Mary Holm: Tax-cut money is ideal to invest

We are a couple in our mid-30s and are contemplating investing our tax cuts - about $140 per month - in a growth asset such as shares.

In our early 20s we had our confidence knocked by managed funds (allocated to shares) that endured three years of minus 30 per cent returns. We know we're young and shouldn't be so nana-ish, but ever since then we've invested in cash or very conservative investments.

Can you please recommend a way for us to ease into a more growth-orientated asset allocation.

Investing your tax cuts is a great idea, for two reasons. The first is that it's money you didn't have before, so if it's a bit of a rocky road, maybe you can tell yourselves in the downtimes that it was "easy come, easy go".

Secondly, if you invest $140 a month you will be drip-feeding it. That works well at any time, but particularly now when the markets are so iffy. It means you'll make at least some purchases at the bottom of the market.

If investing a fairly small amount gradually doesn't give you enough "easing", you could also invest in a fund that holds property and bonds as well as shares. Over the long term its average return probably won't be as high as in a purely share fund. But the road will be easier, and it will certainly be more adventurous than what you are in now.

When choosing a fund, look for one that charges low fees. That can make a big difference over the years.

By the way, if you are not in KiwiSaver, it would be much better to save via that scheme.

If one of you - or the two of you together - happen to earn around $84,000 a year, your 2 per cent contribution to KiwiSaver would come to about $140 a month. Even if you earn somewhat more or less than that, 2 per cent of it won't be all that different from $140.

If you do your saving through KiwiSaver you'll get government and employer inputs too, which make a huge difference to your total savings.

One more thing: as you venture back into risky investments, promise yourselves you won't take fright and move your money out of them when the going gets tough. That's how people lose lots.

I refer to the letter in your March 28 column regarding your advice to "hold on" to shares in case you "miss out on the upturn". Your response - lengthy and defensive - did not do justice to the underlying point.

This was not someone seeking advice on what to do with the nest-egg, the investment property or even KiwiSaver. On the contrary, it was an opinion piece attempting to say things are bad, could get worse and "holding on" may not be the best policy.

Twenty years to get back to the status quo may be acceptable if the very structure on which our economic system exists wasn't under such intense pressure.

Just this week billionaire investor George Soros stated in a BBC interview, "The international financial system has collapsed and cannot be restored in its current form. It should be recognised that the last 25 years were an aberration and we cannot go back there. We have to reconstruct the financial system from its foundations up. The rebuilding means the previous economic system has to be scrapped."

Soros concluded by noting that the price of inaction may be years of economic devastation worse than the Great Depression.

This is not your normal "hunker-down-she'll-be-right" recession. There are fundamental economic issues that, if not addressed, will affect our lives in a negative fashion over the next period of time. Deleveraging is occurring all over the world, unemployment is rising rapidly, reduced tax takes are being reported, as are increased government deficits.

This will have a flow-on effect, which may lead to increased social unrest and a threat to the provision of social services we have all come to expect. And it is always the "little guy, the Joe" who suffers most.

It's not the end of the world, but perhaps the "hold on" philosophy needs to be reviewed, given what we are facing. Given the prevailing economic conditions, realising a loss now may be better than being scalped later.

Mary, many thousands of "little guys", including myself, read your comments and take your advice. What may be needed now is a little unpleasant advice as the alternative may not be so palatable. Your thoughts on how deep this history-making recession will be, what effect it will have on our lives and what we can do to prosper or survive (if you think it is going to be that bad) would be welcome.

My thoughts on all of those issues can be summed up in three words: I don't know. Nor does anybody else, including George Soros.

Every now and then I read something like your letter and think, "Gosh, perhaps I should suggest that everyone gets out of shares". Then I read an equally compelling, more upbeat article, and think, "Okay, the international financial system is certainly changing, and many people are spending less. But practically everyone will still buy some goods and services, and many companies will keep producing them.

"Sure, some companies will fold, and others will struggle over the short term. But it's quite possible much of the bad news has already been reflected in falling share prices."

I've been studying and watching share markets for more than three decades. People have said, "This time it's different" before. And it always is a bit different, but not fundamentally. We may not come out of this recession with as many fancy financial instruments - thank goodness - but good old shares will still be with us.

Having said all that, I'll confess to being a bit of a Pollyanna. It's possible that share prices will fall significantly further, and take an unusually long time to recover. If you are a really cautious type, maybe you'll want to get out of shares now.

But, as I said two weeks ago, alternative investments have their own risk. Where property goes from here is anybody's guess. And fixed interest investments could seriously lose value if inflation takes off. Pick your poison.

I fully agree with your comments in the March 28 Weekend Herald. Now retired, I have been a small investor for many years, including buying shares during the 1987 crash when all around me were tearing their hair out. Made 16 per cent after tax in 12 months.

Regarding which US share index to use, I think you were somewhat hard on the first questioner. I too thought that the Dow Jones index was the most reliable, simply because it is the only US index that is followed and quoted daily in the Herald, etc.

If the S&P 500 is a better index, then why is it ignored by the Herald, TV and National Radio?

The problem stems from America. The Dow Jones index is much older than the S&P 500, and the US media never switched when the newer and much better S&P index started.

US newspapers often publish both. But the quick "how did the market do today?" index has always been the Dow. You know what they say about old habits.

Still, I did try - back in 1987 when I was business editor of the short-lived Auckland Sun. Before we launched the paper, I researched which share market indexes to use, and we published the S&P 500 as the main US index.

I urged other media to switch to highlighting the S&P 500, but I was a voice in the wilderness.

The fact is that while the Dow Jones index is deeply flawed, it moves pretty closely to the S&P 500, so it's good enough for many purposes. But the trouble starts when you use it for research.

Sorry if I was hard on the reader. It's an issue I've felt strongly about for decades, so perhaps I got a bit carried away.

Oh, and congrats on your "defying the crowd" investing. It works well surprisingly often.

In a couple of your responses in the past, when asked about affordability of property, you mentioned buying a property at the bottom of the pile, taking time to do it up, and then gradually moving on as your finances improve.

This has baffled me. Am I missing out on a secret? Where would I purchase a house in the Auckland region where I could sustain the mortgage on a household income of $60,000? We wouldn't mind doing up a property over time, there is just nothing affordable in Auckland.

I obviously have to be within commuting distance from my work and close to my partner's client base, from which he can be called upon at short notice. (By the way we live on the North Shore.)

I would be interested in your response on whether there is a secret stash of houses for sale at affordable prices and in a locality where we don't have to give up our jobs (in which case we wouldn't be able to pay for anything).

It all depends on how much you really want to own your own home. While there aren't many lower-priced houses in Auckland, there are units and apartments for less than $200,000. And readers may have other suggestions.

I'm not denying that it's still tough for first home buyers. But if you are willing to sacrifice spending so you can save a deposit, and then put up with factors like a small home, a harder commute and a longer drive to clients, you could make it work.

Not worth it? That's fair enough. As long as you save enough to pay for your accommodation in retirement, renting can be a satisfactory alternative.

But if you make the choice to rent, please don't moan about it. For a couple on $60,000 the options are there.

Mary Holm is a seminar presenter, part-time university lecturer 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 (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.