You can worry about the future, but there's no knowing the best time to take to the field. Photo / Alan Gibson
OPINION:
Q: I have a simple question. After a few months of research, I am about to invest most of my savings in two different managed funds.
I am quite concerned about current media reports about the "Evergrande crisis" in China and the "GFC style collapse" that it may trigger in global markets. Do you think there is anything to worry about? Is it best to wait until the dust settles?
A: There will always be something to worry about when considering investing in shares. And there will always be heaps of people — including some with impressive credentials — writing about it.
The fact is that nobody knows, for sure, how things might turn out for the huge Chinese real estate developer. Meanwhile, you are sitting on the sidelines, probably earning a pathetic return in bank deposits.
By the time this crisis plays out, another will loom. And another. You could stay on the sidelines until you have retired, with probably a lot less savings than you would have had if you'd stepped into the game.
Yes, the Evergrande situation might cause a worldwide downturn — although if many professional investors thought that, we wouldn't expect the MSCI world share price index to have climbed an impressive 32 per cent in the last year. Share prices don't only reflect what is, but what investors expect.
In any case, as long as you stick with the three rules of share investing, you should be fine. They are:
• Diversify widely. You will do that by using managed funds. I hope you are looking at international as well as New Zealand shares.
• Use money you don't plan to spend for at least 10 years — despite what our next correspondent says!
• Leave it there, no matter how much the markets might fall in the meantime.
Having said that, if you are investing what for you is a large amount, you might want to invest a third now, a third in three months and a third in six months.
True, in the meantime the uninvested money will probably be earning less in the bank.
But your risk of investing the lot at what turns out to be a market high — which would be discouraging — will be reduced. It's psychologically easier.
If you do that, though, stick with your plan regardless of what the markets do in the meantime.
Q: I take a desultory interest in your column as an ex-IFA (independent financial adviser) from the UK. In general I agree with your advice, but I do find that you are unduly negative about the risks associated with investing in equities (shares).
Recently in your column you say: "Received wisdom says share investments should be with money you do not plan to spend until 10 or more years have passed." This was the sort of feeling when I first became involved in financial services some 40 years ago. However, if you look at the returns on equities over the past 40 years, they far outstrip fixed interest or property.
Certainly you need to spread the risk, as investing in a single share is clearly high risk, but if you invest in 10 or 20 shares, or in a mutual fund, the risk is very significantly reduced.
Certainly have a longer-term horizon, but in reality a balanced portfolio of lots of shares is nothing like as risky as you suggest. I suspect that, especially since the fall of interest rates, equity returns have beaten cash or bonds in most years, on an annual basis.
I would certainly advise against short-term (12 months or less) investing, or using capital that you know you will need in the next couple of years, but losing 10 years' growth is a big risk in itself.
I do not use any set formula for my holdings, but go for companies that I feel are getting it just right. I also like local companies that you feel you may have an interest in, or connection with, or technologies that you understand or support. This can make your portfolio just a bit more interesting and allows you to go to annual general meetings etc. Keep up the good work.
A: ... even though it's worth only your desultory interest! Oh well.
I sent your letter to financial advice provider Brent Sheather, a close follower of research on long-term returns on investments.
"Yes it is true that equities have vastly outperformed bonds and cash over the last 40 years," he says. "But perversely that is less reason to be overly confident that equities will outperform in the next 10 years." Shares have become more expensive, says Sheather.
"And if you believe in mean reversion" — the tendency for returns to move back towards their long-term average — "there is a risk that valuations could fall in the future. It is probably unlikely but possible."
He adds that with the "forward equity risk premium" — the expected gap between returns on shares and bonds — "at just 3.5 per cent, the attractiveness of equities over bonds is nowhere near as compelling as it has been in the past." Then comes the old chestnut: "I would also mention the fact that past performance is not indicative of the future."
So what does Sheather advise on time horizons? "Personally I would be very cautious about investing money that I needed within 10 years, and would instead hedge my bets by investing maybe half of the money in cash or bonds.
"From a legal standpoint if a financial adviser invested money that the client would need within 10 years (in shares), there is a chance that if a major prolonged downturn occurred a court might rule that such a move wasn't prudent," he says.
Add to this the fact that I'm not a financial adviser, able to hold the hand of a client if their share investment loses value. Instead I'm giving one-off suggestions to people with a wide range of risk tolerances. So usually I'm going to err on the side of caution.
