Q: I am 63 years old and want to invest approximately $340,000. I plan on retiring when I am 68 to 70. I would like to invest this money in a safe place. I am not a risk taker and want to have access to the funds if I require them. Do you have some suggestions where I could invest this money?
A: Safe and accessible? Hmmm. If you really mean that, the only place for your money is in a bank account.
Even then, it's possible the bank could get into financial difficulties. The Reserve Bank would step in, and a portion of your money would be frozen, although you may get some or all of it back later.
The Government plans to change this. It has said it will introduce a guarantee of up to $50,000 per depositor in any bank, but it will be a while before that becomes law.
In the meantime, while it seems highly unlikely a New Zealand bank will fail, you might want to spread your money around several banks.
The trouble with this plan is that bank account interest is pathetically low. By the time you pay tax on the interest, and inflation does its thing, the value of your money — in terms of what you can buy with it — will be falling.
To avoid that, I urge you to be just a little bit brave. I'm not talking about the high diving board. But how about a gentle bellyflop into the pool, rather than taking the steps?
Risk and return (interest and other earnings on your money) go together in investing. The higher the return, the higher the risk.
Obviously you're not a candidate for, say, a growth or aggressive fund, which invests largely in shares. Your balance would sometimes fall a lot. And in any case, you might want to spend some of the money in less than 10 years, so a share investment is unsuitable.
But you may be able to cope with seeing your balance fall a bit every now and then, in exchange for probably making a somewhat higher return on average.
I suggest you put your money in a low-risk KiwiSaver fund. You'll be able to withdraw any or all of it at any time after you turn 65. Here are the steps you should take:
• Go to the KiwiSaver Fund Finder on sorted.org.nz, and answer the three questions in "Find the right fund for you". It will probably tell you to choose a defensive or conservative fund.
• Compare funds of that type. You can list the funds by fees, services or returns. Concentrate on the funds with the lowest fees, not the highest returns. Fees hardly ever change, but returns change all the time, and the ones with the highest returns could well do poorly in the future.
• Check out, say, five low-fee funds by clicking on the fund names. Don't agonise about your choice, as it probably won't make a huge difference. Get your money in there!
• Don't panic when your balance dips. Stay put, and it will come right.
If you want to keep a small proportion of the money accessible before you turn 65, put that in short-term bank term deposits.
But if you want the whole lot to be accessible from now on, go through the process above and then ask the KiwiSaver provider if they have a similar non-KiwiSaver fund. They probably will — but the fees are likely to be a bit higher.
Helping the kids
Q: I have two children aged 14 and 11. Their grandfather would like to generously put a significant amount of money into a fund for each of them, that would grow the investment. The sole purpose is to build the base into a deposit on their first home.
We are interested in any disadvantages for the children that you know of to having a KiwiSaver scheme for this at any stage, and any impacts as they start their working careers down the track.
A: Lucky kids! The only disadvantage is that the money can't be withdrawn for anything but a first home or retirement income — except in special circumstances.
It's possible one of the young ones will decide home ownership is not for them. But that wouldn't be the end of the world, as they would keep the money for retirement — and would need more if they don't own a home.
Some other points:
• Once the children are in KiwiSaver, they will have 3 per cent deducted from their pay when they get jobs, including part-time jobs. After a year they could take a savings suspension, but discourage that. It's no bad thing to start a lifetime savings habit when you're young.
• Their employer doesn't have to contribute 3 per cent until they turn 18, although some employers do it voluntarily.
• They won't receive the Government's contribution — 50 cents for every dollar they contribute, up to $521 a year if they contribute $1042 or more — until they are 18.
Their granddad might consider holding back some money. Then, if one of the kids isn't working after they turn 18, perhaps because they are studying, he can put in the $1042 each year.
Q: I read with interest your reply to my question last week about price-earnings (p/e) ratios. Regrettably you failed to answer my question. Indeed, far from identifying an acceptable price-earnings ratio, you eschewed the use of it completely.
Such a fundamental aversion to sound share investing practices concerns me, coming as it does from someone with your wide reputation within the personal investment industry.
The price-earnings ratio is neither esoteric, nor is it only for the specialist. It is simply a measure of how much return a company is making as a function of its capitalisation.
If the p/e ratio suggests negative earnings as a function of the risk-free cost of capital, then the business is effectively a loss-making entity. And with the cost of capital as it stands today at historic lows, it makes such an investment an even greater concern, almost egregious — expecting naively that some greater fool will purchase the shares from you at an even higher p/e.
