There are two good reasons to move from a higher-risk growth fund " KiwiSaver or otherwise " into a lower-risk fund:
• You realise you can't cope with volatility.
• You're planning to spend your KiwiSaver money on a first home or in retirement within the next 10 years.
In a growth fund, there's too big a chance your account will lose value right when you want to withdraw money.
But, importantly, if you reduce risk, you should then stay in the lower-risk fund.
It sounds as if that's not your plan. You're considering timing the market " moving your money to a low-risk fund right before you think the market will fall, and then back again when you predict a rise. If you can accurately forecast market changes, such a strategy could make you extremely rich.
If ...
The world is full of people who think they can time big market swings. But the vast majority end up with considerably less than they would have, if they had found the right risk level for them and stuck with it, regardless of what the market was doing.
There's heaps of research on this. For example, AXA quotes a study over 30 years, from the start of 1983 to the end of 2012 " which is 360 months.
If you invested $1000 in diversified US shares at the start and left it there, at the end you would have $21,700 " not bad! But if you were moving between shares and conservative investments and you happened to be out of the sharemarket for just the 10 best months out of 360, your money would have grown to less than $8200. And if you had missed the 20 best months, it would be a mere $3800.
Big growth happens in short bursts - University of Michigan research found that between 1963 and 2004, 96 per cent of the total gains happened on less than 1 per cent of the days.
If you can pick the good days and months in advance, you're a rare bird. In the 30 years to 2013, America's S&P 500 sharemarket index grew an average of 11.1 per cent a year. But the average person in a share fund earned only 3.7 per cent, says financial services firm Dalbar.
Why the huge difference? Partly fees and poor choices by fund managers, but mainly human nature. Former US money manager Erik Conley puts it well: "Despite knowing better, we give in to the emotions of fear and hope. When the market is going down, we often give in to fear. But we don't sell at the beginning of a market decline, we sell when it's closer to the end. We typically wait until the market has gone down so much that we can't take any more pain.
"Then we compound the problem when the market recovers. We are often late in buying back in. The end result is a classic pattern of 'selling low and buying high', just the opposite of what we should be doing."
The message is clear: as long as you can tolerate volatility, choose a higher risk fund, which is likely to grow more over time. And stick with it. Don't try to time markets.
Share-plan pitfalls
I noticed your advice last week to put money into a low-cost share fund as an alternative to buying rental property.
I recently started investing in the sharemarket as an alternative to property, to which I feel I'm over-exposed.
I put $100 a week into a savings account then, when I have $1000 or so, buy some shares. So far I've bought two lots of Australian mining company shares, mainly because they are at historic lows and I feel that this won't always be the case. I'll probably look at other industry sectors once I've got a bit more invested in the mining shares.
I'm planning on keeping the investments for five to 10 years and, although I'm not too worried if they drop in value for a while, I do like to check on them daily to see what they are doing.
Is this a good alternative to a low-cost share fund and a reasonable investment strategy, or am I kidding myself?
Good on you for diversifying away from one type of asset. And also for buying into the sharemarket gradually, rather than with one lump sum. That means you won't put the lot in just before a slump.
But the way you're investing is worrying. You're taking a fair bit more risk than necessary, and it's risk you might not be rewarded for. My three concerns:
• You're investing in just a few shares. They might do better than average, but they might do worse.
• You've invested in only one industry " and it's a high-risk industry.
• You're watching the share prices daily. While it's good that you plan to hold the shares for quite a few years " 10 years is a good minimum " checking on prices frequently makes it more likely you will panic when they fall.
To show the importance of diversification, let's say the average long-term return on shares is 10 per cent.
If you invest in a few shares, over 10 years your annual returns might range from minus 80 to plus 100 per cent.
But if you invest in a widely diversified share fund, the range will be much smaller, perhaps minus 30 to plus 50 per cent.
That's because when some shares do badly, that will be offset by others doing well. For the same average 10 per cent return, you take way less risk.
I realise you think Aussie mining shares are good buys. But they didn't go down for no reason. They could just as easily fall further as rise.
Put it this way: There are lots of professional investors " including many working for share funds " who know much more about the companies than you probably do. If they thought an Australian miner was a good buy, they would have rushed to buy shares and pushed the price back up. The price you've paid is probably fair, rather than a bargain.
A lot of people like to pick shares, and if you get pleasure out of it, that's great. But if an amateur stock picker beats the average market performance, it's almost certainly good luck.
If you want to avoid big risk, it's hard to go past a low-fee share fund. True, you have to pay fees. But the fund pays much cheaper brokerage because it buys in bulk. And it also does all the admin of running a share portfolio. So it should be worth the fees.
Furthermore, some share funds would accept contributions of $100 a week, so you could set up an automatic transfer, making it all simple.
One way to research share funds is to look at aggressive funds on the KiwiSaver Fund Finder on www.sorted.org.nz, even though you don't want a KiwiSaver fund. Aggressive funds hold all or nearly all shares. Once you've found a fund that suits you, ask the provider if they have a similar non-KiwiSaver fund. Many do.
Silly? Not at all
I'm sorry if this is a silly question, but I was raised in a family that invests in property, so I feel as if there is a large amount of information other people already know but that I'm missing.
I'm a 19-year-old contributing regularly to KiwiSaver. I also put in a lump sum each year if I'm a bit short on getting the full tax credits. While I am hugely grateful my Mum signed me up when I was younger, and I do plan to keep on contributing as long as it's around, I would like to start my own independent retirement savings, particularly while I still have time on my side.
But I don't know how to do this. Term deposits and savings accounts seem too conservative, but how on earth do I save anywhere else? Do I buy shares a little at a time, with the 10 per cent of my income that I'm saving each week? Do I save up and buy lots of shares at once?
How do you buy shares? Do I just go to the bank and ask them? I feel a bit like Monica in Friends ringing up information on her phone and asking for the stock buying shop. I wish they had taught this in school.
Any basic information or user-friendly sites you could guide me to would be much appreciated.
There's no such thing as a silly question about investing. And you've already proved you're far from stupid by not only taking part in KiwiSaver, but topping up your contributions to get the maximum tax credit, and by making a long-term saving plan at a stage in life when "long term" often means "next year". Well done.
The place to go to buy individual shares is a sharebroker. There's a list of them under the "Investing" tab on the stock exchange website, nzx.com. You could check the broker websites for one that seems accessible to you.
But for the reasons listed in the Q&A above, I suggest you'd be better off investing in a low-fee share fund.
Credit card double-up
A question about credit cards. How is it that in some months some regular direct charges come through on statements twice in the one month?
For example, recently our Southern Cross payments on our current credit card statement were shown for July 1 and August 1. It is almost as if the bank is trying to entrap us into credit debt when we have tried to spread our outgoings.
That's taking the "sinister bank" idea a bit far.
For some reason credit card bills don't always cover exactly a month. Sometimes it's 32 days, sometimes 28 " even when it's not February.
If you get two lots of a large monthly payment on one bill, that does seem bad luck. But it must mean that you have no Southern Cross payment on either the previous bill or the following one.
Over the course of the year there will be only 12 monthly payments. And I would hope that your emergency savings could tide you over any two-payment bumps.
• Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. 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.
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