Diana Clement: Don't fritter away your hard-earned money

There are ways to look after your money. Photo / 123RF

You've worked hard for your money, now keep it. That doesn't mean giving up on good causes that you support, of course. Rather, don't fritter it away, don't let scammers get their mits on it, don't overpay unnecessary fees or choose to gamble it on ill-thought-out investments.

Going guarantor on someone else's loan

Too many parents in particular get caught out by guaranteeing loans for children and other relatives. This comes back to bite many people when bad fortune or behaviour befall the borrower and the guarantor is made to pay up.

Flash returns

People can and do make money buying and/or trading shares (equities). They also don't tell you when they make a thumping great loss. It's okay to buy companies' shares providing your money is well spread. If you buy 10 (or even more) very different investments and one proves a dud you have most likely still made money overall. If you have more than you can afford to lose in one investment, you'll be in trouble sooner or later.

Specialist funds that use managers instead of computers to pick the best investments, do cost more, and may beat lower-cost funds. Photo / 123RF

Fees

The fees you pay on KiwiSaver and other funds are a bit of a big bogey in the media. I'm not quite in that camp. It's true that tiny differences in fees can eat into your returns long term. On the other hand, it costs money to run good funds. Specialist funds that use managers instead of computers to pick the best investments, do cost more, and may beat lower-cost funds. But do compare the after-fees return of that specialist fund against funds that reflect an index such as the NZX50 or S&P500. Or when comparing two nearly identical funds you may find that the one that charges slightly more has some added benefits, such as investing responsibly.

Tax-effective investments

If you're investing for the sake of lowering your tax bill (AKA making money out of the taxpayer), be warned that it could backfire. Case in point is highly leveraged property investors who until March this year may have been just breaking even. Now, thanks to the Government's 2021 housing package, they've suddenly lost the ability to claim mortgage interest against income, and many are now newly subject to the "bright line" capital gains tax. Their gamble came back to bite.

Fads

Some businesses come and go. If you hold onto investments in fad companies for too long you may lose out. A great example was the company Crocs. It hit US$66 in October 2007. Then fashions changed and its shares fell to US$1 each. For the record, after 14 years, Crocs has finally returned from the dead, hitting the US$66 mark in January this year, but long after many had sold out at a loss.

Failing to diversify

It's all good having multiple investments. If they're all subject to the same winds, then they could all suffer the same fate. I always think of the late 2000s, when too many New Zealanders had their entire life savings spread across multiple finance companies. Almost all went to the wall within two years because they were too dependent behind the scenes on property development.

Get-rich-quick investments

Super-sized returns often come with the same amount of risk. A lot of people start investing in investments such as derivatives, forex (and cryptocurrency). The trouble is they're mostly a zero-sum game where every time an investor wins, another loses. A good chunk of the people who invest in these lose.

Scams

Unfortunately, scammers are getting very slick at what they do. Netsafe's last annual report noted New Zealanders had reported losing nearly $19 million in 12 months. If that total included unreported fraud, it would be much higher. As I've written before, it's not only dumb people who get caught. Some of these scams are super believable, especially email redirection frauds where a scammer changes the bank account number you are making a large deposit into for things like house purchases or building work.