Q: My wife and I have saved 10 per cent of our income since we started teaching. The result has been that at the age of 67, we have been retired for 15 years.
We invested our savings in a wide portfolio of dividend-paying shares in the NZX top 50. We have experienced several stock market catastrophes, including the last one. Each time we did not sell our shares but with every spare bit of cash we bought more shares while the market was low.
The result of our share ownership has been a steady income for 15 years and the buying power of our savings has kept pace with inflation. By that I mean the value of our savings has quadrupled over the years, but of course inflation has also quadrupled the cost of living.
I am writing at this time because of the people who will keep arguing with your advice on rental property ownership. We own property shares listed on the NZX. These properties are not the odd rental here and there, they are hospitals, warehouses, clinics, shopping centres, office blocks.
We don't have to maintain these valuable buildings, we don't have to chase rent, we don't have to chase tenants. The rent is regularly delivered as dividends and is tax-free. The share price rises and falls as property values rise and fall and so we get the capital gain that any other property owner gets, and it is also tax-free.
Why would anyone buy a rental property with a return of 4 per cent when they could buy property shares and gain returns of about 8 per cent tax-free? My advice to some readers is read your column carefully, do the research and follow your advice. We have.
A: Well done - especially given that teachers are not known for their high pay.
Your reaction to market "catastrophes" is a great one - buying up shares while they are cheap. Not everyone has the courage to do that. They fear that the market will stay down. But it never does.
Owning property shares is an interesting combination of share and property investing. The value of those shares tends to be affected by trends in both the share and property markets. And, as you note, it's much easier to diversify and the investments are easier to run than direct property investments.
However, you won't always get higher returns than in direct property. If you did, everyone would realise that and buy property shares. The higher demand would push up the share prices to the point that returns were not as high.
That always happens if any investment starts to look better than the alternatives with similar risk. Market forces push things back into line.
Still, it's good to know you are content with the way your investments have worked out. Read on.
Q: I am generally happy with your response to my letter last week, but could I please quibble about one thing?
You say that not every property investor follows my advice about over-commitment and you go on to describe how one can lose one's entire investment and still owe the bank money.
I would contend that in most cases that would be the fault of the investor, not a significant weakness of the investment.
Housing bubbles bursting in the UK and the US with resulting negative equity and owners resorting to jingle mail are fresh in our memory, but these things happen fairly rarely. Furthermore, a prudent investor can reduce risk by not buying at the top of the market, and not over-gearing. This is quite feasible.
We have five rental properties, now all paid for, and have never borrowed more than 50 per cent of the purchase price. And through it all we have had control.
A: We now have two happy couples, each with their own style of investing. Great!
I agree with much of what you say. However:
• Most people don't start out in rental property without taking on a substantial mortgage.
• It's easy to say, "don't buy at the top of the market". But when are we at the top? Now? Nobody can ever know that until afterwards.
• While the UK and US examples - and they're not the only countries - might seem rare, they did happen. Let's just say I feel uneasy about what I read about New Zealand property prices.
P-lab on property
Q: Having worked with a number of financial advisory firms over the years, I know that a mantra of many of the best ones is to protect and grow people's wealth. To this end, I note with interest the passing comments regarding the risk to a person's wealth presented by a P-lab locating in an investment property. Good on you for pointing this out.
A couple of points I'd like to make:
• The cost of clean-up is likely to be dwarfed by the loss of capital value arising from the change in perceived value that is associated with declaring a meth history at the time of sale.
• Because the loss of value compounds the losses associated with the cost of clean-up, too many people decide to try to sweep this history under the carpet, not do a proper job of cleaning up and flick it on to some unsuspecting punter who pays market rate for a lemon!
• The key stakeholders in the property transaction, real estate companies, banks, etc, are not raising awareness among their client/customer base.
• The result is people who think they are getting ahead are actually taking a massive financial step backwards, often while the vendor pockets a handy tax-free capital gain, or the bank mitigates its loss.
A: You are apparently in the meth clean-up industry, so some might say that would colour your opinions. Still, what you say rings true. This is certainly another concern for investors in rental property - a scary one.
Q: I received an offer from email@example.com to buy my Fletcher Building capital notes. The price is slightly more than half of the current market price.
I just wonder who would be so silly to sell at the offered price and how could a buyer do such a silly thing as well?
A: One might well ask about the sellers. I suppose some people - who have been given the shares and don't know much about them - might not realise the price is low. But that suggests they don't read the offer very closely.
Under new rules, such offers have to include the market price or a fair estimate of the value, as well as "specifying a minimum offer period and a cancellation period".
If you have ended up with a tiny holding worth just a few dollars - which might happen, for instance, when a portfolio is divided up among heirs - you might think this is a chance to easily get rid of the notes. I can't think of any other good reason to take up the offer.
As for the buyers, I suppose they must get some takers or they wouldn't bother - which is a bit depressing.
Click here for guidance on these sorts of offers from the Financial Markets Authority.
Q: In a recent column in the Herald - not your column - a reader was asking whether they should keep repaying more than the minimum off a student loan or save for a house or start retirement saving.
They were told to go see an adviser (if an adviser exists prepared to take on such work) to get personalised advice. Where is the money going to come from to pay for that advice?
It gets worse, because the answer is, I believe, glaringly obvious and could have been provided as class advice in the article to the benefit of all Herald readers, and I am sure that you would have done so.
Based on the simple assumption that the correspondent will remain in New Zealand, the answer should surely have been for anyone in a similar position:
• Pay off the interest-free student loan as slowly as possible.
• Join KiwiSaver to earn some income on the money that would otherwise have gone to pay off the interest-free student loan, and also to get the maximum KiwiSaver subsidies available - including the potential subsidy available towards a first home loan. How hard is that?
A: You're right, that's exactly what I would have said. The reader should be making the most of the KiwiSaver kick-start, tax credits and - if he or she is an employee - employer contributions. Also, KiwiSaver is the best place to save for a first home.
On your comment on seeing an adviser, some advisers don't charge a fee. That's because they receive commissions from putting clients into certain investments. But in the reader's situation, the commission isn't likely to amount to much, so not many advisers would be rushing to help. In any case, I don't recommend using a "free" adviser who receives commissions. There's an incentive for them to steer clients towards the products paying the biggest commissions.
Instead, I recommend using an adviser who charges a fee, so they clearly have the client's interests at heart. For more on this, including a list of such advisers, see the Info on Advisers page on maryholm.com.
In the case of the reader, though, I agree that seeing an adviser seems like overkill.
Q: After reading your column recently I just had to write and say do not stop promoting KiwiSaver.
I joined shortly after it began, and last year the government and employer contributions ceased as I was over 65 and had been a member for five years. I kept contributing until I retired recently.
There is no way I could have saved the amount in my KiwiSaver as I am a widow and only worked part-time. I am pleased that I joined and have encouraged members of my family to join. My money is still invested until that "rainy day".
A: Your story is not uncommon.
Research suggests that many people in KiwiSaver would have saved that money anyway - even without the KiwiSaver incentives. The argument goes that the Government is therefore throwing away money unnecessarily.
But would you have salted away 2 or 4 per cent of your pay - or whatever amount you saved? Even if you would have, I suspect there are others who wouldn't. In the coming years many people will retire with a little or a lot more than if KiwiSaver - and the hoopla that went with it - hadn't happened.
• 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.