Mary Holm: Bonus Bonds - the $100 that returned $10 in 36 years

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OPINION:

Q: I recently received a refund on my Bonus Bonds. I bought $100 of bonds in 1985 and never won any prizes.

My refund was $110, and I just wondered what my $100 would have been worth if it had been in a savings account for the 36 years.

A: An online savings calculator shows that if $100 turns into $110 over 36 years, you received a return of 0.26per cent a year.

That's dreadful. But we already knew Bonus Bonds weren't a good investment, even for those who won an average prize. It was only the big winners who did well.

So how would you have done in the bank?

Brace yourself. If you had put the $100 into six-month term deposits from June 1985, you would have $518 by now, assuming you were taxed at 33per cent all the way through.

If you were on a lower tax rate, it would have been considerably more.

Back in 1985, interest was around 18per cent on six-month deposits. However, five years later it had dropped to 12per cent, and by the turn of the century it was 6.7per cent. Since 2000, the six-month rate reached an 8.4per cent peak in June 2008. Recent rates have been low, as we all know — although they are just starting to rise again.

But for all the ups and downs, the rate has never been as low as your 0.26per cent.

Still, there's another more positive way to look at this. In Bonus Bonds you could have won a big prize.

And even though you didn't, you had the excitement of knowing it was a possibility.

You've ended up with about $400 less than you could have had in the bank. But perhaps you've had more than $400 of entertainment value over the years.

Gold doesn't shine

Q: I have been privileged to receive inheritance money. It is currently sitting in a New Zealand bank account.

A family member is saying the only safe thing to do is to purchase gold bullion, as banks are going to collapse, etc. She talks about bail-in laws, whatever that means.

I am so confused, and aside from putting the money in a term deposit, I have no idea what to do.

Please help. I am over 65 years.

A: Please, no gold! Stay where you are.

As I said last week, the best place for money while you are deciding what to do with it is in a bank — or several banks if it's a large sum — or in a cash fund.

The bail-in law your relative is referring to will be New Zealand's Open Bank Resolution system. Under it, if a bank fails, you could lose a portion of your bank deposits. That's why spreading the money over several banks is wise.

However, our major banks, ANZ, ASB, BNZ, Kiwibank and Westpac, all have strong credit ratings and it would be astonishing if one failed in the near future.

"The Reserve Bank of New Zealand — Te Pūtea Matua — closely monitors the strength and resilience of the financial sector," says a spokesperson.

"New Zealand's banking sector is robust, and all NZ registered banks' capital levels remain above our minimum required levels."

He adds, "On May 4 we will be releasing the latest iteration of the Reserve Bank's biannual Financial Stability Report, outlining our assessment of the soundness and efficiency of the country's financial system." You might want to watch for news reports about that.

In any case, by late next year, under a new law the government will be guaranteeing bank deposits of up to $100,000.

Meanwhile, what about gold? It sounds as if your relative might be a "gold bug", someone who thinks gold is the safest investment.

Perhaps she argues that the money system can collapse, but gold will always be there. But would anybody be buying it if the financial world fell apart? It doesn't taste good.

Gold is often recommended by enthusiasts when, for example, the sharemarket plummets. They seem to overlook the fact that the price of gold can also plummet.

Our graph shows that the gold price halved in the early 1980s, and then went nowhere for decades. It soared in the global financial crisis in 2007, and kept rising until 2012, but then there was another major "oops!". Recently, too, the road has been rocky.

And it's important to note that there's no ongoing return on gold. When share values fall you still get dividends. When property prices fall you still get rent.

When bond values fall you still get interest. In gold, you just have to watch in dismay as the price drops.

For sophisticated investors, putting a small proportion of your money in gold is not a bad way to diversify. But it's not the place for your inheritance.

Mere millionaires

Q: Growing up in the 1950s, millionaires were super wealthy. The equivalent term is now billionaires. From one poor millionaire to another — cheers.

A: And cheers to you. But let's not get too carried away.

It's true that when New Zealand changed to decimal currency, on July 10, 1967 (who among us oldies can forget that date?) £100 became $200. So that would have greatly boosted the number of millionaires.

And inflation and house price rises have continued to push up the numbers, so that millionaires are now two a penny — or should that be "two a five-sixths of a cent"?

But still, the Reserve Bank's inflation calculator tells us that £1 million in 1955 would buy what $57 million buys now.

That's not quite $1 billion.

Spending the savings

Q: We recently retired and split our savings into three diversified investments, one third in conservative, one third in balanced and one third in a growth fund.

The idea was to always draw down on the conservative fund, and over time rebalance so that in say 15 years the remaining money is just in the conservative fund.

But is there another, perhaps better, way? What if we put all the savings into the growth fund and slowly draw down from that? Very much like the reverse of drip feeding into a fund.

