Mary Holm on investing

Mary Holm is a personal finance writer

Mary Holm: OE savings launch a share passion

5 comments
Investments have grown through well-researched portfolio as engaged couple works on being mortgage-free

Shared interest in investing can give couples a financial boost. Photo / Getty Images
Shared interest in investing can give couples a financial boost. Photo / Getty Images

Q: I wanted to add to the thread regarding amateur investors. As a young couple we have recently taken up a keen interest in share investing.

After reading several investing books - a woman's guide to shopping for shares was an excellent choice for me - we both now find ourselves reading the daily business sections online and research reports of our companies and watch lists.

Having saved about $60,000 for a house deposit while working overseas, we decided to invest this money while renting. Our current 15 companies are diversified and well researched with anything from $2000 (a punt) to $20,000 (steady growth with good returns).

Sharing this new adventure has been a great bonding experience shared over a few (or many) glasses of wine for my fiance and me. We help each other not to freak out through the ups and downs of the sharemarket ride.

Clicking on your Xero app while having a sip of Moa beer gives you a strange sense of satisfaction knowing you own a little part of those companies!

Having good jobs with no kids we soon saved up another house deposit and have since bought a house. Meanwhile, our portfolio has grown to $85,000, both from growth and good buying opportunities when we see the market drop. For me this is like buying a dress I want on sale!

We call our portfolio Mortgage Free as that is our goal. We made the choice to not accept our bank's offer of a $600,000 mortgage and bought further out from the city at $375,000. We hope to knock the mortgage off as soon as we can, using continued savings and eventually selling the shares.

A lot (well actually, all) of our friends think we are crazy, but we love it!

A: Far from crazy, it sounds to me as if you two are pretty savvy.

I've got a few reservations about what you say. One is that I would be wary about a book that purports to tell you how to select shares - let alone one that suggests gender has anything to do with it! Think about it. If the author really knows how to choose winners, why don't they just get rich doing it for themselves? Or if they want to do it on a grander scale, running a share fund?

Also, I've already expressed my doubts in earlier columns about the ability of any non-professional to choose the best shares based on what's in the news media and readily available research reports.

But you should do fine as long as you diversify, and 15 companies is pretty good. I don't like the fact that one share - the $20,000 holding - makes up almost a quarter of your portfolio, though. You might want to water that down.

One more issue: it's never wise to invest house savings in the sharemarket if you expect to buy within about 10 years. As it turned out, it didn't matter for you, because you were able to save more for the house. But if that hadn't been the case, and the market had hit a downturn, it could have delayed your house purchase by years.

Still, there's lots good in your story:

It's great that it's a shared interest and you support one another through the worrying bits.

Good on you for buying when share prices are low. That can take courage.

And well done for keeping the mortgage low and aiming to pay off the loan fast.The Capital Markets Development Taskforce (I was a member) would be proud of you. The taskforce - and it would seem the Government - are keen to encourage New Zealanders to invest in our shares.

Too bad about the friends' attitudes. Maybe they'll come round when they see the progress you're making.

Capital gains valuations

Q: In last Saturday's column you answered a question on how the value of property would be decided if a capital gains tax is introduced and suggested that the last rating valuation might suffice.

I think this would result in considerable injustice, as the rating valuation is a three-yearly desktop valuation for rating purposes only and is not a market valuation by any stretch of the imagination.

Use of the 2006 rating valuation in Christchurch has resulted in many bitter owners of destroyed buildings and land complaining that they are tens of thousands of dollars out of pocket as the rating valuation was considerably lower than the market value at the time of the earthquakes.

There is also the case that in areas outside Auckland, house prices and commercial property prices are lower now than they were in 2004-7, so people who bought then could face a capital gains tax on their sale price even if that sale price was lower than the price for which they bought the property. Paying tax on a capital loss would be a bitter experience indeed.

The starting value of property for tax purposes should be the original purchase price or a registered valuation on valuation day, whichever is the higher.

A: Labour's spokesperson for finance, David Parker, said in last week's column that the starting date for calculating capital gains on property would be the date the tax is introduced.