Old-fashioned my 10-year rule might be, but I'm sticking with it.
Q: Who would have thought that ANZ, the rotters, would have missed their own deadline and not sent me my Bonus Bonds money? I doubt they've sent anyone theirs and it is 1 November!
The distribution was meant to have been last month, so I waited till the very end, hoping ... But nothing. I can only hope the Banking Ombudsman can do something about it. It is robbery and we won't get any additional interest back either, will we?
It would be super if you could a) do something about it — ie give ANZ a blast and b) write something about it.
A: Now, now. Calling people rotters will get you nowhere!
ANZ acknowledges that "when we started the wind-up we gave investors an indicative date of 31 October 2021". But the bank's spokesperson adds that "no specific deadline was set for the payment.
"During the year we have kept investors updated via our annual report and website that our expected payment date had moved to December. Making payments has required significant changes to the Bonus Bonds technology systems. This has taken some time as it's important that it was done right."
Still, she says, "We're working to make payments as soon as possible and expect bondholders — who have provided their current bank account details — to be paid before Christmas." Recipients are scheduled to get $1.10 for each Bonus Bond. However, the funds are still invested and the management fee has been reduced to zero. So you may eventually get a little more interest — despite your cynicism.
"The exact amount that customers receive will be calculated at the conclusion of the wind-up next year," says the spokesperson. "However, we expect any additional payment above the $1.10 would likely be small, at less than five cents per Bonus Bond."
She adds, "After the distribution in December investors can continue to provide account details to receive their payments if they have not already done so.
"We encourage anyone who thinks that they may have Bonus Bonds to contact us before then so they can get their money as soon as it is available. Call us on 0800 266 374 or visit bonusbonds.co.nz for more information."
By the way, the Banking Ombudsman doesn't take action unless somebody files a complaint with her.
Q: Where to invest the proceeds of a sale of a rental property? Last week you confirmed with a reader, who was over 65, that they invest the proceeds in their conservative KiwiSaver fund, and encouraged the reader to put money not needed in the short term in a higher-risk KiwiSaver fund, sticking to the same provider.
What is your reasoning behind sticking with the same provider?
Which prompts me to ask as a retired person, if I have both a KiwiSaver (growth and conservative funds) and a substantial amount invested in the same provider's balanced and conservative managed funds, would I be better off to transfer all the managed funds across to KiwiSaver?
A: The answer to your first question is easy. You can be in only one KiwiSaver scheme — although in many funds within that scheme if that suits you.
On your second question, the answer is "probably". Most providers charge lower fees for their KiwiSaver funds than for similar non-KiwiSaver funds, and the investments are probably much the same.
I suggest you ask your provider about the fees, and if there's any other reason why you shouldn't make the move.
But first, it would be a great idea to confirm that you're with the best provider. Use the KiwiSaver Fund Finder on www.sorted.org.nz, to check how well your provider ranks on fees and services at different risk levels.
By all means also check its ranking on returns, but only to dismiss that provider if its returns are below average year after year — click on "Show yearly returns". It's not wise to choose a provider based on high returns, especially over the short term. And even a strong long-term performance is no indication that that will continue.
If your provider doesn't come off well, particularly on low fees, I suggest you move to a provider that does. All you have to do is contact the new provider. They will get the money moved for you.
Q: So often I see older people who have inherited a property from dear deceased Aunt Agatha and have rented it out rather than sell.
They then have not increased the rent for the last God-knows-how-many years because the tenants are "so nice", and consequently have not had the money to upgrade the property to the current so-called mandatory standards.
On the other hand, the tenants are not going to complain about that because if they do "the owners might put the rent up".
No wonder property is held to be not a good investment, because the owners don't run it as an investment. Effectively, the owners are unpaid social workers.
A: They're not exactly "unpaid". But yes, some landlords are not driven to receive the maximum rent if they like their tenants.
That's what makes rental property a more complex investment than any other, but not necessarily a worse one. It seems that the reward for some landlords is partly monetary, and partly the satisfaction of knowing they are providing a family with good accommodation.
I don't see anything wrong with that, although I agree that it's not good if a landlord finds they can't afford to maintain a property well.
- 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 or click here. 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.
'Debt becomes more like a rent payment that people get so used to paying.'