And your suggestion of Smartshares is a good one for many people. I've received a few letters about Smartshares lately, and have been meaning to write about them. So here goes.
Last week I said there are two ways to invest in shares:
• Putting your money in a managed fund that invests in many different shares, sometimes called a growth fund. Higher risk KiwiSaver funds are examples, but there are also non-KiwiSaver growth funds. You can invest a small amount, or even less if you make regular contributions.
• Investing directly in shares. This is where I reckon you need at least $100,000, so you can buy reasonably sized parcels of shares in at least 10 to 15 different companies. If you buy fewer shares, your lack of diversification increases your risk considerably.
Smartshares funds sit on the fence between the two. They are funds that hold shares in lots of companies, so I think of them as being in the first category. However, while in most share funds you buy units from the fund manager, Smartshares are listed on the New Zealand stock exchange. So in some ways it's like investing directly.
This type of investment is called an exchange traded fund or ETF. Internationally, the popularity of ETFs has soared over recent years. But Smartshares are the only ETFs traded on the New Zealand exchange.
If you invest in Smartshares, my $100,000 "rule" doesn't apply. As you say, the minimum initial investment is $500, and after that you can regularly contribute as little as $50 a month. And it's fine to invest such small quantities, because you get wide diversification with just one investment.
The main advantage of Smartshares over most other managed funds stems from the fact that most Smartshares funds are index funds - they invest in all the shares in a share market index.
You mentioned the NZX50 index - which includes basically the 50 biggest companies on the New Zealand market - and the S&P500 - 500 of the biggest US companies. There are also Smartshares funds linked to smaller company indexes and indexes in Australia and various regions of the world, and so on. The range is wide.
Index funds have been around for decades, and I have been recommending them for years. But index ETFs - traded on stock exchanges - are newer.
Unlike "active" managers of share funds, index fund managers do no research on which shares to hold, and change their holdings only when an index changes. This makes them much cheaper to run than active funds, so their fees tend to be considerably lower. And lower fees make a big difference to how fast an investment grows, especially over a long period.
But this could be cancelled out by active funds bringing in higher returns. Do they? Every year perhaps half do. But we don't tend to see the same funds outperforming index funds year after year, especially after taking fees into account.
Even if the odd active fund does do better over a long period, how will you know in advance which fund it will be? I think index funds are a better bet.
Your letter mentions that - despite the lower fees of index funds - Smartshares fees are still high by international ETF standards. I'll go into that more in the next few weeks, along with other aspects of ETF investing.
Paying off debt vs investment
I'm a 40-year-old single female. I have a good job earning close to $100,000 a year and regularly contribute to KiwiSaver. I own my own home and have a small mortgage to pay off of around $100,000.
I am looking to start making some investments for my future. The property and share market both seem to be at their peak, so I am not sure where to look.
I have seen Smartshares advertised, which enable you to continue to invest a small amount monthly in exchange traded funds, so that could be an option.
I would be interested to know your thoughts as to whether I should keep chipping away at the mortgage or get into something like Smartshares while interest rates are so low.
I'm assuming that you have no debt other than your mortgage. If you do have credit card debt, for example, getting rid of that should be your top priority.
Beyond that, let's look first at the argument for paying off the mortgage faster than you have to.
Your wealth is measured by your total assets - in your case your home, KiwiSaver account and perhaps other assets - minus your mortgage and any other debt.
That means you can increase your wealth by either adding to your assets or reducing your debt.
We'll say your mortgage interest rate is 5 per cent. If you pay down the mortgage, you get rid of a debt that costs you 5 per cent a year.
To improve your wealth more than that, you have to invest the money in something that will bring in a return - after fees and tax - of more than 5 per cent a year.
You probably have quite a good chance of doing that in a Smartshares share fund. But the returns will be up and down, and there'll be losses in some years. You might panic and sell in a down market - a terrible move.
What's more, paying off a mortgage gives you great security. Whatever happens after that - such as a job loss or ill health - you have your accommodation taken care of. The lower risk option is to get rid of your mortgage first.
Okay, now let's argue for investing in Smartshares.
You're in KiwiSaver, so you already have some investments beyond just your home. But it wouldn't hurt to have more. The wider your diversification, the better.
Also, by investing beyond your home you will learn more about how markets work. For example, if instead of panicking when the market plunges you stay calm, sooner or later you will see the market rise again. This is valuable knowledge for when you eventually do pay off the mortgage, and have more spare cash to invest.
And, as mentioned above, you're quite likely to make an average return of more than 5 per cent in Smartshares. As you point out, the current low mortgage interest rates make it easier for an investment to beat mortgage repayment.
Given that your mortgage is only as big as one year's income, I lean towards the Smartshares option. If your mortgage were bigger, I would suggest you tackled it first.
Finally, a comment on your observation that property and share markets "seem to be at their peak". It's always impossible to know if that's the case. In fact, since you wrote to me, both markets have risen further.
You're planning to invest gradually - which is the best way to invest. Over the years, you'll buy some shares or units when they're cheap and some when they're expensive, and the market levels at the start won't matter much at all.
Retiree worries
Being a "soon to be" retiree, I appreciate the space you allow in your column for anything pertaining to the subject.
One further question: who worries the most, the retired person with no money, or the retired person with money?
What a thought-provoking question. There would be no doubt about the answer if we didn't have NZ Super, which pretty much guarantees that no New Zealand retiree will starve.
I read somewhere that about 40 per cent of retired people live on NZ Super alone, and another big percentage live on not much more. And many of them say it's enough to get by, especially if they have a mortgage-free home.
Meanwhile, some retirees with considerable savings seem to spend a lot of time and energy wondering if they are investing and spending wisely.
It probably all depends on what you're used to. Most beneficiaries end up with more income once they start getting NZ Super, and many are therefore content. But someone who has lived high on the hog might struggle if their income falls in retirement - even if it's still well above average.
I recently read one of those corny emails that do the rounds. Part of it went like this:
"As we grow older, and hence wiser, we slowly realise that whether we are wearing a $300 or $30 watch, they both tell the same time.
"Whether we drink a bottle of $300 or $10 wine, the hangover is the same.
"Whether the house we live in is 300 or 3000 square feet, loneliness is the same."
As is often the case, there's wisdom among the corn.
Other readers might have some interesting observations on your question.
Letter from the Commission for Financial Capability
The Retirement Commissioner is taking a long, hard look at retirement income, including NZ Superannuation and KiwiSaver, as part of a three-yearly review of retirement income policies.
She will be reporting back to the Government with recommendations, but wants to hear from as many people as possible first.
It's not just a conversation for retirees. We will all stop paid employment at some point and now is the time to think about how our finances will work when we're not employed.
Tell us what you like or would change about KiwiSaver; your thoughts on who should be eligible for NZ Super; and will declining home ownership rates be an issue for retirees in the future?
What do you plan to do, or are you doing, with your savings and investments in retirement to make your money last as long as you do? Have you worked out how long you expect to live for and how much you might need?
Do you plan to work past 65 and if so, why?
What are the issues in continuing to work? If you're an employer, what challenges and opportunities does this present?
Who should pay for the growing cost of NZ Super?
Do we need to save more now or should taxes go up in the future?
Find out more and have your say by visiting the review section at cffc.org.nz or email: review@cffc.org.nz
Here's a golden opportunity for readers to express your views in a way that might lead to improvements. Go for it!
Mary Holm is a freelance journalist, member of the Financial Markets Authority board, seminar presenter and 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.
