People who try to time markets often end up regretting it. Photo / 123RF
COMMENT:
I have a classic question — probably one you've seen before.
I'm keen to switch from a balanced to a growth fund. I'm 42. If the sharemarket clearly dropped would it (likely) be advantageous to choose then as your moment to make that switch?
You're certainly not the first one to ask this. But it's an important question, so I'm happy to answer it again.
What you plan would certainly beat doing the opposite — moving out of a fund that holds lots of shares into one that holds fewer shares after the market has fallen — which is what many people do. It's better to buy when something is cheap.
But what if you miss out on some great gains in the meantime? And would you have the nerve to switch right after a big fall? How would you know the market wasn't going to plunge further? Big falls and rises tend to happen over a period. Nobody can be sure when prices will hit rock bottom.
People who try to time markets often end up regretting it. It's far better to move your money when it suits you — perhaps because you've realised that you have lots of years to go before retirement and your savings will almost certainly grow faster in a growth fund despite the ups and downs.
If you're worried about moving all your money at what turns out, in retrospect, to be a bad time, you could move a third now, a third in three months and a third in six months.
Once you've set up a plan like that, stick to it, regardless of what the market is up to.
I'm not sure if you're in KiwiSaver, but even if you are, you are allowed to have your savings spread across more than one fund with the same provider.
I have saved several thousand dollars since my husband and I agreed to have our "own pocket money", no questions asked.
It's the best way to avoid almost all arguments over money. It only took us 25 years!
I get to save and play around a bit in Sharesies, and no longer have to say all my clothes purchases are super cheap.
He gets to build up a very nice wine collection. He no longer has to say "super cheap deal" and is very happy about his collection.
Thanks for a great tip. There are too many money arguments in too many marriages.
Now that the minimum wage has increased to $17.70 an hour, I have looked into whether my sons need to increase their KiwiSaver payments in order to remain eligible for the HomeStart Grant, should they wish to buy a house later on.
Both are students and are paying the minimum amount into their KiwiSaver accounts to be eligible for the full members' tax credit.
This was also sufficient to be eligible for the HomeStart Grant, which requires 3 per cent of the minimum wage based on a 40-hour week paid into KiwiSaver.
But Housing New Zealand has confirmed that as the minimum wage has increased, the minimum amount required to be paid into KiwiSaver has also increased to $21.24 a week (3 per cent of $17.70 times 40 hours) or $1104.48 a year. This is more than the $1042 required for the tax credit.
I wonder if this should be advertised more, as young people may find they are no longer eligible for the HomeStart grant, just when they need it.
You're quite right — although I'm afraid your letter might have left some readers confused.
We're talking about two different sets of rules here. To receive the maximum $521 KiwiSaver government contribution (formerly called the tax credit), you have to contribute at least $1042 a year. Some non-employees, such as students, reach this total by putting in $20 a week.
If you want to apply for a KiwiSaver HomeStart grant — money from the Government to help you buy a first home — you have to contribute at least a certain amount each year, for at least three years.
That amount has varied over the life of KiwiSaver. For details see tinyurl.com/HomeStartRules. Since 2013, the minimum contribution has been 3 per cent of your income or benefit or, for non-earners, 3 per cent of the adult minimum wage, based on a 40-hour week.
As it happens, until April 1 this year, contributing $20 a week has been enough for non-earners to satisfy both sets of rules.
But now you need to raise your contributions to at least $21.24 a week to maintain eligibility for the HomeStart grant.
This is likely to be a continuing issue as the minimum wage rises further in future years.
If I were you, I would suggest your sons increase their contributions to $25 or $30 a week so they don't have to worry about it again for a few years. Even students can surely afford to save a few more dollars a week.
Lucky guys to have Mum looking out for them!
I always appreciate your column, which often alerts me to issues I have not considered.
Soon after KiwiSaver started I gave my daughter a lump sum to start a KiwiSaver account for my new grandson, and later for granddaughters.
I think there was an incentive to do so in the form of a government contribution. Did you encourage this perhaps?
Since then I have transferred the occasional lump sum of $1000 for their accounts. Now I am thinking about the effect of fees on these KiwiSaver accounts.
