Should I put all my daughter's KiwiSaver in a growth fund? Photo / 123RF
OPINION
Q: My daughter was born in 2014, and we immediately took out a KiwiSaver in her name.
We have regularly saved into her account and added FlyBuys top-ups of about $300 a year.
I have always saved 50 per cent conservative and 50 per cent growth, including in my daughter’s KiwiSaver. Her growth fund balance today is $11,186 and the conservative fund is $9360.
I could not bring myself to invest at 100 per cent growth. Perhaps I should do that from now on?
A: Perhaps you should, given that your daughter is about 9 now and almost certainly won’t use her KiwiSaver money to buy a first home within 10 years.
There will have been periods when you may have thought twice about having some of your daughter’s money in a growth fund. This was probably particularly true early in 2020, soon after Covid broke out, when the share markets plunged.
Fortunately that came after a long period of higher returns in growth funds than conservative funds – probably giving you confidence that your daughter’s growth fund will keep doing better, on average.
You’ve proven you could get through a downturn, so you should be able to do that again – when, not if, the markets fall again.
However, once you think your daughter might be within 10 years of a home purchase, I suggest you switch her to a bond fund or balanced fund. And then, within three years of purchase, move to a lowest-risk defensive fund. This takes care of the worry that the markets will plunge just before she buys.
Hopefully, by then she will be taking an interest and she can make the move.
Q: Recently in your column, someone raised the issue of losing a substantial amount from a KiwiSaver withdrawal after 65, caused by a delay in processing by the bank.
You justified that by asking whether the complaint would be there if that delay resulted in a gain.
Well, I too had suffered and hence feel that the provider should bear the cost or retain the gain, as followed by many nations outside New Zealand.
The provider must verify the applicant’s credentials, immediately or at the latest by the next working day, and if it is in order the rates of that day should be applied for the transaction.
The provider can take its time to process the claim and disburse the amount. The question of gain or loss will thus be above board.
A: Not sure I “justified” what happened by asking that question. But you raise an interesting point.
Perhaps a provider could guarantee that someone applying for a withdrawal would get a specific amount, once they’ve checked the applicant is who they say they are. That won’t be immediate but there would be less time for the markets to change.
Sometimes, of course, the provider – or perhaps the rest of the investors – would lose, if prices fall between the guarantee and selling the units. But given that KiwiSaver funds gain more than they lose over time, the provider/investors would benefit in the long term.
It does raise another issue, though. In situations where the provider gains, will I get letters from people angry that they missed out on that gain?
Q: I have just received Contact Energy’s results and had a great deal of difficulty understanding them. It does seem to be a trend that appears to have been a deliberate attempt to confuse the shareholders.
All the majority of shareholders really want to know is what the dividend is and the profit or loss after tax.
Some standard format for company results would help solve this ever-increasing issue.
A: I don’t normally comment on an individual company’s shares. But Contact Energy has 62,000 shareholders – fewer than Mercury with about 100,000, but more than Meridian, at 45,000, says Oliver Mander of the NZ Shareholders’ Association. It’s one of New Zealand’s most widely held shares, so I’ve made an exception and forwarded your message to the company.
“This year, we reported a profit of $127 million, which recognises an expense of our contract with the Ahuroa Gas Storage facility,” says Matt Forbes, head of corporate finance. “Our underlying profit was $211m, which is up 16 per cent from last year.”
On September 26, Contact will pay a final dividend of 21 cents a share. This will take the annual dividend to 35c, the same as the year before.
Forbes adds: “It’s important to us that our results are easy to understand for all shareholders. We provide information about our results in a few different ways, such as email communications and a live presentation, which is recorded and available on our website.”
Still, I wouldn’t mind betting that your letter will prompt Contact to try harder with its announcement next year.
The Reserve Bank is updating an online booklet I wrote for it several years ago, called Upside, Downside – A Guide to Risk for Savers and Investors.
Over five weeks, I’m including excerpts in this column. This week we look at the problems that arise when you own one or just a few shares, properties and so on, as opposed to owning many.