People could establish the value of their property on that date by choosing one of:

The most recent government valuation for rating purposes.

The purchase price in a recent arms-length purchase.

A private valuation done at the owner's expense.People whose property value has risen since the last government valuation could go with the third option.

What about people in your last scenario - whose property value has fallen since they bought? Let's say, for example, you bought for $500,000 in 2007. On the date the capital gains tax starts, the most recent government valuation or a private valuation is $440,000. A few years later you sell for $480,000. You are taxed on the $40,000 gain, even though you sold for less than your purchase price.

That's probably going to be the way it is, says Parker. "We need to have a valuation date.

"We want to achieve a fair and equitable outcome. It should be prospective rather then retrospective. If we made it retrospective, we would be backdating gains as well as losses. It would seem unfair to not count gains made since purchase but before the valuation date, but to count losses."

Parker adds that he thinks it unlikely many people would be caught in the scenario. And he disagrees with your statement that they would be taxed on their loss. "They would be taxed on their gain from the date the tax comes into effect."

Whenever something like a new tax starts, the transition period is tricky. There are always winners and losers. I think Parker's proposal is probably as fair as any.

Forrest Gump's view

Q: Re your correspondent last week, "Low return points to large entry fee", there is no excusing the 0.7 per cent return that your correspondent has enjoyed. His adviser, on the other hand, has done well, as has the selected fund manager(s).

And as Forrest Gump said, "That's all I have to say about that."

A: Fair enough. But authorised financial adviser Brent Sheather, who is also a Herald finance writer, adds another dimension in the next letter.

Drilling down for farmer

Q: I read the story last Saturday about the farmer who only earned 0.7 per cent on his investments in the half year. I thought it might be helpful to look at what the asset classes concerned did in the half year to try to better understand the low return.

The farmer apparently invested 60 per cent in bonds, 10 per cent in property and 30 per cent in shares, and if we assume the bonds and property are local and the shares are split between New Zealand and international or New Zealand and Australia, then we can look at what these sectors did, weight them as per the portfolio and see how the portfolio would have performed had it done as well as the index in each market. This is summarised in the tables.

It seems likely that the main reason for the poor return in the half year was the high weighting in bonds, but before we reject bonds as an option we should remember that six months is a short period. The 10-year return on NZ Government bonds at 6.1 per cent a year has been quite satisfactory, better in fact than international shares at 4.8 per cent a year.

The other reason for the low return could have been the drag from annual fees. If the farmer is invested via a fund manager and was paying a high monitoring fee, these annual fees could easily total 2-3 per cent in a full year.

Alternatively if the adviser runs a concentrated portfolio he or she might have underperformed the index in some of the asset classes.

Either way this sort of analysis should give the farmer more information.

In fact a drilldown of returns by asset class should probably be provided by the financial adviser each quarter.

A: Thanks for this, which should indeed be helpful for the farmer.

Keeping it simple

Q: Looking at the KiwiSaver scheme, I note that the annual member tax credit is available for scheme members after they have reached the age of 18 years.

However, I understand that in certain employment situations scheme members may be in substantial employment from the age of 16 years.

Is there any reason for 16- and 17-year-olds in employment not being able to access the annual member tax credit?

Where do you draw the line?

A: I think it's fair that children can't get the tax credit.

I've got a horrible feeling that the parents of most children in KiwiSaver will have higher-than-average incomes, because they tend to be more financially knowledgeable. And their kids also get the advantage over children not in the scheme, by picking up the $1000 kick-start.

It's true that 16- and 17-year-olds in "substantial employment" are a whole different group. But how do we define "substantial". And what happens when they are in and out of work? And would parents start "employing" their kids to mow the lawns and do the dishes so they qualify?

It could all get pretty messy and expensive to administer.

Better to keep it simple, at 18 for everyone. After all, people who enter KiwiSaver at that stage are in for many thousands of dollars from the government over their lifetime.

Mary Holm is a freelance journalist, part-time university lecturer, 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. 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.

- NZ Herald

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