Mary Holm: You've got the money — now to enjoy it

To learn how to loosen the purse-strings, start small - maybe with a book or art. Photo / Getty Images

COMMENT:

Q: I feel like I have always scrimped and been very careful with money — firstly when I was in my 20s as my boyfriend and I saved up to travel overseas as well as buy a house (it was easier back then), and then later when I was a single woman and buying a house on my own.

I met my husband when we were both 40. It was stressful financially for me, as he was in debt and was paying child support, so we made no headway on our mortgage for years.

Now we are 55 and due to starting a successful business, we are in an excellent financial position (mortgage-free house plus two rentals that cover their expenses), but I still don't feel relaxed about money and financial security. It's like my emotions and feelings around money haven't caught up with the new reality. I feel like I should be more generous with money now, but I just find it hard.

A: Many readers would love to have your problem. But that doesn't make it easier for you.

It's often obvious that a person's attitude to money comes from their past. People in my parents' generation who went through tough childhoods in the 1930s depression were often reluctant to take on any debt, except a mortgage, until the day they died.

It seems your history is not about hardship as much as careful money management, at least in your early adulthood. You learnt that if you saved, you got ahead. But then came the tough times. And then came the easy times. It must all be rather confusing for what we might call your financial psyche.

I'm not a psychologist, but I know that a really good first step towards change is to acknowledge your problem, which you have done. It's also a good idea to set yourself a challenge with small steps.

Maybe every month splash out on a small purchase, gradually raising the spending amount. There must be something that excites you — books, art, music, travel — that you would enjoy buying and owning. The next Q&A might inspire you.

Also, research suggests that many people get more pleasure from spending on others than on themselves, so perhaps buy for family or friends, or make significant contributions to a charity.

Readers might have other suggestions — but please don't send me requests for our correspondent's email address in the hope she will spend on you!

Next week we'll look at a letter from a husband who's trying to persuade his wife to relax and spend in their retirement.

Living la dolce vita

Q: I wrote to you last year about whether my husband and I were being rash buying a holiday home in Abruzzo, Italy before paying off our mortgage (letter published July 13, 2019).

I just wanted to let you know that the purchase was completed a few days before Christmas, and we now own our very own tiny corner of Italia. It's a much more sensible property than the one we were considering at the time I wrote to you — smaller, less expensive, less ongoing maintenance required and lower bills overall.

It's next door to a castle with amazing views from the roof terrace over the Majella mountains. And no need to increase our current mortgage as our savings covered it. We can't wait to get over there in May and enjoy it! Thanks very much for your advice, which confirmed our decision.

A: Well done!

Before other readers rush off to buy overseas dream homes, and then complain to me when it all turns to zabaglione, I should note that you and your husband are in a strong financial position and are in your 40s, so you can cope if the worst comes to the worst.

Here's to that first glass of local red, while gazing out beyond the castle to the mountains.

Cin cin!

Thanks for KiwiSaver

Q: I have been in KiwiSaver for six months now, and ended last year with an annualised 8 per cent return after taxes and fees ($12,000 return so far on $300,000 deposited) and can withdraw or deposit as I wish.

It's the best thing since sliced bread, so many thanks to Dr Cullen and Adrian Orr. I don't have to pick "winners" or have to manage a large basket of investments, as people I don't know labour hard 24/7 for me doing it.

NB: You will not hear from me on this when it turns down, of course, as it might tomorrow, but in the meantime I raise a glass.

A: Another toast! Well, it's not far from New Year.

You are obviously over 65, and promptly took advantage of the change last July 1 that allowed people of your age to join KiwiSaver.

From the level of your return it's likely you're in a medium- or higher-risk fund. So you're right, your fund's returns could suddenly plunge into a loss for a while. It would certainly be a mistake to expect them to continue steadily at around 8 per cent a year.

But as long as you can cope with that — perhaps drawing your spending money from another lower-risk source — all's well.

By the way, you're giving Adrian Orr undue credit. Michael Cullen is certainly the father of KiwiSaver. But in 2007, when Cullen's baby was born, Orr was moving from being deputy governor of the Reserve Bank to chief executive of the NZ Super Fund. Most agree he did a great job there, before switching to his current role as Reserve Bank governor. But he hasn't had a big KiwiSaver role.

One more thing: not every KiwiSaver fund requires 24/7 labour. In fact, some of the best ones — called index or passive funds — require little supervision. Read on.

Passive or asleep?

