Mary Holm: Don't let downdrafts send your KiwiSaver off course

Like flying, when investing, it pays to stick with your flight plan. Photo / Getty Images

OPINION:

Q: In June, I looked up from my book while the stock market was tanking and snuck a peek at my KiwiSaver. Everything I had gained since I joined had gone and I was back to where I started.

Then in July, for no apparent reason the Dow index shot up and I made back 80 per cent of my "loss". Great! But then the US Federal Reserve chair made it clear that he would fight runaway inflation by using unprecedented, continuous 0.75 point interest rate rises. From the second week in August the Dow has collapsed 18 per cent.

Now, yes, long term, the economy and KiwiSaver will recover. But actuary tables tell me I don't have 20 years, and who knows how long this coming recession will last?

But that's not a concern as I got out in the first week of August. (If I had waited one more week I would have made back 100 per cent, but that's okay, too.)

Yes, nobody can time the markets, but there comes a point when classic financial advice must give way to pure common sense. I am happy with a 5 per cent (safe under the coming bank deposit insurance scheme) compounded term deposit (TD) for five years.

Yes, that's currently below inflation, but that will come down, as will TD rates to 2 per cent over the five years, but I will still have my 5 per cent.

Eventually the Federal Reserve will signal that they will reduce the 0.75 per cent rises, at which point the Dow will ascend. And that's fine too as I have layered TDs which mature each year and I will get back into KiwiSaver and enjoy the rise.

This doesn't work for everyone, and younger people will do well by sticking to the course. But I am going back to a good book and disregarding the stormy times ahead with actual cash coming in each month.

A: Five years ago, in late September 2017, a reader wrote to me: "We frequently read and hear that the market is due for a big correction soon, and we wonder whether we should put all our savings in a bank deposit instead of shares before this happens."

I encouraged them to stay the course, and I hope they did. Since then the New Zealand sharemarket has grown 45 per cent, including dividends. And the world sharemarket has grown 70 per cent, also including dividends.

What if you are as wrong as our 2017 friends were about where the sharemarket is headed?

Sure there are worries about the economies around the world. But that doesn't mean share prices will fall further. Big institutional share investors, such as KiwiSaver providers, have heard the US Fed, and that knowledge will already have pushed down share prices.

Everyone, including the Federal Reserve chairman himself, is uncertain about the future.

And that uncertainty, too, is "discounted" into current share prices.

In other words, share prices don't fall when economies stumble. They fall when experts first realise economies are likely to stumble in future. Even if the US and New Zealand economies decline further, if the decline is not as severe as experts currently predict, share prices are likely to rise.

Maybe that's what happened in July, until the outlook darkened again.

Where does that leave us all? As always, flying blind into the sharemarket future. That calls for the use of instruments. And what do the flight instruments say? "Hold your course!" Unfortunately, you've already changed route. Sometimes a market timer like you is lucky and gets it right. But on average those who get in and out of shares do lots worse than the stay putters. As hugely successful share investor Warren Buffett puts it, "Our favourite holding period is forever". Still, you sound content. Enjoy that book.

What, me worry?

Q: I think it's abundantly clear that we will move into a large, long recession over the next few years. So I pulled all my shares, managed funds etc and have them in the bank under fixed one-year terms. Suits me.

Many think the economy will right itself soon. They don't look at overseas business news. But from my observations the world markets are dropping at an increasing rate. Interest rates are tracking up and still inflation is rising.

Maybe for people's peace of mind it's good not to worry about the world economy?

A: Worry isn't good, but awareness is.

It's wise to watch economic developments so you know what to expect when your mortgage term or term deposit expires, and have a feeling for what might happen to grocery prices, job markets and so on.

But it's not wise to try to translate economic news into share price forecasts, as explained above.

I hope that you, like our correspondent above, don't live to regret your moves.

KiwiSaver shift

Q: I was part of Aon KiwiSaver, which was sold to Fisher Funds. In July, Fisher transferred my funds to an "equivalent" fund. The info they provided said I wouldn't be "materially worse off".

However, in the transfer I lost nearly $2000 through paper losses being realised. I'm in higher growth funds, as I'm in my early 40s. When I questioned this with Fisher they told me that as I'd invested in equivalent funds the loss wasn't crystallised.

I feel like it's a bit of public spin and against normal perception. Any thoughts on this?

A: Until now I've never considered exactly what happens when a KiwiSaver scheme closes and members are transferred to another scheme.

While it might seem simple to move people from one growth fund to another, for example, not all growth funds are the same.

Some hold about two-thirds shares while others hold close to 90 per cent shares. The latter will probably be more volatile, but with higher average long-term growth.

If your money was transferred from a riskier growth fund to a less risky one at a time when share prices are falling — like recently — you would indeed be making paper losses real. In effect, you would be selling some shares while they are down. Is that what happened to you?

