I'm self-employed and make regular contributions to my KiwiSaver account. My account has been losing money recently, which is fine, since I am in it for the long haul. But I'm wondering whether I should continue to deposit into it when the market is down or wait until it picks up again?
You've got it upside down! If — and that's an enormous "if" — you knew what was going to happen next to the sharemarket, you should be buying more shares when the market is down and they are cheaper. It's just the same as buying more apricots when they are cheaper.
But don't worry about it, because you can't know what will happen next. Not even the experts are any good at it.
Sharemarkets might drop lots more soon — or resume the gains most markets have made in recent years.
It's good to read that you're relaxed about your balance going down, and you're there for the long haul.
Too many people have been needlessly worrying lately about market downturns.
But I suggest you don't look at it as "losing money". Only those who panic and switch to a lower-risk fund after a downturn are losers. Think, instead, of your savings going on a journey, with hills and valleys but almost certainly a long-term gain.
Given the recent global stock market downturn, is it wise to make a lump sum payment into my KiwiSaver to reach the maximum member tax credit? Or is it better just to carry on contributing 4 per cent of my annual income?
I'm self-employed. I'm currently in an ANZ growth fund, so the rationale is that the lump sum payment would "buy" me more units, and when the market picks up again (whenever it does) the extra units would bounce back nicely.
I've also been looking into other fund providers, as I read that the ANZ growth fund had been one of the worst performing growth funds. I am also hoping to buy my first home in two to three years' time, all going well.
Do you have any fund provider recommendations?
I'm considering one that appears to have great historical performance. What about a good time to change?
At least you've got it the right way up — wanting to buy more KiwiSaver units when the market is down. But, as I said above, there's no way of knowing what will happen next.
People who try to time markets nearly always end up worse off than those who just keep drip feeding a constant amount into their account, regardless of what the markets are doing. Bonus — it's much easier.
On the performance of your fund, it doesn't look too bad to me.
According to the KiwiSaver Fund Finder on sorted.org.nz, one of ANZ's growth funds came fourth and the other seventh out of 28 growth funds, rated on their performance from April 2013 to September 2018. And it's long-term returns you should look at.
More important, though, is the fees they charge. Past performance is often not repeated, so it's best to largely ignore it. But fees rarely change. And on fees, the two ANZ funds came 15th and 16th in the Fund Finder.
I would normally recommend moving to one of the growth funds with the lowest fees — except that you hope to buy a first home soon, presumably with your KiwiSaver money.
In light of that, I suggest you move your money promptly to a lower-risk conservative fund so your balance can't plunge right when you want to take the money out. Again, go for one of the funds with the lowest fees.
The lead letter in your last column was about a recently retired person in a KiwiSaver balanced fund.
A balanced fund is a balanced fund, and is not really 40 per cent cash/bonds and 60 per cent shares, or whatever the manager has set as the benchmark. It is a single investment — that is, a single unit and not a cash unit, bond unit and share unit.
It is rebalanced continually. So if the sharemarkets halve, as they will some time, the $60 in a $100 investment goes to $30, while the $40 stays at $40.
To rebalance, the fund manager sells cash and bonds and buys shares to get back to the 40/60 split.
That works well when you are saving.
The fund is buying shares when they are cheap. But if you are retired and regularly withdrawing money from a balanced fund, you are converting temporary market losses into permanent losses. You can't take your money out of just the cash and leave the shares time to recover.
In retirement you have to have a no-volatility fund — for example, cash; a low-volatility fund that generates income above cash — for example, bonds; and an inflation-protection fund — for example, shares.
This way, when the market halves you can take money out of the other funds without crystallising market losses from shares.
When you are withdrawing money, the concept of conservative, balanced and growth funds does not work well. The KiwiSaver schemes that do not have cash and bond funds do not work well in retirement.
Equally the ideal share fund for retirees would not automatically reinvest the dividends. They should pay them to the retiree's cash fund, and only put them back in shares if the cash levels are too high and the planned expenditure is at least 10 to 12 years away.
You make some excellent points.
In my reply in my last column I suggested the reader transfer the money she plans to spend in the next three to five years into a conservative or cash fund.
But I added that the money she expects to spend later than that could stay in her medium-risk balanced fund, with perhaps some of the longer-term money in a higher-risk fund.
