Q: In your last column you said that since the Covid downturn, "share prices have grown strongly. And — just as with New Zealand property — nobody knows what will happen next, but further huge long-term growth feels unlikely." What makes you say "unlikely"? I see no current-world reason at all that the stockmarket wouldn't continue its climb.
I read somewhere that since 1950, stockmarkets closed "at an all-time high" on one in 15 days. Just because we've been through a recent bull run doesn't mean it won't continue for a long time yet.
A significant black swan event like the complete crash of our financial system or major revolution-level uprising by poor against wealthy would obviously do it — except those of course aren't strictly black swans because by considering them, I identified their remote-but-plausible chance.
In any case, time for bed. Nice having you back.
A: Thanks. It's good to be back, and pondering letters such as yours — especially "I see no current-world reason at all that the stockmarket wouldn't continue its climb". I think I've heard that before.
Note that I was saying further "huge" long-term growth seems unlikely. That was based simply on the fact that growth in both the world and New Zealand markets has been pretty extraordinary for more than a decade — apart from the Covid hiccup — as you can see in our graph. (The graph shows growth after tax at the current maximum 28 per cent prescribed investor rate and under the fair dividend rate regime for overseas shares).
I'm not saying the markets won't keep growing for a while. They might. But as the graph also shows, rapid growth never goes on forever. And I'm worried that many people — especially those new to share investing — have got an overly optimistic view.
I'm also worried about the get-rich-quick messages some will have taken from the recent shenanigans with US stock GameStop.
There are two ways people invest in shares:
• Buy for the long term, preferably using a diversified portfolio or a low-fee exchange-traded fund or other share fund. Stick with it through market downturns.
• Trade frequently. You can make big money fast, but it's equally easy to lose big money fast. If you want to play with frequent share trading, please do it only with money you can afford to lose. And be aware that most frequent traders do worse than long-term holders.
One more thing: please, please don't borrow to make short-term share investments. Therein lies wealth for some, but also ruin.
Interesting comments from you about how often stockmarkets close at all-time highs. I found data on America's Dow Jones Industrial Average, and number crunching showed there were record closes about one in every 17 days of trading since 1950 — much the same as what you said.
That's not that surprising though. Share prices tend to grow over time as companies grow. And inflation certainly helps. So the long-term trend is upwards. But it doesn't mean the markets don't sometimes crash in between times.
For other readers' opinions on future sharemarket trends, read on. Oh, and I hope you slept well — perhaps dreaming of future opulence.
Q: I am concerned for my children's KiwiSaver. With the sharemarket in an upwards spiral and with the financial effects of Covid yet to hit it, I believe the world sharemarket is in for a huge correction downwards.
My daughters, 45 and 56, and granddaughter, 25, have money in KiwiSaver. Should they be considering moving into a conservative type fund to try to minimise any losses?
A: Only if they are either:
• Planning to spend the money on a first-home purchase within the next 10 years.
• Likely to panic if the market falls and move their money at that time.
If a first-home purchase is looming, it's wise to gradually reduce their risk level — to, say, a medium-risk fund about 10 years before the spending, and then to a low-risk fund at two or three years before spending. That way, they avoid the possibility of seeing their money plunge in a market crash, with too little time to recover.
What about panicking? If they rode out the Covid crash of last March, they should be able to cope with another big downturn — even though next time the recovery could take a lot longer.
The clear lesson from early last year is to ignore downturns and stick with higher risk. In the long run, your average returns will be higher.
On your forecast of Covid effects pushing the market down, if the experts thought that would happen, they would have been selling shares long ago and the markets would have stayed low, instead of recovering in mid 2020.
Where to from here? Who knows! There is honestly no way amateurs — including you, our previous correspondent and me — can predict sharemarkets. Even the experts get it wrong all the time. Don't bother trying. Set things up so you can cope with whatever happens.
Too good to last?
Q: We are a couple in our late 20s/early 30s who got into Sharesies at the beginning of last year. Our shares are doing well, perturbingly too well in fact.
We understand that part of being smart investors in the sharemarket is riding the highs as well as the lows. But we can't help but be reminded of the famous story of Joe Kennedy and the shoeshine boy.