Would you purchase an investment property or business if it was making a loss, or only a few cents on the dollar? I doubt it, yet you are recommending the purchase of a minority shareholding in companies where as an investor you have little to no control over their future direction, while simultaneously exposing yourself to the risk of said investments becoming worthless.
I am sorry but such a cavalier response from someone with your credibility worries me greatly.
A: I'm sorry, too, that I've worried you. But I'm not sorry about what I wrote.
I said a couple of weeks ago that there are two ways people invest in shares: buy for the long term or trade frequently. The former usually works better.
There are also two approaches to selecting share investments:
• Pick individual companies, usually after analysing their prospects using p/e ratios and other information. That seems to be what you do, and what my father used to do.
• Invest in a share fund — preferably a low-fee index fund or exchange traded fund — that holds a wide range of shares. The investor may not know which shares the fund holds, let alone their p/e ratios. That's what I do.
I'm not saying your way is inferior. But it takes a lot more effort. And non-professional investors have to compete with fulltime experts to be among the first to spot good buys before they become popular and therefore more expensive — a tough challenge.
It's true that my funds will hold some loss-making dud shares. But people in your camp will have been analysing and rejecting them, so they will be cheap. And while many such shares end up worthless, some recover and become great investments — partly because they were bought for a few cents a share.
I wouldn't want to concentrate only on cheap, deeply unpopular shares. Too risky. But I'm happy that my funds include some of these in the mix.
Q: I read much of your article on so-called price-earnings ratios this morning in a cafe named The Bakehouse, in Thames.
I was turning off the article until in the third paragraph there was an explanation for the term P/E ratios. What has happened to the old understanding that full meanings are given the first time a term is used in an article?
Ultimately, it was an interesting article. I'm tempted to buy the paper but I'd probably get told off for buying more ephemera, and also I've never bought shares.
Now a retired scientific glassblower, most of my resources have gone on providing funds towards my daughter's and then son's university educations.
Things were manageable financially until my partner died of lung cancer in June 2001 (she had never smoked but her father and brother did). She had been an inspirational primary school teacher and assistant principal and helped her female charges consider careers and not just having babies.
Warm regards. Health and Happiness.
A: Thanks! Your email caught my eye, as your "name" is "Curly Poetical Journeys". And you've certainly taken us on one.
In reply: I did define p/e ratios as soon as I could. Do buy the paper next time! You're a generous Dad. Sorry to hear about your partner, who sounds neat.
Q: I am a 73-year-old living in a rental unit in Whangārei. I have been a landlord and now a tenant. When I agreed to rent this property in late August I suggested to the manager (Quinovic) that I could be interested in purchasing the property, which as it happens is going to be listed very soon.
But having lived in this totally original 1966 brick and iron two-bed unit for five months, I am not going to buy it.
The main problem with long-term domestic rental from private landlords is: can a tenant put up with the deficiencies forever, and put up with dated decor etc forever?
I agree that certainty of rent would be attractive, but you would need a commercial-type lease, otherwise the rents would just keep going up each year. If the landlord agreed to a long-term verbal arrangement, won't rent hikes every year deter tenants? We need more public purpose-built units.
A: You make some good points. But they could all be solved with the right wording in a landlord/tenant agreement. It would be good to hear about a long-term lease that is working well.
The landlord's view
Q: (Letter from Andrew King, president of the Property Investors' Federation.) In reply to a recent question on longer tenancies, you said, "I wasn't necessarily thinking the tenant would be bound to stay for the long period, just that the landlord couldn't require them to leave."
This fails the "what's in it for me" test. There is no benefit for landlords in this situation that cannot be achieved through the current periodic tenancy. A periodic tenancy doesn't lock the landlord into a one-sided long-term tenancy they cannot escape if their circumstances change.
There needs to be a new type of long-term tenancy that meets the needs of both tenants and landlords who would like to have or are prepared to offer such a tenancy.
This new tenancy could be based on the German model, where tenants must provide wall, floor, window coverings and sometimes even kitchens, plus three months' bond and three months' notice to end the tenancy, with strict and speedy recourse if they exhibit anti-social behaviour.
In turn, landlords would offer long-term security, even forgoing selling the property, which is the main cause of NZ tenants' unsecure tenancies.
A: I did say in that column, "What's in it for the landlord? If this arrangement appealed to a tenant, they are quite likely to be long stayers anyway." I would think some landlords would welcome that.
But I take your point. More incentives for a landlord would probably increase their interest in long-term leases.
- Mary Holm, ONZM, 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.