When the markets plunge - act like a dog and play dead. Photo / 123RF
OPINION:
Q: I've heard you and another expert saying you shouldn't shift KiwiSaver from growth to conservative in a market downturn. Could you explain why?
I understand when you do this you "realise" the loss, but are you not at the same time ameliorating further losses, then to reposition back in the growth category when the market turns positive?
A: You already have the brief answer I emailed to you right away, which was: "Don't do anything until you see my next column". Ditto for the next letter.
Two years ago, when I was answering emails like yours, the share markets had plunged when we first learned about Covid. Then, just as abruptly, they recovered. This time, the New Zealand and world markets dropped on the day you wrote but have since been lurching one way or the other. By the time you read this, who knows?
Regardless, what you should do in these situations is act like a dog playing dead.
That might seem a bit extreme, but there's a story — which sometimes emerges when sharemarkets wobble — about big US financial services company Fidelity. Apparently, a researcher looked at which of its investors got the best out of their share funds. Those with the top performance turned out to be people who had died. Their estates weren't yet settled, and their investments were sitting there, untouched.
A variation on the story is that most of the top group were still alive but had forgotten about their presumably minor Fidelity investments.
Some people challenge the truth of this tale. But nobody challenges University of California research done by Brad Barber and Terrance Odean in the 1990s. It found that the clients of a large discount sharebroker who traded most often earned an annual return of 11.4 per cent. Sounds great. But the market was booming then, and the average return was 17.9 per cent.
The researchers found that the more people traded, the worse they did — partly because of trading costs but also because they couldn't time markets well. "Our central message is that trading is hazardous to your wealth," they said.
You're not considering frequent trading, just making a couple of moves. But it's the same issue. If you knew whether the market was going to fall further, and when it had troughed and was about to recover, your strategy would work well.
But nobody — not even those who work at this full-time — can make those predictions accurately. When the market starts to rise again, is that a blip on a downward trajectory, or the start of a boom? By the time you've established this really is a recovery, you've missed most of it.
Over and over, people try to time the sharemarket. And over and over they end up worse off. It's best to be a "dead" dog.
Q: On the brink of turning 65, markets down-swing. My KiwiSaver and other investments are falling currently, and with the latest conflict I am wondering if I should take money out to more stable term deposits and move the rest into conservative funds?
I am okay with a bumpy ride, but don't want to lose what I have saved to allow cutting my working hours down or retiring.
A: If you're in the right investments, you shouldn't worry about market downturns.
Sure, you won't like them, but you should be able to take them in your stride.
If you do worry, one of two things is going on:
• You are too nervous to cope with volatile investments. Gradually switch to lower-risk funds — for example, move one third of your money now, one third in a month, and one third in two months.
Gradual moves work well for two reasons. You're less likely to muck around, waiting for prices to rise before you take action. Also, when you look back, you don't want to find you moved the lot at what turns out to be particularly low prices.
Once you've made the moves, stay there. Do not move back later, or this will happen again.
I should add, though, that it would be great if you leave some of your savings in a higher-risk fund and try to get used to the ups and downs. You might even move more money into that fund over time. In the long run you will save more, because the average returns are higher.
Check out our graph below, which shows that $1000 invested at the start of 1980 has grown to nearly $47,000 in world shares, and more than $94,000 in NZ shares, after tax and with dividends reinvested — despite some big and prolonged downturns.
• You expect to spend the money within about 10 years. That money shouldn't be exposed to sharemarket risk, as your investments might fall and not recover by spending time.
It's best to have your three-to-10-year money in a bond fund, and shorter-term money in a cash fund or bank term deposits. But leave your long-term money in share funds or similar.
Again, moving money over a few months tends to work better, psychologically, than moving the lot in one go.
In your case, it seems the second situation applies. It sounds as if you may be uncertain of your retirement date, but make a guess, perhaps erring on the conservative side by assuming you will retire sooner rather than later. For more on how to set up your money for retirement, see my book, Rich Enough — A Laid-Back Guide for Every Kiwi.
Q: I've had money in a couple of different managed growth funds for about nine months that I plan on leaving there long-term (10-plus years), and I make regular contributions to them both.
I have another lump sum of savings to invest. Is it generally a good idea to invest that money now, while they're making negative returns and the unit price is low?