The children are still some years away from earning. Would this money have been better placed in a savings account earning interest but without fees? What should I do with any future contributions from me?
I don't think there have been any other contributions from other people, but I don't have access to the KiwiSaver details as they go through my daughter.
More lucky kids!
Yes, back in the early days of KiwiSaver I did encourage people to sign up their children while the $1000 kickstart was offered to everyone.
That's gone, sadly. But children's savings are still quite likely to grow more than in a savings account, especially if they are in a middle or higher-risk fund where average returns are somewhat higher.
Low or no fees will help, though. As I said last week, Juno charges no fees for under-18s in KiwiSaver, and Craigs, NZ Funds and Simplicity give children a break on fees. Aon cuts children's fees slightly.
Perhaps you could suggest that your daughter moves the children's accounts to one of those providers.
I, too, was sceptical when we signed our kids up to receive their $1000 kickstart to get into KiwiSaver. We signed them up soon after they were born and have added nothing more.
I thought the fees would slowly decrease the balance to nothing. However, my daughter aged 10 was in KiwiWealth and now has around $1600, and my son, now eight, was in Superlife and has over $1700.
I say "was" because I have recently taken your advice and moved them both to Juno, which has zero fees for kids. But before that, despite the fees, the balance has increased.
That's good to hear. Mind you, if the children have been in funds that hold quite a few shares, they will have benefitted from a strong period for sharemarkets. In slower markets the results might not have been quite so good.
Being in a no-fee fund will help the kids to stay ahead of the game.
Have you viewed the video on the OneRoof website illustrating whether it is better financially to buy or rent a house?
I'm just wondering if you agree with the way it has explained that you are far better off buying.
No, I don't. The video, which can be seen at tinyurl.com/BuyDecision, compares what happens over 25 years to Kaea, who buys a house at the start, and Lucy, who rents throughout. Lucy's rent costs less than Kaea's mortgage, insurance, rates and maintenance, and she invests the difference in shares.
After 25 years, Kaea's investment is worth about $2.77 million and Lucy's is about $1.99m.
But there's one important difference in the calculations. Kaea starts out with a deposit of about $184,000, whereas Lucy starts out with nothing.
If we even up the comparison by giving Lucy that same lump sum to start with, and she adds it to her other share investments, she would end up with $3.77m — way ahead of Kaea.
The calculations assume that Kaea has a 20 per cent deposit and a 25-year mortgage at 5 per cent, and that the value of his house rises 7.7 per cent a year.
Meanwhile, Lucy earns 9.5 per cent on her shares. There are also assumptions about Kaea's expenses and how fast they rise, and Lucy's rent and how fast it rises.
None of those assumptions is clearly wrong. But what if mortgage interest rates go back up to 10 per cent — much closer to historical averages? Or house prices don't rise so fast, given they have risen unusually fast in recent years and are slowing now? Or — on the other side of the ledger — Lucy's shares grow by less than 9.5 per cent?
The comparison also ignores the risk of investing in a single house. What if it's found to be leaky, a gang moves in next door, or a major employer in the area closes down?
Lucy doesn't face a similar single-investment risk, as she can easily invest in a share fund that owns many shares.
The fact is that you can do well financially following either Lucy or Kaea's example.
There's no sure way to predict which will be better.
There are, of course, non-financial advantages to home ownership, especially if you have children and want the security of a home base. But there are also advantages to renting, such as no worries about maintenance.
OneRoof, which is owned by Herald publisher NZME, has lots of useful info about property. But I don't think that particular video is its best feature.
I was disappointed to hear the Government has given up on a capital gains tax. I think it could have made taxation fairer, although I was concerned that the Tax Working Group didn't suggest gains should be adjusted for inflation.
Anyway, let's not get into all that any more. Maybe another government, another time, will make it work.
Thanks to all the readers who sent me questions about the proposed tax. There were far more than I could publish, even if I had filled the column with nothing else for the past couple of months — which would have been pretty dreary.
But it's great to see so many people taking an interest — and not all of them motivated by their own self-interest.
- Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. Her latest book is "Rich Enough? A Laid-back Guide for Every Kiwi", and her website is www.maryholm.com. 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 mary@maryholm.com. 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.
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