Q: Jamie Gray's article in the Herald last Tuesday refers to the ever-increasing proportion of NZX (NZ Stock Exchange) trades in the last 15 minutes of the day, the closing match.

This is apparently being attributed to the rise of index funds as a preferred investment vehicle for more investors.

Would you please explain to me and your readers why index funds, which are passive, need to rush into the market every afternoon to buy and sell, the activity apparently moving share prices.

If that is really what they do, what do we call investors like myself who sit on a portfolio of shares for years on end, only making small adjustments two or three times a year — passive or asleep at the wheel?

A: Who better to ask than Jamie Gray himself?

"It's because money coming in or out of the ETF gets the closing price," he says. ETFs, or exchange traded funds, are index funds that are traded on the stock exchange.

Adds Gray: "Since they've seen big inflows over the last couple of years, they've tended to be big buyers on the close.

"The NZX has confirmed that ETFs typically use end-of-day prices set during the closing auctions for their daily pricing. It's the same in other markets apparently."

In other words, while index funds do large trades infrequently — only when the index they are based on changes — they need to do a bit of trading when new money comes into their fund, so that the new investors enter the fund at a fair price.

ETF or index fund investing is increasingly popular around the world because it's cheap to run, so fees are low. And average returns tend to be higher than in the average active fund, after taking fees into account.

However, it seems that you prefer to directly buy shares — although your investment style is fairly passive.

I would call you wise rather than sleepy. Research shows that frequent traders generally do a lot worse than those who buy and hold for long periods.

Booster confusion

Q: I was interested to see in your column late last year that Booster is one of the KiwiSaver providers that have index funds.

I have my KiwiSaver with Booster so I rang them to see what the fees are, expecting them to be lower than the rest of their actively managed funds. To my surprise, they aren't lower, they charge the same as their actively managed funds.

Isn't that a bit of a cheek (and a bit of a ripoff) seeing as they do less work?

A: It would be if the Booster funds I listed last year were, in fact, passive.

In my December 14 column, I said the following: "Within KiwiSaver, the following providers have told the Commission for Financial Capability that these funds are passive:

• AMP: AMP Passive International Shares Fund, ASB Moderate Fund, ASB Balanced Fund, ASB Growth Fund (you can invest in ASB funds through AMP).
• ASB: Conservative Fund, Moderate Fund, Balanced Fund, Growth Fund.
• Booster: Asset Class Conservative Fund, Asset Class Growth fund, Asset Class Balanced.
• Simplicity: Conservative, Balanced and Growth Funds.
• SuperLife: 33 of its 40 investment options are passively managed, as well as its Age Steps funds.

"Many of these providers also have similar non-KiwiSaver funds. Check their websites or email and ask them."

However, Booster shouldn't have been in that list.

"Our Asset Class funds are actually not passively managed," says a spokeswoman. "Your email alerted us to a reporting error between Booster and the commission that had them categorised incorrectly, which we have now tidied up. So a big thanks for bringing that to our attention."

Index charges

Q: I am writing in regards to your response on December 14 to the query about index funds. I agree with you that it is best to go for passive or index funds in the long run. This assumes that fund charges for index funds are low and hence you will save money in the long run.

I randomly checked provider websites for fund charges for index/passive funds that you mentioned, and have noted them below for everyone's benefit:

• ASB KiwiSaver Growth Fund, 0.70 per cent
• Simplicity Growth Fund, 0.31 per cent
• Booster Growth Fund, 1.29 per cent

Fund charges on Sorted.org.nz are higher. It seems that Sorted also includes "administration fees".

In the US, Vanguard offers various index funds where fund charges are in the range of 0.04 per cent to 0.20 per cent. This makes me wonder if investing in passive/index funds is worth it in New Zealand?

A: Thanks for forwarding that info.

See the previous Q&A for an explanation about the Booster fees. Fees on the other two funds are certainly higher than you would pay on Vanguard funds in the US — although they're well below average fees for KiwiSaver growth funds. If you're investing within KiwiSaver, they're amongst the best deals.

But what about non-KiwiSaver savings?

Investing directly into overseas funds is more complicated. In a local fund, you don't have to worry about international tax rules, converting returns and balances back to New Zealand dollars, or delays in your heirs getting the money if you die. And if something goes wrong it's probably more easily fixed. But still, some people might think the lower US fees make it worth it.

An intermediate step is to invest in Vanguard funds through a New Zealand company. There are various ways to do this, listed at www.tinyurl.com/VanguardinNZ. I don't know much about this website, but it looks helpful.

• Mary Holm 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 are personal, and 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.