You've sent me a letter from Fisher Funds showing the four Aon funds you used to be in, and the Fisher funds they transferred you to.

In two cases, the old and new funds are pretty much the same risk level. In the other two cases, your risk reduced somewhat in one transfer and increased somewhat in the other.

And you had more money in the latter transfer. A rise in risk when the markets are down is good. It's like buying cheap shares.

All in all, then, it doesn't seem that you have suffered a loss in the transfer. The $2000 drop was probably the result of market movements around that time. If you had stayed in Aon, your balance probably would have fallen by around that much — and possibly a bit more.

Note, though, that whenever anyone's KiwiSaver account is transferred to another provider because of a takeover, there's no obligation to stick with the new provider. If you would rather be elsewhere, just approach your preferred provider and they will move you.

Shocking news

Q: Like many people, checking my KiwiSaver balance gives me a regular shock (my balance has reduced $50,000 in the past year). I contribute 10 per cent of my pay. Should I reduce this to something like 4 per cent during this downturn?

A: No! Units in your KiwiSaver fund are cheap these days. If anything, increase your contributions — by sending money directly to your provider. And try not to look at your balance too often. A couple of times a year is enough.

Saving the nest egg

Q: I am 71 and retired. I am in a KiwiSaver conservative fund and in another balanced fund. Last year it seemed I would have enough money to live on forever.

I am living off NZ Super and regular fortnightly withdrawals from KiwiSaver. I have lost 9 per cent of my nest egg over the last eight months, and it continues to drop. With world economic conditions, this seems likely to continue. This worries me.

Should I cash in the non-KiwiSaver investment and put it on term deposit at the bank?

This investment is losing more money than the KiwiSaver. At least this way, I will not lose any more from this fund.

A: Last week I suggested readers put the money they expect to spend within three years in a cash fund or term deposits, their middle-term spending money in a bond fund or balanced fund, and their longer-term money in a higher-risk fund or shares.

Your KiwiSaver fund isn't at low enough risk for spending money. Conservative funds can hold anything from 10 to 35 per cent in shares.

Many also hold lots of bonds, and both share and bond values have fallen recently.

I suggest you move the KiwiSaver money into a cash fund or bank term deposits, and continue to make withdrawals from there.

Leave your other money where it is, as your middle and longer-term money. I don't think you would cope with higher risk than that. The balance will keep fluctuating, but over the long term it will probably grow more than in lower-risk investments.

Risk — who needs it?

Q: Does your investment strategy ever change, by taking into consideration the current market environment?

The couple last week, 60 and 72, were asking about the right approach for their $400,000.

Shouldn't you be trying to minimise your risk at this age? With deposit rates nearing 5 per cent for a five-year term, is this not an acceptable return? Why the need to take on any extra risk? Protect the nest egg I say.

I can understand your recommendation when deposit rates were much lower, but now that they have risen, should the strategy change?

A: Over time, average returns are always higher on higher-risk investments.

Anyone at any age with savings they don't expect to spend within about three years will almost certainly end up better off if they take more risk with that money.

Having said that, it's certainly not so bad to park your savings in term deposits these days. If you've got enough money for a comfortable retirement — even if term deposit rates fall back to 1 or 2 few per cent later on — go for it. If the kids inherit less, too bad!

Cross-lease OK

Q: I note the poor publicity that cross-leased properties have endured recently, including coverage in your excellent column. However, I am delighted to own a home on a cross-leased title with a neighbour in a good suburb.

With the Auckland Unitary Plan, any freehold section around my neighbourhood can have a huge multi-apartment, multi-storey complex built on it. However, the cross-lease arrangement means it is impossible for such a development to take place on my neighbour's site nor mine. How wonderful. I wouldn't have it any other way.

A: At last we escape from sad stories about KiwiSaver and shares!
You make a good point. You and your fellow leasehold owner would have to both agree for your property to turn into an apartment complex. At the rate some neighbourhoods are changing, knowing the house next door won't suddenly turn into a row of townhouses is a big plus.

Imperfectly perfect

Q: We settled for a cheap cross-lease standalone house on a large section after a long search in Avondale, shared with one other house.

The house is a bad design and south facing. Being cheap, we paid off the mortgage with much discipline on a low income. We travelled to beautiful countries.

The house provided equity for our second home. We are mortgage-free again. Now the cross-lease house is surrounded by high-rise homes but continues to give an income. It's not all bad!

A: What a great example of a less-than-perfect first home — with a price to match. And, just as our previous correspondent predicts, it's lying low among the multi-storeys!

Clearly cross-lease homes can be good buys, just as long as the purchaser is aware of the rules.

- Mary Holm, ONZM, 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 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.