Mary Holm: How a money mentor can be like a superhero

Gal Gadot stars in Wonder Woman 1984. Photo / Supplied

OPINION:

Q: Perhaps you have some idea of what I can do? Is it too late for me?

The sad reality is that I have no job, no savings either. I've lost my hearing and most of my mobility, I am divorced and turn 65 in October.

On the bright side, I own my house worth about $350,000, but it has a mortgage on it of $60,000.

A: Everyone can always do better with their money.

You're actually in a stronger position than many — if I'm right in assuming you have no debt other than your mortgage. You own your home, and from October you will receive NZ Super.

Still, there's probably more that can be done to make your life comfortable, with the help of MoneyTalks. This is a free service, run by FinCap, a non-government organisation that supports 200 free financial mentoring services around New Zealand. It's funded by the Ministry of Social Development.

"We can absolutely help in a situation like this," says Ange Smart, team lead at MoneyTalks. "Firstly, we would let them know they are not alone, that this is far more common than the average Kiwi realises, and often it's because of circumstances out of our control.

"It's never too late to seek help from a financial mentor. They are basically superheroes who don't wear capes.

"Importantly, we make sure that a person's immediate needs are met, have they got enough kai, is their power connected etc. Once that has been established, we can find out where in Aotearoa they are and hook them up with a financial mentor that they can either see in person or communicate virtually with.

"For this example, our Helpline advisers can give suggestions on how to help in the immediate, but I think they would really benefit from having a financial mentor walk alongside them and make sure they are looked after financially but also emotionally, by engaging other wraparound services if needed.

"Financial mentors can renegotiate outstanding debts to make them manageable, can advocate to ensure that the client is receiving all eligible entitlements from Winz, and set up a plan for the future to enable future financial wellbeing. There is always hope; the hardest step is making that first call." Go to moneytalks.co.nz for more information. And do make that call!

Switching KiwiSaver

Q: I have had a good look at my KiwiSaver, and with the use of the sorted.org.nz guides have decided I am in the wrong type of fund. I'd like to stay with the same provider, but move from a balanced to a growth fund.

Aside from the actual management fees for each fund that will vary, are there fees for moving funds? Also, I am having trouble deciding whether to move the existing savings all to a growth fund or keep the existing savings where they are and only make future contributions in a growth fund.

I understand moving to a more conservative fund in a market downturn is not necessarily a good idea, but what about the reverse?

A: It's great to hear from someone who wants to move their KiwiSaver money not because of what the markets are doing, but because they have used the tools on Sorted — probably the KiwiSaver Fund Finder.

You've obviously answered questions there about when you expect to spend the money, and how well you could cope with market volatility, and realised it would be good to move to a growth fund. In answer to your questions:

• I don't think any providers charge a fee for moving from one of their funds to another.

• If you leave your current savings where they are, they almost certainly won't grow as much as in a growth fund, over the long term. But maybe you're a little concerned about how you will feel when — not if, but when — your balance drops a lot in the next downturn. It will rise again, but it may take a while.

If that's the case, you could move gradually, so you get used to the increased volatility. Perhaps switch a third of your current savings to growth now, another third in a year or two, and the rest a couple of years later.

• Moving to a less conservative fund — which is what you're planning — is a good move in a downturn. The value of the units in the growth fund will probably have dropped more than in the balanced fund, so you're buying bargains.

Picking winners

Q: I am pretty aghast at your choice of examples when responding to your "Retirement gamble" correspondent last week.

You have used the previous person's ANZ vs ASB example, but then completely cherry-picked how to present the comparison.

You have chosen to use the banks' respective fees (1.05 per cent and 0.7 per cent) but then completely ignored their long-term return figures and pretended they returned the same value.

An honest comparison would be $400 a month for 50 years, with ANZ averaging its 10-year return of 9.85 per cent a year after fees and ASB averaging its 10-year return of 9.1 per cent a year after fees. Doing that reveals:

• ANZ $6.581 million.
• ASB $4.891 million.

This gives ANZ a clear win.

Will ANZ consistently return 9.85 per cent? No one knows. Will ASB consistently return 9.1 per cent? No one knows. But a 10-year average will smooth out providers that have wide swings, which is what you're really warning against by chasing return figures.

Disclaimer: I have NO money with either provider.

A: I understand where you're coming from, but I'm coming from somewhere else. And the research supports me!

I used the same before-fees return for both funds because there is no reason to think ANZ's KiwiSaver Growth Fund will perform better than ASB's similar fund in future. Smart Investor shows us that ASB's fund did better than ANZ's fund in two of the last four years, in 2018 and 2019. Who knows what lies ahead?