The updated booklet is being launched on the Reserve Bank website, rbnz.govt.nz, through this month.
Some economists claim “There’s no such thing as a free lunch”. You can’t, for instance, get a high return with low risk. Others disagree. There is one free lunch, they point out. By diversifying across lots of shares, lots of properties, lots of bonds or whatever, you can reduce the total risk of all your investments without reducing your expected return.
To keep the numbers easy, let’s say that the annual returns we might expect on a single share range from minus 40 per cent to plus 60 per cent, with an average of 10 per cent.
On a portfolio of 20 shares, we might expect the same 10 per cent average return. But the range would be narrower – perhaps minus 20 per cent to plus 40 per cent – because when some shares do badly, others do well. The return is the same but the risk is lower.
Market crashes do occasionally happen, when practically all prices drop. But generally, while a single bond or share can become worthless, and a single property can lose much of its value, it’s much less likely that all of them will do badly at once.
Every big institutional investor always diversifies its holdings. You’re silly if you don’t take advantage of it.
You can gain good diversification through managed funds specialising in bonds, property or shares. You also benefit from the savings gained from the manager’s large-scale operations. For example, a fund manager will pay much lower brokerage per share than you would pay if you bought individually. But, as noted earlier, you do have to pay fees, which can partly offset the advantages.
Fixed interest
If you’re investing in investment-grade bonds, the bond issuers are not very likely to default. It’s still possible, though, so it’s a good idea to invest in several different companies.
And if you’re investing in higher-risk fixed-interest instruments, where default is more likely, it’s particularly important to spread your money around – although even that didn’t save some finance company investors early this century. It’s best to stick with high-quality fixed interest.
Property
With direct investment in property, it’s hard to diversify across many properties unless you have lots of money or are willing to take on the risks of gearing heavily to buy several properties – and can find a lender who will let you do that.
If you insist on direct investment and you can afford only one investment property, keep in mind the following:
Best of all is investment in a broad range of property types in different regions. For many, the only way to do this is via a property fund or shares in a company that invests in many properties.
Shares
Many New Zealand shareholders own shares in just one or a few companies. That’s not clever. Holding just two shares gives you considerably more diversification than one. Three is better and 10 is better still. Some experts say that, to get the full benefits from diversification, you need to hold 20, or even 50, different shares.
The easy way to do this is via a share fund or several funds. If you prefer direct share investment, make sure you spread your holdings across different industries and company sizes.
Concentrating on just one industry, as some investors did during the tech stock boom of the late 1990s, is highly risky. Many tech stock investors saw the value of their portfolios reduced to a fraction of what they had been before the inevitable bust came.
And technology is not the only volatile industry. In worldwide sharemarkets in 1999, the top four performing industries out of 10 broad categories were IT, telecommunications, consumer cyclicals and basic materials. Six months later, they were the bottom four.
People who invest in a wide range of industries tend to have a much less bumpy ride.
Going offshore
With all types of assets, you can boost your diversification considerably by holding international investments as well as New Zealand ones. It’s not uncommon for international investments to be rising while local ones are falling, or vice versa.
The easy way to invest offshore is via managed funds, and it’s common for even small investors to hold units in an international share fund. As it happens, international shares have had a really up and down ride in recent years, growing extremely fast in the late 1990s, dropping an unusually long way in 2000 to early 2003, and growing again since then, only to plunge in the global financial crisis and recover since – with a few wobbles along the way.
Over the long term, though, average returns on international shares have been high. And you can invest in many industries that are under-represented in the New Zealand share market.
Because the New Zealand and world share markets sometimes move quite differently, you can broaden your share diversification considerably by including an international share fund in your portfolio.
Similarly, you can invest in international bond or property funds.
KiwiSaver
Almost all KiwiSaver funds hold a wide range of investments in the asset types in which they invest. For example, a predominantly bond fund holds many different bonds and a predominantly share fund holds many different shares. And many KiwiSaver funds have considerable international investments. Your provider should be able to give you information on their range of investments.
- Mary Holm, ONZM, is a freelance journalist, seminar presenter and 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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