Mary Holm: When bitcoin comes calling, just say no

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OPINION:

Q: Someone just phoned and asked me to invest in bitcoin by opening an account for $50. I said I thought it was just virtual currency with no real value. But he said no, it wasn't. What do you think? I told him to phone me back next week when I would get paid.

A: The minute I saw your email I replied, "Do NOT take part in this. I'm certain you will regret it," and suggested you wait for this Q&A.

Let's start with a question: has any reader done well with an investment they got into after a stranger approached them, whether by phone, email, social media, in person or — let's see now — perhaps telepathy?

I've asked this before and never received any replies.

Think about it. If an investment is great, why isn't the stranger simply investing in it themselves? If they're short of money, surely someone will finance them if the deal is so rock solid. Why on Earth would they want other people to get in too, pushing up the price?

And note your bloke's tactic: suggesting you start with $50. So many scam victims say, "I started small, so I didn't really care if I lost the money. But when I did well, I put in more and more money." The scamsters manipulate the numbers to make sure you do well with that first small amount. And then ...

Next time he phones, don't give him a chance to use any more clever marketing tactics. Say, "Not interested" and hang up.

There's another question here though: is bitcoin basically a good investment, if you buy through a New Zealand-based trading platform, as recommended by the Financial Markets Authority (FMA)?

One negative is that you make no return except a gain — or loss. With shares there are dividends, with property there's rent, with bonds there's interest, which all help when prices are falling.

Also, with those other investments it's easy to understand where your wealth comes from. Most companies grow, and so their shares appreciate. Property values grow because more and more people and businesses need accommodation. With bonds you get compounding interest.

With bitcoin? Some websites tell about the increasing role of cryptocurrencies in world finances. But will it really work out that way?

Nor is bitcoin good for spreading your risk. Experts observe that its price tends to rise and fall with financial markets — only more so. So it's unlikely to cancel out a fall in your other investments.

Our graph shows its extreme volatility. The sharemarket might be a roller coaster ride, but the bitcoin market is a voyage in a small boat through a raging storm. Riding up a wave might be good fun. But then, oops!

Sure, some people — perhaps even your friends — have done really well investing in bitcoin and other cryptocurrencies. They were lucky. You don't hear as much from the unlucky ones.

If you're still interested, read these two articles on the FMA website: tinyurl.com/NZcrypto and tinyurl.com/NZcrypto2. Sample quote: "Investors should be prepared to lose their entire investment."

Shrinking cash

Q: Last week you said a low-risk cash fund shouldn't lose value.

I recently switched to Fisher Funds' Cash-Enhanced Fund. All was going well, so I decided to put in an additional $100,000.

Before the slide started this year, I had $210,000 in the fund. This is now below $199,000. Should that have been expected with a cash fund?

A: No, but your fund is not a true cash fund. I've said this before, but let's repeat it: don't rely on fund names. Check the holdings in your KiwiSaver or other managed fund using the Smart Investor tool on sorted.org.nz. It tells us the Fisher Cash Enhanced Fund holds about 59 per cent bonds, 20 per cent shares, 2 per cent property, 2 per cent other, and only 17 per cent cash.

To find a genuine cash fund, look at the lowest-risk Defensive Funds and sort by Growth Assets (lowest first). This will include funds that hold bonds, so look for the ones with "cash" in their name. Click on the fund name and scroll down to This Fund's Asset Mix. Choose from those that are 100 per cent cash.

Watching the fall

Q: For the first time this year, I moved my money from a term deposit to a conservative investment fund. I have been quite alarmed at how much it has lost value, and the rate at which it continues to go down.

I have done some research and it is invested 80 per cent in bonds, and with the rising interest rates, apparently this impacts quite directly on bond investments.

I was wondering if you had some insights into how you can see this moving in the future?

A: Good on you for checking what the fund holds. Conservative funds, despite their name, hold 10 to 35 per cent growth assets — shares and property. And the rest can be bonds, although many also hold some cash. Your fund is very bond-heavy.

As you say, bond values have fallen lately as interest rates have risen. How does this happen?

Some of the bonds in a typical fund will have been bought months or years ago. So they will pay lower interest than newly issued bonds.

The fund manager must regularly value their investments at current market prices. If they were to sell the older bonds, nobody would want them — because their interest rates now seem low — unless they could buy them cheaply. So the bond prices fall, and with them so does the value of units in funds that hold bonds.

If we go back a couple of years, when interest rates were falling, we'd see bond prices rising for the opposite reason. Older bonds were paying what looked like attractive interest rates, boosting fund valuations. But people didn't notice that as much.

Basically, the current fall in the value of older bonds will continue as long as interest rates keep rising. But when rates become steady, funds holding bonds will gradually start posting positive returns, as older lower-interest bonds mature and are replaced by newer higher-interest ones.