While it's true that it's better to look at a fund's 10-year returns than its shorter-term returns — which can be all over the place — 10-year returns are still a poor guide for the future.

A while back, US research firm Lipper Analytical Services looked at the 20 best performing US share funds in 1988 to 1998. How did they do in the following decade?

Out of 2322 funds, the one that topped the list in the previous decade came 1485th. The best that any of the 20 could do was 208th. The average performance of the previous decade's top 20 came three-quarters of the way down the list. In other words, most performed abysmally.

I've tried in vain to find more recent research that similarly compares two decades. But I did find lots of research by S&P Dow Jones Indices over three- and five-year periods.

Their paper on US share funds titled Does Past Performance Matter? The Persistence Scorecard says, "For funds categorised as top performers in September 2017, 47 per cent maintained their top-quartile performance the subsequent year. However, there was a dramatic fall in persistence afterward — just 8 per cent of domestic equity funds remained in the top quartile in the three-year period ending September 2019.

"This result (8 per cent) is consistent with the notion that historical performance is only randomly associated with future performance." The paper also notes that the longer the period, the less likely top-performing funds will stay successful.

Over five years, "Less than 3 per cent of equity funds in all categories maintained their top-quartile status at the end of the five-year measurement period. In fact, no large-cap fund (a fund that invests in big companies) was able to consistently deliver top-quartile performance by the end of the fifth year." What it all amounts to: it's foolish to expect funds that have done well to continue to do well.

Passive problems

Q: I have been a big fan of low fees above all else. Not so sure on the passive side of things, although our KiwiSaver is in a passive growth fund.

If everyone invested passively then exceptional companies would always be undervalued and poor companies would be overvalued. If the long-term trend is towards money moving to passive over actively managed funds, then isn't this a house of cards?

Effectively blind investing.

A: Let's put other readers into the picture. Passive funds — sometimes called index funds — invest in all the shares in a market index and don't trade unless the index changes.

They are cheap to run, and so charge low fees.

Active funds — the traditional type — have managers who choose which shares to invest in, and when to buy and sell them. Surely that's better than just buying and holding the whole lot passively?

The trouble is that picking good shares that are selling cheaply — what you call undervalued companies — is devilishly hard. If a fund manager thinks a company is going to perform better than expected, she or he has to buy that company's shares before another big investor realises and gets in and buys them, pushing up the price.

The company may still be good, but if its share price is no longer cheap, it's not a particularly good investment.

As noted in the previous Q&A, it's hard to keep on being one of the top fund managers.

The growing realisation that low-fee passive funds are a better bet over the long term means they are becoming increasingly popular around the world — which is what's worrying you.

But there's a long, long way to go before all share funds — including higher-risk KiwiSaver funds — are passive.

Even in the US, where the move to passive is more advanced, passive funds account for only about 20 per cent of the value of the US share market, says S&P Dow Jones.

And while the percentages in the US, New Zealand and elsewhere are likely to keep growing, they won't get anywhere near 100 per cent for a couple of reasons:

• Many people have trouble believing that active fund managers can't beat index funds over the longer term. After all, in most other fields of endeavour, if you try harder you do better. And active managers' marketers will keep trying to convince people that they are the special ones that can keep outperforming everyone else.

• Imagine if we did start getting towards having only passive fund management. The few active managers left would find it quite easy to be the first to spot undervalued companies, because they would have few competitors. Their performance would be good enough, despite their higher fees, for some investors to prefer them.

We would reach an equilibrium with enough active managers still operating to keep the market efficient at correctly pricing each company's shares.

Meanwhile, most of us could stick with our passive funds.

The right insurance

Q: I have worked in the insurance industry for more than 20 years. Regarding last week's couple with the life insurance, it sounds like they have term life insurance.

In their fifties they should expect premiums to rise significantly each year, plus the CPI if their cover increases with inflation. For example, there might be a 10 per cent annual increase plus 7 per cent because of current inflation.

They should be reviewing their cover regularly — at least at each policy anniversary — to determine if it still suits their needs. The expectation is that this cover will reduce as they pay off their mortgage, children leave the nest, etc.

It likely would be a mistake to reset their "cover plus KiwiSaver" to the amount that they wanted when they first took out the policy (however long ago that was), as their needs may have changed. Instead, they should reassess how much cover they want.

They should also look forward to determine how much money they will need for retirement. Only use the KiwiSaver to offset the insurance (or pay down the mortgage) if the remaining spouse will not want to spend it in retirement.

Expect to cancel the insurance if you are lucky to live to a ripe old age, as term premiums will continue to increase until it becomes uneconomic to continue.

A: Makes sense. Thanks for your expertise on this.

- 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.