The idea is that every year or so you transfer some money from the high-risk to the medium fund, and some from the medium to the low-risk fund. The aim is to always have the money for the next few years at low risk, and not susceptible to market downturns.
See the previous Q&A for an example of this.
But as you say, for retired people it would be better for the medium-risk fund to be invested fully in bonds, rather than a balanced fund mixture of cash, bonds and shares.
The following KiwiSaver providers have told the Commission for Financial Capability that they offer KiwiSaver bond funds: AMP, ANZ, Milford, OneAnswer, Summer and SuperLife.
Note that some of these funds are called fixed-interest funds.
If you're not in one of those schemes, you can easily switch by contacting that provider. Or, if you're retired, you could always move your money to a non-KiwiSaver bond fund.
Your final point about transferring dividends from a retiree's high-risk fund to their low-risk fund makes lots of sense. Do any KiwiSaver providers offer this? Let's hear from you.
Over to you
I was wondering if you could tell me how successful you have been in following your own advice?
I know it's probably an impertinent question, but I figure taking finance and investment advice from someone who is actually successful at it themselves is better than someone who isn't.
I've held on to this letter for months. Didn't anybody ever tell you that you don't ask Kiwis about their finances?
But I suppose your question is fair enough. We all look at the dentist's teeth, the doctor's health and the hairdresser's hairdo. So I've decided to start the new year with a burst of transparency.
The basics are: From my first job, I've always saved part of my income. At first that was to fund uni, then my OE, buying a first home and subsequent homes, and finally retirement.
For decades, my long-term savings have been in low-fee share index funds, and over the years they've performed strongly.
I don't think I've ever borrowed to buy a car or anything else other than a house, but instead used savings. I don't like shopping, so that keeps the spending down.
It all makes me sound like a goody goody. Not so. I've splashed out on travel and concerts and plays.
And because I don't enjoy clothes shopping I've sometimes bought expensive garments just to get it over and done with! But I've always had an eye on the credit card balance, and been able to pay it off each month.
As a result of all this, I'm comfortably off. But I'm not rich, for three reasons:
• I've been a newspaper and magazine journalist for my whole career — although these days I'm also on a couple of boards. That means I've never made big money. I've had opportunities to move to something more lucrative, and worked in a big accounting firm overseas for a month once. But it wasn't for me. I craved the chaos of a newsroom and moved back to a lower-paying reporter's job.
• I'm a moderate risk taker. You might prefer investment advice from seriously wealthy people who got that way taking big risks. But they were also lucky. Many others who have taken big financial risks have bombed out. The trouble is, they don't write books or run seminars about it, so the public gets a one-sided view — with the risks often underplayed.
• A few things have happened in my life that have reduced my assets. They've had nothing to do with how well I invest or handle money. But — as many readers know — life doesn't always run smoothly.
Still, I'm financially fine. As my new book Rich Enough? A laid-back guide for every Kiwi points out, once you get your money sorted and have reasonable savings, making more money won't necessarily make you happier. It might even reduce your wellbeing.
In any case, unlike some writers, my advice is not based mainly on what's happened to me.
I have an MBA in finance, and have watched the markets and learned from many different people's financial journeys — partly from all you wonderful readers who have written to me over the years.
Letter from Claire Dale of the University of Auckland Retirement Policy and Research Centre:
A very delayed response to your column on December 1, 2018. With reference to the percentage of people in long-term residential care, I misread the Ministry of Health graph — the proportion of people aged 75-plus in aged care has reduced from 11 per cent in 2006/7 to about 8 per cent expected in 2021/2.
I said those numbers applied to people 65-plus. My apologies.
Also, while only about 5 to 6 per cent of those aged 65-plus are in residential care at any one time, the 47 per cent chance of requiring residential care some time in your life cannot be described as an unlikely event.
Thanks. You also said in that Q&A that the decrease from 11 to 8 per cent is "largely as a result of the 'ageing in place' policy — it is cheaper to provide a few hours of care a day to someone in their own home".
But, as you said then and repeat now, current data suggest almost half of people over 65 will use residential aged care in their lifetime.
And of people who live to 85, about 66 per cent will use that care, based on current numbers.
- 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 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 email@example.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.