The cost of goods is rising. Photo / 123RF
OPINION:
Q: Inflation is returning, so they say. Quelle horreur! Weimar Germany in the 20s! Zimbabwe in the 2000s! NZ in the 70s, but not as brutal. Here's hoping countries now have a better handle on how to head it off.
I'm not asking you to predict what will happen, Mary. These are complicated times. But can you please suggest some precautionary measures investors can take to survive? No, not how to make a fortune out of it! Don't be silly!
A: Thanks for letting me off making predictions. I'm not one for forecasting markets or inflation or anything else economic. Too hard — as we saw in early Covid days when pretty much all the experts predicted house price falls.
But I do have some ideas about investor survival if inflation increases. And I also have a worry. Interest rates tend to rise with inflation, and if that happens, people will be more content to leave their savings in bank term deposits or other low-risk investments such as cash funds.
History shows us that these investments are not a great idea in inflationary times. If the interest rate is not as high as inflation — which is currently the case with most bank term deposits — you're going backwards.
For example, you might put $1000 into a one-year term deposit that pays 2 per cent. At the end of the year you'll have $1020. But if inflation is the current 3.3 per cent, when you go shopping the goods that cost you $1000 a year ago now cost you $1033. You're short $13.
That doesn't sound like much, but if it keeps happening year after year, and if it's not just on $1000 but all your savings, you will slip seriously behind.
Nobody knows whether interest rates will stay below inflation. In recent years they've tended to beat inflation. But back in the late 1960s to the early 1980s, people with savings in bank deposits were losing ground rapidly.
What to do about it? Put your long-term savings in shares, property or — preferably — funds that invest in lots of different shares or property, so you get wide diversification. These include KiwiSaver and non-KiwiSaver funds.
Returns are up and down and sometimes negative in these funds, but over the long haul they average out well above inflation.
People often say that if volatile investments, like these, would give you sleepless nights, avoid them. But I think that lets people off too easily, and in the long run they end up much worse off.
If you're really nervous, start out with just some of your savings. And put them in, say, a balanced fund that is only half shares, or similar. Steadily increase the amount, while also putting some in a growth fund that is largely shares with maybe some property.
There's one very important rule: you must not panic and move the money to lower risk investments during downturns. Hang about, and things will come right. They always do.
Scary? It's actually scarier to stick with low-risk investments in inflationary times, watching the amount you can buy with your savings dwindle.
Even if inflation doesn't really get going again — and that's quite possible too — being braver with your savings will bring you higher returns.
By the way, there is a way to make a fortune out of inflation. Borrow as much as possible and invest it, in the hope that by the time you have to repay the loan it won't be worth much. This works well sometimes, as luckier property investors know. But borrowing to invest raises risks as well as returns. You can end up selling your investment for less than your debt. It's too risky for most of us.
Q: I was wondering if your latest book, written last year, is still relevant to what is happening in the sharemarket, and other investment decisions.
My situation is I have cash and very little other assets — and no KiwiSaver.
A: As I said above, I don't forecast markets. I like to see people investing in a way that works no matter what happens to shares, property, interest rates, inflation or whatever. So the book should always be relevant.
Of course none of us likes it when our investments lose value. But if you follow my suggestion — put money to spend within three years in term deposits or a cash fund; money to spend within three to 10 years in bonds or a bond fund; and longer-term money in shares or property or growth funds — you shouldn't have to get out of any investments at a loss.
Bond funds will pretty much always recover from a loss within three years, and higher-risk investments within 10 years. And as long as you don't sell investments when they are down, fluctuations don't really matter.
Meanwhile, you are not in KiwiSaver. Do join. Whatever your circumstances, you will almost certainly do better with your savings if you're in the scheme. My books and columns all have heaps about that.
Q: After reading all info, I understand a passive fund charges low fees for KiwiSaver (or investment funds) and thought Simplicity NZ is the best option.
I have been trying their online "Join" page, but it won't upload the document in its entirety, therefore the online form cannot be submitted. I have contacted them via email and requested a call back via their web page, but they are slow to respond. And today I'm told a "NZ Citizen Certificate" isn't enough even though it was one of the options shown as required ID docs on their website.
After I told the head of operations and research I have half a million to invest, he couldn't care less.
Maybe I should stay put with Kiwi Wealth. Shouldn't good service be a factor when making a decision (both KiwiSaver and investment funds)?
