The returns from a high-risk fund can be thrilling but you need to know your limits.
OPINION
Q: For many years you’ve been telling long-term savers they should invest in a higher-risk fund, but five years before they want to withdraw their funds, they should move to a low-risk fund.
I just don’t get it. If the saver has decided that over 40 years they’re better off in high risk, that means 40 years, not 35. There will, as you always say, be ups and downs along the way, and nobody knows when. By moving their money after 35 years, they might miss a big gain in the last five years. If they’re afraid of the downs, they should invest in a low-risk fund.
Furthermore, if they plan to move their money after 35 years to protect it for the last five, then by your logic they should move it after 30 years to protect it from a sudden drop just before they move it. And if they plan to move it after 30 years, then by the same reasoning, they should move it after 25.
Let’s say the investor stays in the high-risk fund for the full 40 years, and it does suffer a decline in the last five years. According to you, because the investor has been in the fund for so long, it will still have outperformed the lower-risk fund.
So my take-home message is: if an investor decides a high-risk fund is better, have the courage of your convictions and stick with it!
A: Where does investing stop and gambling start? It’s hard to say, but I reckon keeping money you plan to spend shortly in a high-risk fund borders on gambling.
You haven’t got my recommendation quite right. If you are in a growth or aggressive fund, I suggest you move to a medium-risk fund about 10 years before you plan to spend the money. And then move to a low-risk fund – preferably a cash fund - when your withdrawal is about three years away.
This is based on the fact that it’s “safe” to be in a share-heavy investment over 10 years or more because the likelihood of its losing value over that time is really low. Similarly, a medium-risk fund is “safe” over three years or more.
You’re right that if you stay in a high-risk fund throughout, you’ve got a pretty good chance of having more money to withdraw. But there’s also a fair chance the markets will fall at the wrong time and you’ll end up with less.
And it could be a lot less. If your investment was worth $20,000 many years ago, a return of minus 10 per cent would cost you $2000. But if your investment has grown to $100,000 by now, such a return would cost you $10,000.
By the same token, of course, a 10 per cent gain is more powerful in the late years of an investment. But that’s where the gambling comes in. If you’re up for the risk, go for it! But I think most people are not.
Having said that, it depends on what you’re saving for. If it’s a holiday, you might stay in a high-risk fund throughout. Then, if you do well, go to on a luxury overseas tour. If you do badly, it’s time to jump in the car and see New Zealand.
One more point: In response to your “Furthermore” comment, you’re right that moving all the money in one go is risky. That’s why I suggest you move it in, say, four lots, a month or two apart – so it’s not all transferred at what turns out to be a bad time.
And if the markets have just plunged, you can always put off the move for a while. There’s room for flexibility in these fund shifts, but often not in the final withdrawal.
Q: Your advice please. I am 78, retired and withdrawing $1200 per month from my ASB Moderate Diversified Fund, which along with my superannuation, funds my living expenses.
When reading your excellent book, A Richer You, I noticed that you said these regular withdrawals would be better made from a cash fund, which does not lose as much during a downturn as other funds with larger shareholdings.
I do have other investments in balanced and growth funds, with Simplicity and KiwiWealth, as well as a short-term deposit for emergencies, so perhaps this move would provide a sensible mix?
A: Yes, it would be wise to move that money into a cash fund, as explained above.
It’s good that you also have money in higher-risk funds, which could be moved to lower risk later on, to fund your later retirement – or left where it is if you don’t need it.
Q: I was amazed to read in your last column that, according to Morningstar, “the average KiwiSaver balanced fund return was 11.8 per cent in the 2023 calendar year”.
My award-winning provider, Milford, only achieved 6.88 per cent after fees for that period. Should I be worried and thinking about changing provider?
A: Never judge a fund by its return over a single year. The quarterly Morningstar KiwiSaver Report for last December tells us the Milford Balanced Fund didn’t do as well as its peers in 2023 – coming second to last out of 34 balanced funds.
But over the past five years the fund’s average return of 8.3 per cent placed it first out of 21 balanced funds. And over 10 years, its average return of 8.6 per cent also placed it first, out of 16 funds.
