What matters more is your own life expectancy, based on your health, lifestyle and family history. There are various online calculators that can help you with that.
A good one is at tinyurl.com/ExpectLife. It's American, but I doubt if that matters - beyond having to convert your weight into pounds, and that's easy online. And you can see how changes in your diet, exercise, smoking and so on affect how long you're likely to live.
In retirement, once you have a rough idea of your life expectancy, you can plan how much of your savings to spend in the near future and how much to set aside for more than a decade, to spend in your old old age.
On that basis, you can invest your savings as you outlined, with short-term money in bank term deposits.
According to those guidelines, when you get to the point where celebrating 10 more birthdays seems unlikely, you should hold no shares - unless they are part of your estate.
However, if you've got enough money to cope with a share crash, and you enjoy investing in shares, forget the guidelines. That's all they are, not rules!
On indexed funds
This matter of your article last week on indexed funds is disturbing. If you are going to write an article based on research, undertake proper research. Research from a single source, Vanguard, which clearly has an agenda, is not research.
There are numerous examples of actively managed funds that have outperformed the market in the long term. Two easy candidates are Milford and Platinum Asset Management. There are many others.
You have a duty of care to provide factual, unbiased and balanced information to the public. As with all good academic approaches, if you are presenting an argument, present both sides and then present your view on why you prefer one over the other.
Perhaps more care in the future?
Did you actually read the Q&A, or just skim it?
I acknowledged Vanguard's agenda, but said its study was the only fairly recent research I could find, and asked readers if they knew of other research. And I don't mean a list of funds that have done well. I mean analysis of how all active funds have performed, relative to the appropriate market indexes. At deadline time, no reader had come up with any.
And by the way, Vanguard has been doing research for decades, and I've never seen criticisms of its quality - even though I'm sure those who don't like its findings will have pored over the work looking for errors.
I also presented research from Lipper Analytical Services, a major US fund research company that doesn't seem to have any particular agenda.
And despite being unable to find research from the active funds side - and I tried - I did present New Zealand managers' views as follows: "Local active managers often say it's different here, and that their funds will keep doing better than average. Maybe that's true for some. There are not as many analysts following New Zealand shares, so perhaps local managers can find hidden gems."
You've named two local fund managers that say they have outperformed the market, and "there are many others". Indeed. So many that you start to wonder. Mathematically only half can be better than average in the short-term, and fewer if we take into account high active fund fees.
And given that managers have good and bad years, a lot fewer than half outperform over the long-term.
In any case, my main point last week was that the Lipper - not Vanguard - research shows that funds that have managed to do particularly well over a whole decade have tended to do abysmally the next decade.
There are several possible explanations for that:
• If fund managers are able to pick better than average investments - despite my scepticism - they are poached away to another firm, or they retire or change countries.
• Top-performing funds take more risks than other funds, perhaps investing in alternative assets or taking a punt on particular industries. Sometimes that works brilliantly, sometimes the opposite.
• Successful funds attract more investors, and they get so big that it's harder for them to trade successfully. Let's say they want to buy Share X to make up 3 per cent of the total fund. If it's a big fund, they will have to buy lots of shares, and that demand will push up the share price while they're buying.
• In any list, somebody has to come out on top. But perhaps they got there by sheer luck.
The last thing I want to do is encourage readers to invest in high-performing active funds that then perform poorly in the following years.
You want factual, unbiased and balanced information. I work hard to give exactly that. Unlike many other writers, I have no incentive to push active funds or index funds. I just want to give readers the truth, so they can do the best with their savings.
Hawes on funds
Your column last week mentioned passive versus active investment and said there was little research on the New Zealand market in this respect.
I was surprised to read Martin Hawes (the two of you are my favourite financial columnists) advocated his KiwiSaver "Summer" product (named after his book 20 Good Summers). He claimed that active managers produced better returns. Perhaps you could ask him about this.
I did. Here's his reply, with my responses interspersed:
"Of course, active managers do not always produce better returns than passive, but they can do so. If you look at it on a before-fees basis you would expect about half to beat their index. On an after-fees basis, it is obviously more difficult.
"Passive funds will give an average return (which is not too bad), but there are people who set out to be significantly better than average and plenty of these succeed over the long run. Quite simply, in any particular activity in our lives, there are some people who are better than others. Good active managers can and do get superior returns."
My comment: As I said last week, research shows that:
• The same funds don't keep beating the average.
• Even the 18 per cent - less than one in five - of US funds that did outperform over 15 years had lots of bad years.
Back to Hawes: "I do not know of a New Zealand study on this, but there are certainly some New Zealand managers who beat their indices consistently. Identifying them is not too hard."
Me: Yes, but are they comparing themselves with an appropriate index? Even if they are, will they continue to outperform?
Hawes: "You do have to be very careful with studies on this topic. There are many managers who are index huggers: although they call themselves active managers and charge fees as active managers, they invest closely to their index. As such, on an after-fees basis they are most unlikely to outperform."
Me: Indeed. Non-index hugging funds are much more likely to outperform. They are also more likely to underperform significantly. See my second "possible explanation" bullet point above.
Hawes: "Finally in this debate, consider the management of risk (risk is so often forgotten in the rush to look at returns). An active manager can come out of a market when it perceives higher risk. At Summer KiwiSaver we are focused on getting good risk-adjusted returns - that is, trying to get good returns while managing risk as carefully as we can."
Me: It's true that an active manager can switch, say, from shares to bonds if they think shares are about to fall, while an index manager can't.
But, as I said two weeks ago, nobody, including the experts, keeps doing well at timing markets. "They sell too early, and the market continues to rise. Or they sell too late, after a crash. Or they buy when they think we're in a trough, but then the market drops further. Or they delay buying and miss a rally."
Research shows that active share funds perform worse than indexes over varying periods partly because of bad market timing.
I'm sticking with passive index funds. I first learned about them more than 30 years ago when I was taught finance by Merton Miller at the University of Chicago. He was later awarded the Nobel Prize in economics, so I think we can be confident that he knew solid research when he saw it.
Since then, I've put my long-term savings in index funds, and have watched new research. Nothing has ever persuaded me to move my savings to an active fund.
More on this topic next week.
Leasehold property
Leasehold properties can be a good option.
In our case we bought our first house in 1973 as a leasehold for $12,000, an affordable price. It was on a 20-year lease which provided for us to freehold the property on conclusion. During our seven-year ownership we shared the property with others, then rented it to friends while we travelled overseas for a couple of years, reoccupying it with them on our return before selling. At the time of selling we had been offered purchase of the lease for a manageable $10,000. That offer was then passed to the new purchaser.
Because our initial outlay and therefore mortgage was lower than for a freehold property, this turned out to be a sound investment, as we sold for $19,000 in a rising market. We had the benefits of the lower outgoings as the costs were correspondingly lower than had we had to cover extra interest payments.
Thanks for a good story about leasehold property, to counter the bad ones.
Obviously the right to freehold a property at a reasonable price - and being able to pass that right to the next purchaser - would be a big plus.
But I can only repeat that anyone thinking of buying a leasehold property should work through a worst-case scenario, including huge increases in lease payments. A friend recently told me her ground rent increased seven-fold in a single step.
• Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and 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 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.
