While you're still young, the key is to keep your financial options open. Photo / 123RF
OPINION:
Q: I'm 22 years old and I've moved back home to look after my younger brother, who's just turned 18. Due to certain circumstances both of our parents have passed away, Mum two years ago and Dad a few months ago.
Fortunately for us we will be inheriting what was left of Dad's estate and the house and roughly around $100,000 each. There are three of us.
However, we are not too sure what to do with it. Our options would be either to renovate the house – it is kind of old and could do with a freshen-up. With what's left over, place it into an index fund where we don't touch it for a few years. Or look at options for a rental property and place the money in property?
Any tips or advice around this, as it's a bit of money to be given considering we're all under the age of 23?
A: Gosh, that's bad luck to lose both of your parents when you are so young. But reading between the lines, it sounds as if you are coping well.
What to do with your inheritances? It probably wouldn't hurt to spend a small amount on the house – if only because, if you decide to sell it at some point, it will be looking smarter. But I wouldn't go into major renovations.
It's important at your age to keep your options open. Who knows what each of you might want to do within the next 10 or 20 years? Get further education or training? Start a business, or go overseas, or buy your own separate house and perhaps start a family?
You don't want the money tied up in a rental property, with perhaps one of you wanting to sell after a while and the others not.
I suggest you each hold your money separately. If you were pretty sure you wouldn't spend yours within about 10 years, a share index fund would be good. If there's a market downturn, there's time for it to recover. But can you be sure about what the future holds?
Sorry to be boring, but I would rather see you all put the money in bank term deposits or low-fee cash funds for at least a couple of years, while you see where life is taking you.
Interest rates are low, but you know for sure the money will be there whenever you need it.
A cash fund will probably pay a bit more interest than bank deposits, and you can get your money out in just a few days. To find a cash fund, use the Smart Investor tool on sorted.org.nz. Click on "Compare", then look at defensive non-KiwiSaver managed funds with "cash" in their name. I suggest you sort by "Fees (lowest first)", and pick from the low-fee ones.
Q: For the last 15 years I have paid $750 a month to Sovereign, now AIA, for trauma cover insurance. This is in addition to life cover, which is more modest. It provided peace of mind as I had a young family and they were dependent on me for income.
I'm now 53 with great health, older children, good assets and a good income from shares, rent and fees. I'm resenting the trauma cover premium and wonder if it's time to take that money and start to invest as well as reducing my mortgage. Do I back myself to use it better than insurance? Or have I fallen into a classic middle-age confidence trap?
A: Ask yourself how you would cope financially if something bad happened and you needed the insurance but didn't have it.
If you would be fine – and it sounds as if you might – drop the insurance.
If it's marginal, go for a cheaper policy that gives you a lower payout if you claim, or there's a longer delay before you get any money.
Ditto with life insurance. Hopefully, your family would miss you if you died. But they might manage financially.
People often "outgrow" life and trauma insurances. They were really important to have back then, but no longer.
Q: In your latest column you mention a strategy of exiting and re-entering the sharemarket based on the 200-day moving average.
It sounds like it might be a good exit strategy, but too slow for a re-entry strategy as you miss out on the gains. Could another re-entry strategy be beneficial? For example, using the 50-day moving average?
A: I doubt it. No, let's be clearer – I very much doubt it.
For those who didn't see last week's column, a reader suggested the 200-day strategy, and I questioned its merits, and recommended just buying and holding shares for the long term.
People are always seeking formulas to get rich in the share market. If they play around with enough numbers, they might find something that seems to work. But at the next market downturn, or perhaps the one after that, it fails.
The 200-day plan didn't work in the 1987 crash. I certainly wouldn't count on it, or any other strategy. Read on.
Q: On the "200 day moving average" theory – as an applied mathematician by training, I am always cautious about such claims.
Mathematically, it is always possible to find an equation (or "rule") to fit a finite number of historic data points. However, there is absolutely no reason to assume that this will predict future data points unless there is some underlying reason (eg, economic, physical, biological) for the relationship.
Now there are underlying reasons for normal economic cycles (and, with that, stock market cycles), and on their own these can be somewhat predicted using econometric modelling. These cycles are nothing to be concerned about and easily managed with a steady portfolio strategy. However, they are not the cause of the stock market crashes that everyone fears.