Our withdrawal frame is still 15 to 20 years, but we are simply exposed to higher volatility and will withdraw during the troughs as well as the peaks.

Has there been any research to compare these two approaches, understanding that will be for historical rates?

A: Great question. You're talking about doing the reverse of what's known as dollar cost averaging, or DCA.

DCA works like this: when someone puts regular savings into an investment whose value fluctuates — perhaps 3per cent of their pay into a middle- or higher-risk KiwiSaver account — they benefit from DCA.

That's because their 3per cent buys more units when markets are down, and fewer when the markets are up.

Here's a simplified example, with a regular $100 deposit:

• In a down market, the unit price is $10. So your $100 buys 10 units.
• In a buoyant market, the unit price is $20, so $100 gets you just 5 units.
• The average price over those two periods is $15.
• But you've bought a total of 15 units, and paid $200. So your average price is $13.33 — below the market average.

It's a great reason to make regular deposits rather than trying to work out when is the best time to buy — a thankless task.

But you're thinking of regularly withdrawing rather than depositing the money.

The trouble is you will be selling — as opposed to buying — more units when the price is down, and fewer when the price is up. You'll receive below-average prices for your units.

Not good. Let's call it negative DCA.

On the other hand, I think you are arguing that you will benefit from having all your savings in a higher-risk fund, with higher average returns.

"Would that effect overcome negative DCA?" I asked a friend who does research in this sort of stuff.

"I am sure I could create some assumptions or pick a period that showed this worked, but it would be assumption/period dependent," he says. "Equally, there would be periods where it did not work. In normal circumstances it will not work."

The trouble is, "you get periods like 1987, 2000/2003, 2007/2009 where shares go down by 50per cent-plus, when you are crystallising large losses. The reality is that a higher return of a growth fund will never compensate for the loss when the market corrects."

So much for your intriguing idea! So what should you do?

It's best to take your spending money from an investment that doesn't fall with the markets. And basically that's what you have set up. But there are two improvements you could make:

• Conservative funds, according to the Smart Investor tool, hold 10 to 35per cent growth assets — usually shares and sometimes property. You're better to move to a defensive fund that has no shares. Ideally, go for a cash fund within that category.

• One third of your money may be too much in the low-risk fund, given you expect to have 15 to 20 years of withdrawing. Ideally, put your spending for the next three years in low risk, for the following seven years in middle risk, and for the longer term in higher risk.

There's also the issue of when to move money from your higher-risk fund to the middle-risk one, and from there to the lower-risk fund over time.

You might decide to do that every June 30. But what if the markets have just fallen? It would be negative DCA all over again. You would be converting a temporary loss into a permanent loss.

To avoid that, look for a provider that lets you automatically move all dividends and interest earned on your middle and higher-risk funds into the low-risk fund. I know SuperLife offers this "income distribution to cash" service. Let's hear from other providers who also do this.

If that's not moving enough to cover your spending money withdrawals, you will have to move some money from your high-risk to your low-risk fund. But you can have some flexibility on the timing.

Says my friend, "Take a broad-brush approach. If the market is up, sell some to top up the cash. Otherwise I would wait for a quarter, or year (no stress) and look at it again."

SuperLife will also do this automatically for you. It's called "regular withdrawal rebalancing". Again, if other providers offer this service, let me know by Wednesday, and I'll run a list next week.

Overseas pensions

Q: Is KiwiSaver considered a pension? If not, why when one works overseas and contributes to their own provident fund, similar to a KiwiSaver fund concept, is it considered a pension? And the amount received is considered part of the NZ Super payment and deducted accordingly?

A: Sigh. This really is the last Q&A on overseas pensions for at least a year or so!
As I said in the column last week, the Ministry of Social Development says basically for every dollar you get from an overseas government pension, your NZ Super is reduced by one dollar. However, this may not apply to an overseas pension — or a portion of it — made up of voluntary contributions. Overseas pension payments resulting from voluntary contributions aren't deducted from your NZ Super payments.

KiwiSaver is voluntary. You don't have to join and, if you belong, you don't have to make contributions from your pay.

So if you have been in a similar scheme overseas, in which you didn't have to make contributions under government rules, that pension won't be deducted from your NZ Super. And if, say, half the money came from compulsory contributions and half from voluntary, only half that pension would be deducted.

Note, though, that MSD says payments resulting from voluntary contributions to overseas pensions are still treated as income for any income-tested assistance, and therefore may affect eligibility for things like the Disability Allowance.

Also, all private overseas pensions don't affect your NZ Super. It's just government ones.

If anyone has further questions about this, please see tinyurl.com/OverseasPensions1 and tinyurl.com/OverseasPensions2

- 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.