Splitting term deposits into several lots, or laddering, allows you to spend when each deposit matures or reinvest at the best rate available. Picture / iStock
I was reading your recent advice for term deposits and rolling these deposits over. You recommended five term deposits. I was confused about how you structure the deposits to roll over. Could you explain this?
Also, I was looking at depositing in different banks for maximum interest, or were you suggesting in one bank, as managing this can be tricky.
A: What we're talking about here is sometimes called laddering.
Let's say you have $10,000 to invest in bank term deposits, and you've noticed that usually you receive higher interest if you tie up the money for longer. But you're reluctant to invest the lot for, say, five years for two reasons.
One is that you might want access to some of the money earlier than that. The other is that nobody knows which way interest rates will move.
These days you might get 3 per cent for a one-year deposit or 3.8 per cent for five years. If you go with five years, and interest rates stay the same or fall over the next few years, you'll be happy. But what if they rise? You'll be stuck with what has become a low rate.
With laddering, you split the money into several lots -- three, four, five or whatever suits you. Let's choose five to keep the maths easy.
You invest $2000 for one year, $2000 for two years, and so on, with the last $2000 tied up for five years.
When each deposit matures, spend some if you need to, but otherwise reinvest it for five years. And keep doing that, year after year.
After four years, you will have:
• Access to money every year.
• All your money in five-year deposits, so you benefit from the usually higher rates for longer-term deposits.
• Your money spread out over the interest rate cycle, so some earns higher rates and some lower rates. That beats having it all at lower rates.
If you prefer to have money available monthly, ladder over a shorter period. For example, invest one-sixth of your money for two months, one-sixth for four months and so on, so the last sixth is invested for a year. Then, as each deposit matures, reinvest it for a year.
Every now and then -- because of market conditions -- interest rates will be higher on shorter-term deposits. But stick with your strategy. Over the years it will work more often than not. Banks prefer you to tie up your money for longer, so they usually pay extra for that.
On whether you should use different banks, the advantage is that you can go for the highest rate each time. Check the rates on www.interest.co.nz. The disadvantage is that, as you say, it's harder to manage. Your call.
Q: In October 1997, having attended several investment road shows, we invested $200,000 in Spicers' high risk, "entrepreneurial portfolio". We were in our mid-40s, with time on our side, and the advice was that long-term returns should be greater than moderate or conservative portfolios.
Eighteen years later, the value today is $275,000, a gain after tax and fees of $75,000, hardly 2 per cent a year. The portfolio has returned an additional $42,600 deducted as management fees, a drain many people do not calculate. Annual fees quoted around 1.3 per cent of the portfolio value sound little to the unwary. Translating into more than one third of our return is unreasonable.
What evidence is there that high-risk managed funds give greater returns over the long term? In a "managed" situation where the same fees are deducted in times of loss, this would seem incorrect.
For those selecting KiwiSaver funds, I ask, "Is there value in a high-risk volatile managed fund?" By investing in one-year compounding bank deposits we might have achieved a better outcome.
I have requested the actual returns from a conservative fund over the same period, but that information is not forthcoming.
A: There's any amount of evidence that higher-risk managed funds perform better over the long term.
Take, for example, Morningstar's data on KiwiSaver performance after fees since May 2009. The average return for a conservative fund was 6.85 per cent a year. For a somewhat riskier moderate fund it was 7.80, for a balanced fund 9.09, and for a growth fund 10.53. For the riskiest aggressive funds it was slightly down, at 9.51 per cent, but still the trend is clear.
It's true that if we go back to October 2007, so we include the global financial crisis, the upward trend is not there. Returns are almost the same -- at around 5.5 to 5.8 per cent a year -- for conservative, moderate, balanced and growth funds, with aggressive lower at 4.4 per cent.
But the financial meltdown -- which hit riskier funds harder -- was extraordinary. We don't have long-term KiwiSaver data, but other data show that over decades higher-risk funds wobble around more but pretty much always perform better than lower-risk ones.
However, you raise a really good point -- that high fees can badly eat into returns. And fees tend to be higher on riskier funds. So it's really important to keep an eye on fees.
In your case, a Spicers spokesperson blames the poor performance partly on volatile markets since 1997, "including the tech bubble, the Asian financial crisis and the global financial crisis -- undoubtedly a very challenging time, particularly for high-risk investors who are typically invested in assets such as shares and property.
"While through the financial crisis the customer's portfolio decreased in value by about 31.5 per cent, it actually outperformed the global sharemarket that fell over 37 per cent during the same period."
