. Who knows what will happen to house prices and rents in the short term.
Note, though, that rental property is a business, unlike your other more straightforward investments. You need to cope with landlord hassles – from maintenance issues to tenants who won’t or can’t pay. You can hire someone to manage a property for you, but that eats into your profit. And, as a reader pointed out a while back, sometimes there are hassles with the property manager.
By the way, I think the reintroduction of mortgage interest deductibility makes sense. It’s not logical to let other businesses deduct interest, and rental investors deduct other expenses, but to disallow this one type of deduction.
But – and this is important – I think the gains made in all property, share and other investments should be taxed. We muck around with ever-changing brightline rules and the issue of whether someone bought an investment with the intent of selling it, and some gains end up taxed and others not.
I know it’s hard to design a capital gains tax that’s fair to everyone. But every other nation in the OECD – all the countries we tend to compare ourselves with – has a comprehensive capital gains tax. Surely New Zealand can learn from what is done well and badly elsewhere and set up a pretty good system here.
In the end, it comes down to this: why should a minimum wage earner be taxed on the money they receive, while an investor – who often puts in way less effort to get their money – is not? I don’t see how any government can justify that.
Q: This is more of a political comment than a financial one. My late wife and I invested some of our savings in a rental property for our old age and worked hard to pay it off. It brings in about $20,000 per year after expenses, except in a year (and there are some) when expenses are higher. This represents a return of a little over 3 per cent; hardly usurious.
Currently this return is less than inflation and less than term deposit rates. But some of our politicians would have you believe rental owners (I think the word landlord is pejorative) are heartless capitalists in top hats.
The last figures I saw suggested the owners of more than half of all rentals owned no more than two properties, and are more likely to be a little old lady or gentleman.
A: While some politicians have certainly criticised landlords (sorry, but I always use that word – not pejoratively!), others almost make heroes of you for providing housing. Overall, I don’t think landlords have done badly out of the Government lately.
But still, you’re clearly unhappy about the negative landlord image.
I think it stems, partly, from the power landlords have over their tenants. Most of us are renters at some point in our lives, and many find it hard not to resent the person they have to pay rent to, especially if the landlord is not obliging when it comes to repairing faults in the property.
Also, a landlord can move a perfectly co-operative, rent-paying tenant out of their home because the landlord wants to sell, or perhaps move into the place themselves. These days there are more rules about how this is done, but it still happens. There’s no other investment in which the investor holds such power over another, usually poorer, person.
What’s more, the landlord image isn’t helped by the people who own many rental properties – even if they are in the minority – bragging about how well they have done.
The tenant/landlord tension is one reason I’ve avoided being a landlord over the years, except briefly in unusual circumstances.
If you’re unhappy with the landlord image and situation, you may want to sell. While your current return is quite low, you will almost certainly make up for that in the gain you make on the sale. Indeed, for some landlords the only return they receive comes when they sell. The gain is very much part of the investment.
You could put the proceeds in a managed fund, or similar, and enjoy the use of the money. Same goes for other discontented little old lady or gentlemen landlords.
Q: The letter in a recent column regarding the change to decimal currency brings up another change made a few years ago to our currency - the phasing-out of small coins and the subsequent rounding up or down of prices.
In my experience the rounding is more often than not upwards, and if you pay in cash there is a distinct disadvantage.
My question is, what happens to the odd amount if it is not paid via a credit or cashflow card? For example, those who play the poker machines only receive an even amount rounded down. Who benefits from this discrepancy?
A: I’m not up with what happens on poker machines, but in general we should probably expect to see rounding down as often as rounding up when something costs x dollars and one to nine cents.
According to the Reserve Bank, after the 5c coin went to cash heaven in 2006, the New Zealand Retailers Association suggested to its members that when the total transaction value ends in x cents, and payment is by cash, the following rounding principle should be applied:
That should mean the total is rounded down more often. But of course, retailers could deliberately price things at the 6c-9c end.
The association added that this was a suggestion only. But it also said where rounding is used, the policy should be displayed at the point of sale so consumers are informed.
I don’t think we see that display much any more. If this issue bothers you, I suggest you ask retailers what their policy is, and challenge them if they are not playing fair.
Q: I recently wrote to you about my current financial position, and you very kindly responded straight away with advice about how to ladder term investments.
As a result, I have today set up with my bank the following laddering schedule, which I hope I have interpreted correctly: $200,000 for six months, $200,000 for a year, $200,000 for 18 months, and so on, every six months up to three years.
By this schedule, I have a maximum of six months before another term investment falls due, a period which if necessary I can fill from savings in case one of us has to move suddenly to care.
One question: What do I do when each term investment matures? Should I reinvest each using the same period and schedule, or should I do something different to achieve the same sort of result?
A: You’ve set it up well. Now, when the first deposit matures, reinvest it for three years, so it becomes available 3.5 years from now. Then reinvest the second one for three years, so it’s available four years from now. And so on, always reinvesting for three years.
You will have one falling due every six months forever – while benefiting from the higher interest you’ll usually get on longer-term deposits, despite the unusual current situation.
Q: I’ve been reading your column recently and just cannot understand how you can possibly advocate for someone paying so-called “fair and reasonable” tax, and not just paying what they are supposed to pay.
It positions your entire column on the Government’s side, and all other advice you give must therefore be viewed through that lens.
Keep in mind that governments have massive amounts of spending that is pure and utter waste, or, in fact, actually harmful to society.
A: Sigh. We’ve already had enough on this topic. But I can’t let you say I always support the Government! Longer-term readers know I’ve criticised at least as many policies as I’ve praised, whether the Government is red, blue, green or whatever.
On your last sentence, perhaps you should run for office. If things are really that bad, it should be easy to convince people you can do better.
Getting back to tax, I’m talking about people who wriggle around the clear intent of the tax laws to pay way less than their fair share. Topic now closed.
- 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 or click here. 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.
Investors are waiting for next week's pivotal interest rate decision.