Q: If I make an extra contribution to my KiwiSaver growth fund when markets are down, as now, are KiwiSaver providers nimble enough to invest it at the lower unit prices? Or doesn't it work like that?
A: At least you want to invest more. Many people will be thinking the opposite — that the recent market drop reduced their KiwiSaver balance, so they want out, by moving to a lower-risk fund. And that's a bad idea, as it makes their loss real. There's advice for them at the end of this Q&A.
Still, you're trying to time markets, and that's not particularly clever. Markets change all the time. You wrote to me on Wednesday, but you won't see this reply until Saturday. Assuming the market is still down, on Monday you could contribute extra money directly to your provider.
Most providers will turn your cash into units in their fund the same day or within a couple of days. But still, that could be a week after you wrote. By then the markets might be zooming back up, or falling further — in which case you'll wish you had waited a bit longer.
It's best to steadily drip feed into a KiwiSaver fund. Employees do that anyway, through pay deductions. Others can set up regular automatic payments from their bank.
You get good buys when the markets are down, and not so good when they're up. But — and here's the bonus — you'll buy more units for the same money in down markets. So the average price of all your units is below the average market price.
This is sometimes called "dollar cost averaging". It works whenever anyone puts the same amount into a volatile investment regularly — whether or not they understand it.
Footnote: For anyone in KiwiSaver who finds the current volatile sharemarkets worrying:
• Don't look at your balance. It's best to check it only a few times a year.
• If you're losing sleep, your fund is too volatile for you. But try not to move to a lower-risk fund now. Wait until the markets have recovered at least somewhat. It might take days, months or even years, but please try to wait.
• Rest assured that if you can learn to cope with the downturns, and you have at least 10 years before you'll spend your KiwiSaver money, your balance will come back up.
Banning fossil fuels
Q: I suspect what I have to say may put you in a difficult position because it requires a judgment on things political. That said, I would be interested in your thoughts.
I'm referring to the Government announcement that it will ban the newly appointed default providers from making investments in fossil fuel-associated companies in their default funds.
Default providers commit only a small proportion of their funds to "growth-type" investments, so the impact is likely to be minimal (and may also be a bit of grandstanding).
My concern is of a more philosophical nature. The whole premise of KiwiSaver was that although the Government created it and facilitates the mechanisms to allow it to work, we as investors felt that our funds were with a private provider and not under the control of Government.
I acknowledge that the Government has always had checks and balances that the providers have had to adhere to for obvious reasons. But is this the thin end of the wedge? How big a step is it to start mandating to all providers and for all funds what investments can or cannot be made? That will be a step too far in terms of Government control of the funds.
A: No, I don't think this is the thin end of any "Government control of KiwiSaver" wedge.
There are those who say all KiwiSaver funds, or at least the default ones, should be run by the NZ Super Fund — the huge chunk of Government money, currently $45 billion, that will help cover NZ Super costs in future decades.
That fund has performed really well in recent years. But it's a very different creature from KiwiSaver. There's just one account holder, and the fund can go into pretty risky investments because it's many years before the money will be withdrawn. I can't see a Government picking up the idea of the Super Fund getting into KiwiSaver.
In 2006 and 2007, when KiwiSaver was being planned, the thinking was that governments don't have experience at running funds with thousands of investors. It's better to let the experts do it, in a competitive environment. To promote competition, the officials made it easy for people to switch providers.
It's hard to imagine a Government wanting to interfere much with that model. It has worked pretty well so far. Having said that, the Government does set some rules, as you say. And so they should, given that:
• The savings of about 3 million people need to be regulated.
• About $800 million of taxpayers' money goes into KiwiSaver each year, in the form of Government contributions.
I would be concerned if the Government didn't take a strong interest in the scheme.
Should that extend to telling the new lot of default providers, as of July next year, that they must exclude fossil fuel investments?
Here's what Commerce and Consumer Affairs Minister Kris Faafoi said about it: "This reflects the Government's commitment to addressing the impacts of climate change and transitioning to a low-emissions economy.
"It also makes sense for the funds themselves given that there is a risk of investing in stranded assets as the world moves to reduce emissions."