The spokesperson adds: "While the overall return on investment over the 18-year period is about 2.18 per cent a year, since the end of 2008 it has provided an annualised return of 6.05 per cent after taxes and fees, a relatively strong performance. If we could remove the negative effects of just the financial crisis, the current investment balance would be more than $380,000."
He adds that conservative investments have also fared badly over the period. "If we look at the performance of a conservative portfolio available to Spicers customers, the UT01 portfolio provided returns of 2.11 per cent a year."
Having said all that, the spokesman acknowledges that "a return of circa $70,000 on a $200,000 investment may not be considered substantial for some investors seeking higher returns, but the reality for many Kiwis over the same period, particularly during the financial crisis, is significantly worse."
I would add, though, that for those who have chosen providers who charge lower fees, it has probably tended to be better.
I suggest you use the KiwiSaver Fund Finder on www.sorted.org.nz to find providers who charge lower fees on high-risk KiwiSaver funds. They are also likely to charge lower fees on similar non-KiwiSaver funds. You might want to move your money to one of those.
Q: Last week's letter about property improvements reminds me of the not-so-hilarious story of my Canadian friends.
They had a beautiful family home in a desirable suburb in Vancouver. They decided to downsize so spent a significant amount upgrading their kitchen and bathrooms. They then brought in a real estate agent to assess its value. She told them the house was a knock down. In disbelief they asked why.
It seems that the multitude of Asian buyers preferred a different style and were willing to pay the full amount so they could replace it with their own choice of home.
The moral of the story is that you should get a real estate person's advice before embarking on improvements. The good news is that in the end they sold it to a local person who did not want to bulldoze it.
A: The only trouble with asking an agent's advice is that they might talk you out of doing extensive work -- even when that would be worthwhile -- because they're keen to get the listing and sell your place as soon as possible.
That doesn't mean you shouldn't ask an agent. But keep that in mind when considering their response.
Another "moral" is that it's probably not wise to spend lots on upmarket materials and fittings that a buyer might not like. Get the place looking fresh, but in a cheaper way.
Q: I signed up to KiwiSaver with the ASB on June 14. This was easy as I have a mortgage with it.
I put in $1042, after ringing ASB KiwiSaver people and asking if I would then be eligible for the $521 Government contribution. They said I would.
It then took out $40 tax from my fund on June 30 (the government contribution cut-off date).
I was worried this would take me below the threshold for the government contribution, so I emailed the bank to confirm I was still eligible. I was then told no, as I hadn't had a KiwiSaver fund long enough. Apparently I am only eligible to get $22 or $1.40-ish per day.
All the advertising information says to put in $1042.87 a year and get the government return, no time period. I was a bit annoyed to find out this wasn't the case after the fact. However, good to join the scheme.
There are three issues here.
Firstly, when you rang ASB, the person you spoke to may not have realised you had recently joined -- although it would be a good idea if they always asked.
In your first year in KiwiSaver, your maximum tax credit is proportionate to how much of the KiwiSaver year -- July 1 to June 30 -- you have been a member.
"We do endeavour to explain [that] in our communications and on our website," says an ASB spokeswoman. But not this time, it would seem.
In your case, you were a member of KiwiSaver for 16 days by June 30, so your maximum credit is 16/365 of $521, which comes to $22.84.
It's a pity your hopes were higher. And the ads didn't help. It's probably unrealistic to expect ads to include the rule for new members in the big print, but an asterisk referring to smaller print at the bottom seems fair.
Secondly, it seems you thought that if you didn't contribute the full $1042 you wouldn't receive any tax credit. But there's no threshold. After your first year, the tax credit is 50c for every dollar you put in -- up to a maximum of $521 if you put in $1042 or more. On contributions totalling $100, your tax credit will be $50.
Thirdly, the $40 tax deduction is odd.
"Tax on investment income is usually deducted [or refunded] at the end of the tax year [March 31], or during the year if a member makes a withdrawal or a fund switch," says the spokeswoman.
She encourages you to "contact us on 0800 ASB RETIRE (0800 272 738) or retire@asb.co.nz with their account details so we can investigate the $40 tax transaction on June 30."
Your introduction to KiwiSaver hasn't been smooth. Still, as you say, it's good you're in the scheme. From next year you'll get the maximum $521 as long as you contribute at least $1042.
'Apartments on the site and more than likely offices' – Andrew Moore, CMP Construction.