A: You're right, of course. The KiwiSaver Fund Finder on sorted.org.nz ranks KiwiSaver funds by services as well as fees and returns, and while Simplicity does well on fees, it's below average on services.
I took your complaints to Simplicity. Says a spokesperson, "We have very few issues with document uploads. If there's a problem, we contact the customer to get what we need, or people can email us the required document directly. We respond to, and resolve, almost all queries within one to two working days."
She acknowledges that it wasn't clear on their website that an NZ Citizen Certificate is not sufficient ID, "so we've since updated it. We called the customer and have successfully resolved their query."
She adds, "We're sorry to hear about this person's experience, and have made changes to the process to ensure it shouldn't happen again. It's been a learning exercise for us, and we're pleased it worked out for everyone."
Q: After reading the excellent letter written by a lawyer last week, about real estate commissions, I haven't laughed so much since Clint Eastwood growled his famous, "go ahead, make my day", in the 1983 movie Sudden Impact.
A: We try to cater to everyone in this column, including those looking for a Saturday laugh! However, the next reader didn't find that Q&A so amusing.
Q: Our daughter has just been in the real estate business for 15 months and, with Covid and as a solo mum, she struggles to make a living, even when she receives a full 50 per cent of the commission.
The lawyer seller in last week's column made some interesting comments but misses the point. They referred to sales in the Wairarapa in 2006. Selling conditions were totally different during this period.
In slower sales times, it is easier to negotiate the commission and/or add incentives for hungry agents.
My point is, real estate agents work really hard and have high professional standards to uphold. They have stringent skills training to gain their credentials (approximately $2000), plus annual training in order to keep their qualifications. Furthermore, they are supervised closely by managers and are unable to write up a sale and purchase agreement in their first six months. To put them in the same category as car salespeople is rather unfair.
At the end of the day, I cannot help wonder whether your lawyer would like us negotiating his/her fees — the ones set in stone!
Kind regards and keep up the great work and, perhaps at a later date, you will include a column on the great professional work being done by our real estate industry to provide quality service to home buyers?
Disclaimer: I have just completed my real estate qualifications and will join my daughter to help support her journey. Our partnership now gives four generations of real estate agents in our family.
A: You've already done a great job of putting the agents' side of the story. And you're right, of course, that agents will be more open to negotiating commissions in slower property markets.
But still, with house prices rising ridiculously fast, and most commissions set at percentages of sale prices, I would hope negotiations are happening often.
On lawyers' fees, the difference is that their fees don't vary depending on the outcome.
On car salespeople, I listed them along with real estate agents, politicians and journalists as being at the top of many lists of the least respected jobs. I've never really minded it.
Oh and please, no letters from upset car sellers. Or politicians. Or journos.
Q: Thanks for the piece on agents' fees. This has long been a bugbear of mine. I have tried negotiating commissions a number of times over the years, only to be met with a categorical "no" and regular trotting out of the line that it would be illegal.
I think that the opposite is likely to be true; what we have is a range of individuals and businesses acting together (colluding?) to agree on a set and non-negotiable fee structure. In any other industry this would attract large fines and increasingly the risk of imprisonment.
There is a great book called Freakonomics, where they compared (amongst other case studies) time to sell between agents' own houses and clients' houses. They found that when an agent was selling their own house, it was on the market on average twice as long, as the agent waited for the best price. A good lesson on incentives.
A: Once and for all, it is not illegal, or against any industry rules, to negotiate commissions. Sellers can ask for whatever they want in a contract. And agents can agree, or not.
But nor does it seem that the real estate industry is colluding in a widespread way.
Commission structures, and willingness to negotiate, do vary. However, there might sometimes be some bad — and perhaps illegal — behaviour going on. Once, when selling a house and trying to change commission structures, I did wonder why all the agents in that suburb said "No".
I've heard about that Freakonomics research. It's American, but it could well apply here too. When agents get very little extra money if they sell your house for more — because of the way the commission is structured — their incentive is to talk you into settling for less than you hoped to get. Then they can move on to putting more time into selling another house.
That's why a couple of readers and I have suggested, in recent columns, that commissions be restructured so agents have a big incentive to get more for their sellers.
- 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.
'Debt becomes more like a rent payment that people get so used to paying.'