Mary Holm: Don't just flit to brightest flower

Some KiwiSavers flit like butterflies from provider to provider, depending on which fund looks most beautiful at the moment. Photo / Supplied

You keep raving on about how good KiwiSaver is. However, I feel many investment companies like yourself are promoting how much money the Government gives you and are not actually looking at the providers' skill at increasing your wealth.

For example, my KiwiSaver - which I started on October 1 last year - from all contributions lost $187 of the original amount placed with them. I have a mixture of growth shares, cash and fixed interest. Can this be blamed solely on the economic climate?

I have looked at other KiwiSaver accounts, and some have performed better. Would you advise swapping to another KiwiSaver? What is involved in doing this?

I think if this money was all my hard-earned cash I would have swapped it months ago, as a term deposit in a bank would have given me more interest. Your advice would be appreciated.

I'm puzzled that you sought my advice, given that you think I'm an investment company and therefore likely to be self-serving. But luckily I'm not, as you can see at the bottom of this column.

I gain nothing from your being in KiwiSaver - in fact, as a taxpayer, I lose. However, you will almost certainly come out ahead. Already, you must have much more in your account - because of Government and perhaps employer contributions - than you have put in yourself.

That doesn't mean, though, that we shouldn't be critical if a provider performs badly. So how has yours done? It's too early to tell. Your fund includes shares, and they often perform badly over short periods. You really need 10 years or more before you can judge a share investment.

When KiwiSaver started, I worried about members switching providers to chase high short-term returns. And it does happen, with some people flitting like butterflies from flower to flower, depending on which bloom is most beautiful at the moment.

But just as the loveliest flowers often fade first, high-performing funds often do badly soon after. Similarly, some low performers do well soon after. So no, I wouldn't suggest you move schemes because of poor short-term or even medium-term returns.

Under what circumstances should you switch providers? Firstly, if the fees are high. Low fees can make a big difference to returns, especially over longer periods. The KiwiSaver fee calculator on www.sorted.org.nz is on leave for a while, to adjust for changes in the Budget, but keep an eye on it as it's unbiased and useful. And - in response to another reader's concerns about all the different fees in KiwiSaver - this calculator incorporates all of them.

Secondly, communication is really important. If you don't receive clear, easily understood messages from your provider, you might want to switch to a good communicator. How do you tell? Check out their website or literature. Then ring them or email them with a question and note how quickly and well they reply. Also, ask for a sample statement showing how they regularly report to members and check that you can follow it.

It should be pretty easy to switch providers. Just tell the one you want to move to. They will contact your current provider and, if you are an employee, notify Inland Revenue to send your money in the right direction.

By the way, if you really are keen on bank term deposits, you could switch to a KiwiSaver cash fund that invests in them and similar low-risk securities. However, if you are in KiwiSaver for more than five years - and especially if it's much more - you are highly likely to do better in a riskier fund.

Happy saver

Been in KiwiSaver from the beginning. Just received my account statement for last year. My 4 per cent contributions of $2500, plus employer and government's $2300, plus investment earnings of $998 in a growth fund, saw my balance increase by close to $6000. Even with the reduced tax credit this will still be a great deal.

Indeed it will.

If your contributions have been the same throughout, your balance by now is probably somewhere around $20,000 - perhaps more. That means your return is nothing exceptional.

But you're looking at it the right way. If you consider the returns on just the money you have contributed, they are great. And that's the relevant measure. After all, if you were investing elsewhere, you wouldn't have contributions from others.

It would be good if we could get you chatting to the previous correspondent.

Still a decent return

As a member of KiwiSaver since day one (joining on the basis of "when they're giving money away I want to know where the end of the queue is!") I have been happily contributing $87 a month since retiring over two years ago and receiving a net return of 100 per cent on my investment. The Government cutting its contribution by half means my net return will be reduced to 50 per cent.

Unless you can suggest an alternative investment with a better return than 50 per cent and equivalent security, I will continue happily contributing for as long as I am able and advise others to do the same.