A: You're a would-be contrarian investor, thinking of putting money into riskier funds when many people are thinking the opposite. Contrarian investors tend to do better than "the herd".
But still, those who ignore market movements — our dogs playing dead — usually do the best of all. They invest money when they have it, and move it when their circumstances, not market circumstances, change.
Anyway, you've got the money now, so let's invest it.
With a lump sum, theoretically the best idea is to deposit it all now. On average, returns in the fund will be higher than in the bank. But I recommend investing over two or three months, as described above. Yes, unit prices are down at the moment. But they might drop further.
Q: As you wisely suggested once before when markets were falling, I am reading a good novel.
I put away charts and financial commentary links and ignored friends who suggest I "buy at the dip", and I don't check my portfolio hour by hour.
Shares go up and shares go down.
A: And then they rise again. At last, a reader who has got the message! The wonderful thing is that playing dead is the easiest option as well as the best.
Q: In regards to laddering home loans, it can be done, and you can save interest. Economists can be wrong or more likely worId events impact, so picking rates is "best guess" at the time.
As an example, a few years ago you might have taken a 1, 2 and 3-year split on your home loan.
As each rolls off, pick a new rate — it could be any term, as you can alter the term of others as they roll over.
Keep paying the minimum, but any extra can be added to the highest rate you hold at the time. This is where savings occur on interest costs and term of loan.
Banks may differ on their rules for additional payments on mortgages. Mine is easy and can be done online at each rollover.
A: This is laddering your mortgage, as described last week, but with bells on — you pay extra off the portion of your loan with the highest interest.
Do lenders usually let you pay extra? "Generally most banks will allow you to add an extra 20 per cent to your minimum payment during the fixed term without penalty," says mortgage adviser Bruce Patten at LoanMarket. "For example, if your minimum payments are $500 a week then you can increase to $600 a week. ASB is $1000 a month, which is a lot more."
I also asked Patten if someone who has all their mortgage on just one term can easily switch, when the term ends, to having some on one year, some on two years and so on.
"Yes, it will require signing some new documents. However, the loan is not reassessed for servicing capability unless you are requesting an interest-only term or revolving credit facility. If you are simply splitting it to one, two and three years fixed, the bank will just redocument it. Make sure you ask them to waive any redocumentation fees which they normally will do for you," he says.
However Patten adds, "The only thing to be aware of is that it does hold you to that bank and makes it harder to move, because you will have other fixed rates locked in when one loan is maturing. But hopefully the reduced risk outweighs the desire to move."
Q: Adding to last week's letter on house insurance, I have tried to increase the accommodation allowance they provide when a house is destroyed.
At present the maximum amount in most policies is about $30,000. The highest I have found is $50,000.
From the day of destruction to moving back in will take anything from 12 months to two years, due to planning requirements and shortage of builders etc.
The cost of renting a place to live in while the rebuild takes place is likely to erode the $30,000 limit well before you move back in.
I have asked my insurer to maybe unbundle the accommodation from their policy and create a separate one which allows people to choose an amount, but they are reluctant to either increase their amount or unbundle it.
A: It's true that in many cases you would have to pay rent while your house is being rebuilt — unless you can stay with family or friends. But will your other housing costs be reduced?
Obviously, maintenance costs won't continue. What about rates, insurance, and mortgage payments?
"It is possible that the homeowner would be able to apply for a rates remission for the rebuild period, depending on the circumstances of the destruction and the particular council's policy," says a Consumer NZ spokesperson.
In Christchurch after the earthquakes, the council said it based rates on the land value only for uninhabitable houses.
Insurance and mortgage payments "would depend on the relationship with the other party — I would expect you'd have to pay," says Consumer.
Continuing your insurance makes sense I suppose. Another disaster could strike during the rebuild. But the premiums might be lower.
And a mortgage lender might agree to reduce your payments for a while if you were struggling — although that would probably mean the term of the loan was extended.
So where are we? Total other housing costs would be somewhat lower. But still, you might need more than $30,000 or $50,000 for rent, depending on where you live and how long the rebuild takes.
"Re accommodation, it may be insurance companies could offer a separate extra accommodation policy for those who want to increase that particular limit e.g., if you had a large family, it would be harder to find a cheap rental," says Consumer.
- 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.'