Q: Given that I have several years until retirement my savings are in growth funds both in KiwiSaver and in other funds.
One thing though that I really struggle with is fees, especially when trying to compare various funds. Even when KiwiSaver performance tables are published they tend to be before fees. That makes their returns a bit meaningless, given that everyone has to pay the fee, making the true result the after-fee result.
There seems to be a whole lot of different fees as well, so I never quite know the total fees. Is there a way to make sense of all this fee stuff?
A: There is now. The new KiwiSaver Fund Finder just launched on www.sorted.org.nz lets you pick the cherries from all the publicly available KiwiSaver funds.
The website is run by the Commission for Financial Literacy and Retirement Income, so it's not biased. It uses information that every KiwiSaver provider must now publish each quarter.
You're quite right that it doesn't make much sense to compare returns before fees. The Fund Finder not only subtracts fees from returns, but it also subtracts tax. This gives the actual amount that goes into the accounts of people on the top tax rate for KiwiSaver funds, which is 28 per cent.
"If your total taxable income from other sources was $48,000 or less in either or both of the last two years, you are quite likely to pay less tax on your KiwiSaver returns, so they will be somewhat higher. However, this won't affect comparisons from one fund to another," says Sorted.
You're also right that there are lots of different types of KiwiSaver fees. The Fund Finder ranks the funds in each fund group - defensive, conservative, balanced, growth or aggressive - by total fees, which is all that really matters. And I suggest you take more notice of the fees ranking than the returns ranking.
That might sound silly. All that really matters is the after-fee, after-tax returns you'll earn from now on.
The trouble is that we can't predict returns. A fund that did well last quarter, last year or last decade might well do badly in the next period.
Fees, though, are pretty consistent over time. So I suggest choosing a fund that charges low fees, in the expectation that it's likely to have better after-fees returns over time than a high-fee fund.
The Fund Finder also ranks providers by the number of services they offer members - such as choices about communications, and help with maximising tax credits. You might want to also take this into account.
Oh, and well done for picking growth funds, which invest largely in shares and sometimes property. They have more ups and downs than lower risk funds, but over the years they are likely to grow more.
I should disclose here that I helped Sorted to develop the KiwiSaver Fund Finder. So I'm biased about how useful it is!
Let me know if you have any problems or suggestions on how to improve it.
Shares v property
Q: "Such comparisons are tricky", you opined last week. Yes, you are correct, Mary - they are tricky. On the one hand you are prepared to allow the share price increase over 10 years not only to include the dividend but to compound the dividend by reinvestment. Come the house price increase and we see neither an allowance added in for the fact that you can live in it nor what it would rent for and certainly no sight of any reinvestment of rent.
You are either incompetent or stupid (take your pick) and should close your column down, or you are being blatantly dishonest in trying to promote shares over property investment without pointing out all the facts and comparing apples with apples. Your bias is manifest.
How about addressing in your next column the fact that the New Zealand sharemarket is still not back to where it was pre-1987 (shoots your mantra of "got to be in the market for at least 10 years to be safe" right down in flames doesn't it?). I know who I believe out of Gaynor or you on the subject ... and it ain't you. Please excuse my grammar.
A: Help! How can I address your question if I've closed my column down? Perhaps I should keep it going just a little longer so we can discuss this calmly.
My answer last week was hardly positive about shares. Didn't you notice the headline - "Get-rich scheme legal, but it's risky"? Or the picture of the chalkie during the 1987 crash, or my first paragraph about the crash?
I pointed out that the correspondent's boss has had good luck with the timing of his share purchases, but wrote at some length about the consequences of a share price fall. That's not quite blatant promotion.
I acknowledge, though, your point about including dividend reinvestment but not including an allowance for living in a house or receiving rent.
I'm unabashed about the dividend reinvestment. I'm always emphasising the importance of diversification and saying that the easiest way to diversify is by investing in managed funds. And almost all managed funds - including KiwiSaver funds - reinvest dividends.
I also recommend dividend reinvestment for people who directly hold shares, unless they're using the dividends for retirement income. The vast majority of readers of this column who have any share investments will be reinvesting dividends - even if many don't realise it. The trickier bit is how to allow for the accommodation a house provides.