I do not believe that mathematics could have predicted Covid, nor the sub-prime lending and derivatives fiasco that triggered the GFC, nor the Ponzi scheme corporates which pervaded the NZ stock market in the loosely regulated 80s environment. These were the acts of man or nature, and beyond the ability of mere mathematicians to predict!
A: Mere mathematicians, or anyone else.
Researchers have found correlations between the stock market and the moon's phases.
Sure, the numbers happened to move together for a while. But how could they possibly be connected?
And if they really were, wouldn't the word get out to the point that everyone would want to buy and nobody want to sell when the moon is full – or whatever the "rule" is? The market would grind to a halt on a regular basis. The fact that it doesn't suggests the strategy didn't work.
What happens in the share market is the result of many thousands of decisions – not always rational. It is, quite simply, not predictable.
In 1973, American Burton Malkiel first published a huge bestseller, A Random Walk Down Wall Street, which was one of my textbooks when I did my MBA. It's now in its 12th edition. A main message is that in the short term share market movements are like a random walk, similar to flipping a coin.
Q: I don't understand why the NZ share market has been steadily going downhill this year.
We have done so well with our Covid strategy, but this doesn't seem to be reflected in business confidence. Most of the other sharemarket indexes around the world have made gains since January 1, eg, Dow, S&P, Nasdaq, All Ords and FTSE.
I am fully retired, and much of my ASB Conservative KiwiSaver is in the NZX50. I've got my fingers crossed that, pretty soon, the only way for the NZX50 to go will be up.
A: Share markets don't necessarily move with economies, especially over just a few months.
Maybe last year's share market recovery from the Covid downturn was too exuberant in New Zealand, so prices are now getting back to where they "should" be. Who knows?
Over all, the New Zealand market has performed brilliantly this century, by international standards. And in the long run we would expect it to keep rising. But it's impossible to predict how it will do over any short period.
By the way, according to Smart Investor on sorted.org.nz, your KiwiSaver fund holds only 20per cent shares, so it wouldn't be hugely affected by market movements.
Still, if you are planning to spend the money within the next few years, you might want to move it to a cash or defensive fund. If not, sit tight – and preferably ignore what happens in the short term. Reading Malkiel's book might help.
Q: Your answer last week to the person who joined KiwiSaver part-way through the year answered one leg of the conundrum. When entering KiwiSaver you only receive the government contribution for the proportion of the July-to-June year after you join.
I was looking for you to also talk about what happens when you turn 65. Do you still receive the maximum $521, or only for the proportion of the year before turning 65?
A: The latter. And it's similar for people turning 18 – more on that in a minute.
If you turned 65 on, say, April 1, you will have been under 65 for three-quarters of the July 1 to June 30 KiwiSaver year. So your maximum government contribution will be three-quarters of $521, or about $391.
To receive that, you need to contribute twice as much – $782 – during the KiwiSaver year.
There's one exception, though – which harks back to an old rule that applied to people who joined KiwiSaver between 60 and 65.
They used to get at least five years of government contributions and compulsory employer contributions, and were locked into KiwiSaver for five years.
That stopped in 2019, but not for people going through their five years at the time. Those people can choose between:
• Continuing to receive the government and compulsory employer contributions, and continuing to be locked in, for the five years.
• Gaining access to their money any time after they turn 65. But their government contributions will end then, and their employer can stop contributing – although many continue.
What about the young ones? KiwiSaver government and compulsory employer contributions start when you turn 18.
The maximum government contribution in your first year will be proportionate to how much of the July-to-June year you are over 18.
Many in their late teens contribute little or nothing to KiwiSaver. It's great for parents, grandparents or others to boost the young people's contributions so they get as much as possible from the government.
Q: We are a married couple, in partnership in a small food business. Due to Covid, we couldn't trade during lockdown. However, we received the government subsidy of $7029.60.
I have checked the IRD website and spoken to IRD, and have not received a definitive answer as to whether this amount was subject to PAYE or taxed at source, or even tax-free.
Your help would be much appreciated. I am anxious to complete my IRD filing obligations prior to 7th July.
A: Says an Inland Revenue spokesman, "The Covid 19 wage subsidy was money given to employers who applied (including those that employed themselves) via MSD, to be paid out as income. It essentially replaced, for example, sales revenue a business might receive, part of which as a business you would pay as salary/wages and withhold the tax on – or declare it in an IR3.
"Either way you have to pay tax on income."
He adds, "Your readers should talk to their accountant for a completely authoritative statement."
- 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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