And at some point interest rates will fall again, and funds with lots of bonds will report great returns.

When? Nobody knows. You had bad luck with your timing, but now you are in your fund, I would stick with it. You've suffered the loss on paper — and it could get worse — but hang in there for the gain.

KiwiSaver panic

Q: Whenever I read about KiwiSaver in the current environment, the message is "Don't panic. You're in for the long term." I have had $23,000 wiped from my KiwiSaver balance since January. I am with Kiwi Wealth, with 75 per cent balanced and 25 per cent conservative.

If I was 35 years old I would probably grin and bear it — but I'm almost 70 and the expression "long-term investment" is no longer relevant. I get a text each month with my Kiwi Wealth balance. After yesterday's dismal text I headed to the computer to have a look — to discover I'd lost another $3000!

On an impulse I have withdrawn $120,000 and will put it in a one-year TSB investment at 3 per cent and then reassess. I guess I'm contacting you for reassurance that what I have done is sound, bucking the "Don't do it" advice — but preserving hard earned income.

A: Sorry, but that wasn't a great move. You've made those losses real, whereas if you had stayed put your fund would have recovered. So where to now?

The following applies to everyone — whether 18 or 108 — worried about falling balances in KiwiSaver or other funds. The basic "rules" on savings are to put:

• Money you plan to spend within about three years in a lowest-risk "true" cash fund — see above.
• Three-to-10-year money in a middle-risk fund, preferably a bond fund. Put up with some volatility to get somewhat higher average growth.
• 10-year-plus money in a higher-risk fund, if you can stick with it through bigger ups and downs. It will almost certainly bring higher long-term average returns.

Move some money down each risk level every now and then, to keep the time horizons accurate.

People who find they can't tolerate much volatility should skip the higher-risk fund. And if they can't tolerate any volatility, they should invest the lot in a cash fund — and put up with low long-term growth.

What should you do, given that you haven't quite followed the rules?

First, move your spending money for the next year from the conservative fund to a true cash fund, which shouldn't ever lose value. Then, when your term deposit matures, move that into the cash fund so it's available for spending as well.

The rest in the balanced fund? That's your longer-term money — to be gradually fed into the cash fund over the years. Try being that 35-year-old and grinning and bearing the inevitable downturns! At nearly 70, hopefully you still have 10, 20 or even 30 years before you spend it all.

P.S. Cancel those texts. It's best to check your fund balance only every few months, and perhaps only once a year when your annual statement comes. That's what I do.

Landlords and tax

Q: A contributor last weekend states that residential landlords have been paying tax under the same rules as any other investor. That is technically correct, however, it does not mean that our taxation system has been equitable. While I don't believe that removing the tax deductibility of interest on rental properties was right, it was a "band-aid" solution to create more fairness.

There is an assumption that businesses will over time generate enough profit to provide a reasonable return on investment, and that profit is of course taxable. But with most rental property the investment could not possibly be justified based on rental income.

For example, an Auckland house typically has a rental yield of about 2.5 per cent. Deduct 1 per cent for insurance, rates, maintenance and refurbishment, and you are left with a net yield of 1.5 per cent before any financing costs.

After financing costs many properties actually make a loss. It is patently obvious that no one would make such an investment other than for the capital gain.

This doesn't apply to other investments. For domestic shares, the average gross dividend yield over time has been more than 4 per cent, which is taxed either before or after distribution. For overseas shares, NZ investors are generally taxed at a deemed 5 per cent "fair dividend rate" to compensate for low actual yields. Fixed interest income is of course fully taxed.

So compared to most other businesses and investments, landlords have had a tax advantage, which is not a criticism of landlords but of our tax system. In the absence of a comprehensive capital gains tax, this can only be addressed with the removal of tax deductibility of interest on residential property investment.

A: Sounds reasonable. But read on.

Property rules

Q: From my perspective as a property specialist accountant, residential landlords absolutely get special tax treatment. But it's all negative. Any investment except residential property has the ability to:

• Depreciate most physical assets (even share investors get this, indirectly of course). But since 2012, houses depreciate at 0 per cent. "But houses never drop in value!" people cry — clearly not true, given recent media headlines!

• Get a tax refund if your claimable expenses exceed your income in a given year. But since 2019, these are ringfenced for investment property.

• Get tax-free capital gains if bought with the intention to hold for long-term income. But there are various provisions that tax capital gains relating to developments and subdivisions, changes in zoning, association to builders, and of course since 2015 we have had Bright Line — with now a massive 10-year timeframe, when the average house holding period in NZ is just seven to eight years!

• Pay tax only on net profit, after deduction of expenses with an appropriate nexus to income. But interest deductions are gone (or going) for the majority of residential property.

A: An interesting list. The sooner we bring in the comprehensive capital gains tax referred to by the previous correspondent — on all investments — the sooner we can get rid of some of these anomalies.

- 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.