In light of what is happening to global stocks at the moment, would it be prudent for me to consider changing my aggressive KiwiSaver fund to a more conservative alternative? I am 31.
Let's put the recent plunge into perspective, by checking out the New Zealand sharemarket over the past decade.
The "capital" line on our graph of accumulated returns is worrying. It shows that the prices of shares in the NZX40 - an index of our 40 biggest companies - grew steadily in the first half of the decade, but they have lost all their gains since. Dismal.
But when we look at the "gross" line, which includes reinvested dividends, growth has been reasonably good, despite the recent slump and the global financial crisis. Someone who invested $1000 in an NZX40 fund in January 2000 and reinvested their dividends - which KiwiSaver investments always do - has come close to doubling their money.
Dividends tend to get overlooked when a market falls fast. Despite the ups and downs in share prices, most companies still pay shareholders a portion of their profits as dividends.
Our second graph shows dividend yields, which are like interest on a savings account. If your shares are worth $100 and the dividend yield is 8 per cent, the dividend will be $8. Throughout the past decade, dividend yields on NZX40 shares have compared well with bank interest.
But we mustn't overemphasise this. Dividends do fluctuate, and share prices fluctuate more. So what should you do?
Picture this: you're off on a long fishing trip, and you have the choice of two boats. One is a reliable little launch that will hug the coastline and bring in a steady but modest catch. The other is a larger vessel that can handle rough open waters. Some weeks you'll achieve nothing but seasickness, but on other weeks there'll be fish galore, and at the end you'll probably return to port with a considerably bigger haul.
People sometimes choose the larger, more exciting boat while it's cruising in calm waters. But when the weather gets rough, they feel queasy and ask to switch to the inshore boat.
"That's fine," says the skipper, "I'll arrange a transfer. But don't come asking to board again when the weather clears. We never know when the next storm will blow in. Once you're off, you're off."
At times like the past couple of weeks, people who have fairly recently started investing in shares or share funds hit their first downturn. And some find it really uncomfortable.
If that's you, you should probably switch funds. It seems a pity to do it right after prices have fallen, but there's no knowing whether they'll fall further. You might as well escape the misery.
Please, though, heed the skipper's words, and don't plan to move back to a riskier fund when the markets look stronger. People who try to time markets nearly always do poorly. If you have switched to a conservative fund, you are almost certainly better off sticking with your choice.
However, it's not clear that you're not coping with the slump. You might be quite capable of toughing it out, but just wondering if that's wise.
That depends on when you expect to spend your KiwiSaver money. If you might use it to buy a first home within the next 10 years or so, I suggest you switch to a more conservative fund. There's too big a chance that the sharemarket will be down when you withdraw.
Otherwise, though, you've got more than 30 years before you're likely to take out KiwiSaver money. And that is certainly long enough to invest in an aggressive fund, which will hold mainly shares. It's likely to give you the highest long-term returns.
I am 49 and have a freehold home and just under $200,000 in an employer-subsidised superannuation scheme.
About 18 months ago, just after the big sharemarket crash, I changed from being in the balanced portfolio to the high-growth portfolio. My theory was that things must be just about as low as they could get.
This proved to be a good choice, as in the first 12 months I received returns of 21 per cent net, and returns for the last year look to be about 6 per cent net.
How long do you think I should stay in the high-growth portfolio, bearing in mind I have about 15 years before retirement? I have heard some commentators predicting another crash next year after the Yanks stop printing money.
I hate to say it, but you seem to be doing what our skipper was warning against - trying to time markets. And the downturn has come early, in the time since you wrote to me a month or so ago.
Many people think they can work out when the sharemarket will rise or fall. And some, like you, have the misfortune of being right with their first call. It makes them think they have skill, when really it's luck.
Nobody can know a market is booming until prices have risen for a while. If you jump in at that point, you've already missed the rise. Similarly, nobody can pick a downturn until it has happened.
Even the experts get it wrong as often as they get it right. I suggest you give up timing now, while you are probably still ahead.
Instead, decide on your investments based on your risk tolerance and how long you have to invest, and stick with your choice through thick and thin.