As for "tinkering" with NZ Superannuation, astute politicians will be well aware that previous governments have fallen due in no small part to such meddling. They will know there is a bottom line below which the (ever-ageing) electorate will simply not tolerate and vote them out of office. As John Key says, there is not a lot to be said for being on the opposition benches.

We've gone from a KiwiSaver grouch in the first letter to a realist in the second letter, and now we have an over-enthusiast!

The 100 per cent - and later 50 per cent - returns on your contributions apply only to the amount you put in each year. The rest of the money in your account, which was contributed in earlier years, simply earns whatever your KiwiSaver fund earns, often somewhere between zero and 10 per cent a year. That waters down your total return increasingly each year as your balance grows.

That's not to say you're not doing well. Under the current tax credits, which double your own contributions, you end up with a balance twice as big as in a similar non-KiwiSaver fund. And with the new smaller tax credit you will still end up with a balance one and a half times as big. Not to be sneezed at.

But it's not quite accurate to say your total return will be 50 per cent in years to come.

While I'm being a wet blanket, you might not realise that the tax credits will stop when you turn 65 or, if you joined KiwiSaver after 60, five years after you joined. After that you can continue to contribute, or just leave the money there, or withdraw some or all of it. But without the tax credits, I'm afraid the really high returns will be a thing of the past - unless your fund does extraordinarily well.

On NZ Super tinkering, I disagree if you are talking about what is often proposed - the gradual raising of the age at which NZ Super starts. Current recipients and people over about 55 wouldn't be affected. And it seems to me that younger people already expect a less generous deal.

You might be right, though, if you are talking about reducing NZ Super payments - although a cash-strapped government might get away with cutting annual increases. Currently, NZ Super increases with wages, but it could be changed to increase with inflation, which usually grows more slowly.

P.S. Please don't stop being happy!

Ordinary investment

I joined KiwiSaver when I was 64 (am 65 now). I pay $20 a week, but I am thinking of increasing this amount. Would this be a wise thing to do?

Good on you for getting in while you could - before turning 65. It sounds as if you are not an employee, so your only incentive, now that you have received the $1000 kick-start, will be the tax credit.

That means that any contributions above $20 a week - the maximum that receives the tax credit - will just be ordinary investments, earning whatever your KiwiSaver fund earns.

You could do just as well by putting that money in a similar non-KiwiSaver fund, perhaps run by your provider. And you will be able to withdraw the money whenever you like, whereas in KiwiSaver you'll have to wait until five years after joining.

On the other hand, having all the savings in the one account is a bit simpler. And if tying up the money doesn't bother you - perhaps because you have plenty of other savings - there's no good reason not to boost your KiwiSaver contributions.

Index funds

I noticed that you are quite keen on investing in index funds because, as you say, they will give you average market return without the added cost of active management.

My query is this: what happens to the index as index funds become more and more popular? For example, take the extreme case where everyone decided to invest in the same index fund. What does the index actually track then?

The prices of shares in the index - the same as ever.

I assume you mean that everyone who directly owns shares would sell them and put the proceeds in the index fund. What would the index fund do with that money? Buy shares. With the supply from the individuals equalling demand from the fund, share prices probably wouldn't change much.

We would have a problem, though. As I said last week, the efficient market depends on vigilant professional investors buying or selling shares the minute news about a company is announced. That means the price of any share pretty much always reflects all information the public has about the company.

In your scenario, nobody would be watching the markets, so pricing would end up being out of whack.

But hang on a minute. That means some shares would be really good buys.

Something tells me that at least some expert investors would realise that, and break away from the index fund to scoop up the bargains. In a free market, there will always be those aiming to beat market performance.

Active share fund managers - the ones who don't follow indexes - have occasionally told me off for recommending index funds. They say index investors are bludging from active investors, because they count on them to keep the market efficient.

My response: Nobody is forcing you to use active management. Clearly you don't do it as a favour to me, but because you think you can profit from it. I wish you good luck, but I don't think I need to thank you.

* Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her 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 Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (pref daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.