The fossil fuels ban seems a good idea to me. Default funds are what people land up in if they are auto-enrolled in KiwiSaver and don't take enough interest to move to a more suitable fund. So they're unlikely to notice what their fund invests in. And yet three-quarters of New Zealanders don't want fossil fuels in their KiwiSaver funds, according to a Colmar Brunton survey for the "ethical investing" website mindfulmoney.nz.
The Government also announced other changes to default funds, including:
• They will switch from being conservative to middle-risk balanced funds. So your point about default funds not investing in many shares is less valid. In any case, I expect the rule will also apply to bonds issued by fossil fuel companies. And shares and bonds make up the bulk of balanced fund investments.
• Fees will have to be "simple and transparent", and the Government will put pressure on providers to keep their fees at the low end.
• Providers will have to make more effort to engage with investors and help them get into the best fund for them.
I like all those changes. If a default member becomes uncomfortable with the volatility of a balanced fund — or for that matter with the fossil fuel ban — that should prompt her or him to find out what's best for them and move to it.
And, by the way, I have no difficulty commenting on political issues. That's part of my job.
Q: I find the obsession on returns and fees for KiwiSaver ignores the most important aspect of the scheme — the employer matching.
If I am putting in $10,000 a year at 4 per cent of my pay, and my employer puts in 3 per cent ($7500), then after 10 years my $100,000 in savings has become $175,000! Surely that is the real wealth generator. Those numbers are ignoring compounding of returns, etc.
So, yes, the returns and fees make a difference to your retirement total, but nowhere near as much difference as that employer contribution — not to mention the Government contribution.
The real incentive for people is to boost their salaries as much as possible, so they can save more, and the employer has to contribute more also.
A: You'll get no argument from me. The main advantage of KiwiSaver is the added contributions from the Government and, for employees, from their boss.
But beyond that, members can do even better by getting into the best fund for them.
First, make sure you're in the right type of fund, and second, choose from among the low-fee funds of that type, as explained last week.
You might also want to check out how "ethical" your fund is by using the tools on www.mindfulmoney.nz.
Shares for the long run
Q: I saw your reply to my letter last week about whether to sell shares performing well or badly.
Just to give you a bit more background, I do have an extensive share portfolio, which I have built up since the Roger Douglas era. When we were given shares way back then I decided that I either had to understand the subject or sell the shares. I went the "understand" route.
Today, I have about 25 companies in New Zealand and about another 25 in Australia. I have a son in Australia so a bit of Oz income comes in handy. And having held the shares for so long, the gain on them is so much that even today, with the fall in the sharemarket, I only have about two shares that I would sell at a small loss if I had to sell up.
Also I have found the shares an easy way to shift funds to Australia when the exchange rate is favourable.
I use dividend reinvestment where it is available, since I still have a self-employment income. And just to put it all in context, I'm 78 years old, or young, depending upon your attitude.
A: You've done everything right for someone investing in individual shares:
• You hold a wide range of shares.
• They are not all New Zealand shares — although I would rather you had some beyond Australia as well.
• It seems you buy and hold, rather than trying to gain by trading a lot.
• You reinvest dividends when you can — which works well unless, of course, you need the dividends for spending money.
For further thoughts on your question last week — when I suggested you sell a portion of holdings that have got really big — read on.
Sell the losers
Q: My rule of thumb: sell any individual shareholding that declines 20-25 per cent (unless the whole market is down that much) and reinvest in something else.
Only sell a portion of your holding in the best performing shares when they make up such a significant proportion of the portfolio that any decline in value would be unacceptable or catastrophic.
Such disciplined investing will, I believe, deliver better results for an investor.
Do I live by this? I wish. It is hard to be disciplined. Hence, in my own diversified portfolio, which has still performed well, I have suffered larger losses than I needed to in stocks such as Sky TV, AMP and NZME.
The worst one, Wynyard, lost $90,000 and went to zero. Fortunately, such a loss is not catastrophic for me, but if I had sold when Wynyard first went down 25 per cent, instead of buying more, how much better off would I be?
I repeat, be disciplined, sell the "dogs" and reinvest.
A: Yes, but there must also be shares that have fallen lots and then zoomed back up.
My main point last week was that nobody can predict share prices, so it may not make much difference which shares you sell.
Still, your rule of thumb is probably as good as any — along with the strategy you and I agree on to sell some of your shares in any company that has come to dominate your portfolio.
- Mary Holm is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. 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. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.