But could the fund’s recent returns mean it has lost its sparkle? Maybe. Or perhaps this will be just a glitch. The fund holds about 20 per cent cash, compared to about 9 per cent in the average balanced fund, according to Smart Investor on sorted.org.nz. And it holds about 41 per cent in shares, compared to the average 48 per cent. So it’s not surprising it underperformed when the share markets have done so well.
I wouldn’t leave Milford because of what’s happened over a year. But you might consider moving to a lower-fee balanced fund. Smart Investor tells us your fund charges the second highest fees of all balanced funds.
As Morningstar says at the start of its report: “Please note:
• “Past performance is not a guide to future performance. This year’s best performers can easily be next year’s worst.
• “Understanding your risk profile, and the mix of growth and income assets is critical.
• “Fees are the one constant that will always eat away at your returns. Take a close look at the cost of your KiwiSaver Scheme.”
To read the report, see tinyurl.com/KiwiSaverSurveys
Q: I joined Simplicity in November 2020, with $200,000, in a conservative fund, and transferred to a balanced fund in July 2021. I have made $12,394 - approximately 1.8 per cent per annum simple interest. In a term deposit, I could have got at least double that. So this is a bad investment, for 1232 days. Managed funds in the lowest fee companies don’t make as much as term deposits, as you suggest.
A: There are a few important points to note here:
· Your returns are after tax. Published term deposit rates are before tax. That makes a big difference.
· You’re looking at one relatively short period – and with unusually high recent term-deposit rates. When comparing returns, you should look at 10 years or more. See the Q&A above.
· You can access money in a managed fund within a few days, whereas it can be tied up for years in a term deposit. This may or may not matter to you.
Also, I question your assertion of getting at least double 1.8 per cent in term deposits. Back in 2021, those rates were less than 1 per cent – before tax. See graph.
A suggestion: Put $100 in term deposits, for a comparison. Come back to me in 10 years if that money gets higher returns than your balanced fund over that period. I would be astonished.
Q: I’m a great fan of your column, but your lauding of New Zealand’s appalling Covid response last week is something you’re probably not best placed to comment on. Like many other normal Kiwis, I believe this was New Zealand’s most shameful hour.
Maybe better to stick to your sound financial advice and steer clear of politics!
A: When then Herald business editor Rod Oram – who died recently, sadly – asked me to write this column in 1998, he wanted a “column with attitude”.
And that’s what I produce. I love the diversions which, I think, keep the column interesting. If I stuck to just repeating “pay off debt” and “take more risk if you want higher returns”, would you keep reading? Would I keep writing?
Politics and personal finance are often intertwined. Admittedly we don’t usually get into the handling of Covid, but it was the correspondent who brought up the topic, not me. Anyway, we won’t be pursuing it further!
A second reader felt the same way as you, but read on.
Q: Another cracker column last week, Mary, not least this comment:
“On captain’s calls and the pandemic, I would have thought UK investors would have been impressed with our Government’s handling of the crisis. Compared with New Zealand, nearly five times as many people per head of population died of Covid in the UK, according to Financial Times data – while their Prime Minister partied on.”
Keep up doing the great work!
A: Thanks. And another correspondent added to his email, “As regards how well we did in our Covid response compared to UK and other countries, I agree with you entirely. We did well.”
Q: You normally have fair coverage of an issue, but recently there were several anti-landlord letters without anything to provide balance - for example, a letter saying landlords are useful and necessary even if they are unpopular like traffic wardens or dentists. Several thoughts:
Please be kind to us!
A: Last week I said we’ve had enough correspondence on mortgage-interest deductibility. But your letter ranges across other issues, and makes some interesting points.
On several of them, I bet there are readers who would argue with you. But I’ll stick to your final point. I don’t think mortgage interest on homes should be deductible. Homeowners are not in business earning a taxable income, against which costs should be subtracted.
Already New Zealanders with homes are – for the most part – better off than others. I would rather see taxpayer dollars going into helping people get into their own home. While your tenants are apparently happy renting, many are not.
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.
Air NZ engine problems mean just over half of flights are departing on time.