We are unsure whether we are Joe Kennedy or the boy in this situation! Would it be wise to have a foot in both camps and sell some of our shares now whilst holding on to some for the long run?
A: For the benefit of others, US President John Kennedy's father Joseph decided to sell his large share holdings right before the 1929 crash because a shoeshine boy on Wall Street was giving him share tips. Kennedy thought: "If he's buying, everyone is buying. That's mad. I'm out of here" — or words to that effect.
It's a much-told story. The only trouble is, it suggests people can tell when a sharemarket is overpriced. Sometimes they can, but often they can't. Kennedy was a remarkable exception — which is why we still talk about his call nearly a century later.
So should you two dial down your risk?
Let's consider what would happen if you sold some of your shares now. If the markets keep growing for some time, you would be disappointed that you missed that growth. But if there's a crash soon, you would feel good for a while.
Then what? How would you know when to get back in? The market might rise, but it could fall further the next day. Market timers notoriously miss out on rebounds, and in the long run usually do considerably worse than buyers and holders.
Reduce risk only if you plan to spend the money soon or couldn't ride through a downturn, as explained above. Otherwise, stay the course.
P.S. Would you need two boys to shine your shoes if you had a foot in both camps?
Saving for a home
Q: With the housing market the way it is these days, I (and many other millennials) are looking to buy an apartment instead.
I'm thinking of saving up for the next five years in order to have a deposit for an apartment. Most of my savings at the moment are invested in share index funds, but I was wondering if I should start investing in less risky investments if my horizon for accessing that money is five years. Do you have any suggestions?
A: As you will have read above, I generally say people with less than 10 years before spending should save in medium-risk investments like balanced funds, and switch to, say, a cash fund two or three years before spending the money.
However, it does depend on your flexibility. If, for example, you have young children and are really keen to give them a home base, stick with the 10-year and three-year plan.
But if it doesn't matter too much when you make the move to home ownership, you might decide to stick with share investments. If they do well, you can buy an apartment in less than five years. But if there's a big downturn, you just accept that you will buy some time later.
I would still move to low risk within one or two years of spending, though. You don't want to be busy apartment hunting only to find you are suddenly out of the game.
Q: A quick comment on your suggestion last week that landlords offer longer leases.
My accounting practice works solely in the property space, and serves a couple of hundred residential landlords. I've previously had dozens of discussions with landlords (clients and otherwise) about the benefits of long-term leases.
They offer significant positives to landlords in terms of security of tenure. But the general consensus is that tenants don't want them.
I've personally offered tenants the choice between a one-, two- or three-year fixed tenancy on several occasions and the choice has been without fail the 12-month option. Tenants don't like the idea that they're locked into a contract.
Admittedly, I've not yet had retired tenants. Perhaps that sector of the community feels differently, I can see why they might.
A: As I said last week, a long-term lease might work better after a one-year trial period, so both sides can see if things are going well.
And 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.
What's in it for the landlord? If this arrangement appealed to a tenant, they are quite likely to be long stayers anyway.
Let's hear from some tenants on whether they would like that.
Q: Last week you made this comment to one of your correspondents: "You may have to cope with difficult or slow-paying tenants. You can hand those problems over to a property management firm, but that would eat into your profits." I'd like to suggest "nibble" as a better word than "eat".
Property managers can suggest many reasons, I am sure, but two pertinent ones that stand out are:
• A lot of landlords are, or would be, too slow to act when problems with tenants arise. Fast, correct action can save a week, weeks, even months of rent loss.
• If the use of property managers nudges the rent up with the market, where landlords would not raise the rent ourselves, right there they have paid for themselves, forever.
Also, it is tax deductible.
A: Fair enough — although a friend was telling me just the other day how he had tried several property managers and each one brought more problems than they solved. Clearly this is a mixed bag situation.
Here's to the landlord
Q: I loved your latest column. I read what you said about no one writing a song about their landlord and decided to write one about our Dutch landlord Cor, who is a good guy.
So once it's recorded, I'll send you a link if you're interested. Our band is called Dead Simple.
A: Do send the link, thanks, and I'll pass it on to readers. That will be a first for this column — to have inspired a song.
I'm just listening to one of your songs as I write. Pretty cool.
• 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 mary@maryholm.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.