There are ways to do that, but they're controversial. Rent is more straightforward. But many investors in rental property don't literally reinvest the rent they receive. For one thing, it's much harder to reinvest small amounts in property than shares. For another, many "reinvest" the rent by using it to pay interest on their mortgage.
That leads us to another issue. Because people usually borrow to invest in rental property, their gains are boosted by gearing - as are their losses. Gearing increases risk. It's the same with borrowing to invest in shares, which was the main point of last week's Q&A. But far fewer people go into geared share investments.
In short, it's hard to compare a typical share investment with a typical rental property investment. This column has tried before, many times.
Last week I didn't want to go there again. I was just trying to say, "Hey, everyone knows house prices have been rising - especially in Auckland. Did you realise New Zealand shares have also been rising fast?" As the Beatles put it, I should have known better. Any share versus property discussion gets people's blood boiling. Next time I'll do it in detail or not at all.
Okay, on to your comments about the New Zealand sharemarket not being back to its pre-crash level, and about being safe if you're in the sharemarket for 10 years.
If we look at the NZX50 capital index, which doesn't include reinvested dividends, there have been some 10-year periods when you would have lost money in shares. Indeed, if you imagine some poor sod who put all their money in New Zealand shares at the very top of the 1987 boom and didn't reinvest dividends, they are still 32 per cent behind, as our graph shows.
But there are three important points here:
• If you include dividends, you don't get declines over 10-year periods. And over 30 years, the gain is impressive. See the graph. Admittedly, if you're in a managed fund, fees eat into your returns. But if you use low-fee funds, you still do well over long periods.
• I always say it's better to drip feed money into shares. If someone wants to invest an inheritance, redundancy pay or lottery win in shares, I suggest they invest some now, some soon and some later - to avoid the poor sod scenario. And most people who invest in shares via KiwiSaver or other managed funds make regular contributions. As long as you spread your contributions over time, you can be pretty confident of doing well over 10 years - although there are never guarantees.
• I recommend investing not just in New Zealand shares but also international shares. That spreads your risk considerably.
How does all this fit in with comments Brian Gaynor has made in his column?
Gaynor uses capital indexes - the ones without dividends. "All of the world's major indices are capital only, they exclude dividends. This includes the Dow Jones, S&P 500, Nasdaq, FTSE 100, DAX, CAC 40, ASX 200 etc, etc," he says.
"The problem about including dividends is that they give a strong upward [unrealistic] bias because it assumes that all dividends are reinvested. That is unrealistic and few investors do that. The compounding impact of reinvested dividends makes the NZX's performance look better than it does."
My response: Gaynor's readers probably include more direct share investors, many of whom may not reinvest dividends. Still, dividends are part of their return, which they could reinvest if they chose to. And let's not ignore the many investors in KiwiSaver and other managed funds who read both our columns.
As far as international indexes are concerned, it's long been a source of frustration among experts that the news media focus on indexes that exclude dividends - probably just because they always have. But the different countries also publish indexes that include dividends. And all the high-quality research I've seen uses those indexes.
This is partly because different countries tend to pay dividends at different rates, with New Zealand among the highest. In other countries, most companies keep more of their profits to reinvest in growing the company. So if you don't include dividends in international comparisons, you'll get distorted results.
Gaynor adds: "Neither the capital or capital plus dividends indices give an accurate picture of the performance of a market, they are just an indicator. Investors buy individual stocks, not the market. Some investors have done particularly well on the NZX in recent years whereas others have done poorly."
My response: Indeed. But investors who follow my recommendation - to diversify widely through a fund if they haven't got enough to do it directly - do come close to "buying the market".
I'm sticking with my way of judging sharemarket performance - a way that I think makes most sense for my readers.
Q: Isn't there a flaw in the first letter last week?
Interest on your home mortgage cannot be offset against income from your salary. If it can, I have 40 years of tax deductions to claim. Here's hoping.
A: I hate to disappoint you, but you can deduct interest on any loan - mortgage or otherwise - only if you've borrowed the money with the purpose of making taxable income.
Last week's correspondent was thinking of borrowing to invest in shares. Similarly, if you borrow to invest in rental property the interest is deductible.
In New Zealand you can't deduct interest paid to buy your home, as that doesn't generate taxable income.
• 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 firstname.lastname@example.org 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.