Assuming you can cope with volatility, you have 15 years to play with. I suggest sticking to your high-growth fund for a few more years, but then gradually shifting to lower risk.
Gold's the answer
Remember me? I wrote to you about the gold price some months back. Well, it's US$1740 an ounce and rising.
Why? Because the paper money system is failing. Gold is the only investment to own in times of trouble. Period!!! No central banks can print it, and that's why it holds value.
When the Chinese public really start to buy, it will go straight to US$3000 an ounce. Supply and demand!!!
Once we break US$1769 on strong volume it will double in price. Enjoy holding all of your New Zealand dollars that are backed by nothing!!!
How could I forget you, and all your exclamation marks? And thanks, I will enjoy my kiwi dollars, and earning interest on them - something you can't do with gold.
Nonetheless, I have to acknowledge the gold price has soared lately. Even though it didn't reach your predicted US$1600 by the end of last year, it's well over that now.
How about your other forecasts from October 2010? Will the New Zealand dollar equal the US dollar by October 9, 2011?
And will silver top US$100 an ounce by October 9, 2012? At the time of going to print, the kiwi was at about US83c and silver was at about US$38 an ounce. Time will tell.
A note to other readers: gold is looking horribly bubbly. I do not recommend investing in it.
In your recent article, you answered a question from a couple where one spouse is under the age of 65 and they receive the income-tested rate of NZ Super. You said: "NZ Super is not affected by KiwiSaver".
I work for the Ministry of Social Development. We are concerned that your answer to the question needed some additional context.
KiwiSaver contributions are not accessible until the later of reaching age 65 or five years after joining KiwiSaver, so neither of these is an issue in this case for the younger partner.
However, the 65-year-old, who qualifies for NZ Super, is able to access their KiwiSaver contributions once they reach the fifth anniversary of joining. The questioner indicates this will be "in the near future".
After a KiwiSaver fund matures, the clients are able to access the funds. Those funds will be available for use, including investment. Investment income would be included in the income test assessment where there is a non-qualified spouse.
If there is a conscious decision not to access the KiwiSaver funds on maturity, or to invest them in non-income producing assets, this could potentially be regarded as income deprivation under section 74 (1)(d) of the Social Security Act 1964. This provision enables a benefit to be reduced, cancelled or declined if a person deprives themselves of income or property which would otherwise disqualify them for a benefit or increased rate of benefit.
This is a discretionary provision and would require the full circumstances of the client and their partner to be taken into account. Based on the information provided, it may be appropriate for them to contact their nearest service centre at the time their first KiwiSaver account matures.
I stand corrected. While NZ Super and KiwiSaver are in most cases not connected, they are if a spouse under 65 receives NZ Super.
Many people probably don't realise that some under 65s get NZ Super payments. They are eligible if the couple's income is relatively low.
If one partner is over 65 the couple have the choice of receiving either:
* One regular married NZ Super payment - currently $13,597 per person per year after tax (at M rate), or
* Two payments of up to $12,923 each after tax. That amount decreases if the couple has income of more than $100 a week. If the couple's total combined income is more than $24,703 before tax (excluding NZ Super), they will be better off with the first option.
Savings in KiwiSaver are not counted as income in the second option, even after the member gains access to the money. But, as the official explains above, income earned on those savings - such as interest or dividends - may be counted.
What's more, if the income from the investments is very low, "the ministry may consider that deprivation of income has occurred, and apply a notional income charge", says the official.
"The ministry generally uses the Reserve Bank average retail six-month term deposit rate as a benchmark."
A couple in this situation would need to keep all of this in mind until the younger spouse turns 65. At that point, each spouse would be qualified to receive their own NZ Super, with no income testing, and whatever they do with their KiwiSaver money is irrelevant.
For more info, go to www.sorted.org.nz and click on "Retirement".
Sorry to anyone misled by what I wrote. And thanks to the official for writing.
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 best-selling author on personal finance. Her website is www.maryholm.com. Her 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 email@example.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.By Mary Holm Email Mary