Q: My wife and I have both recently retired, aged 70. We are both healthy and consider ourselves extremely fortunate. We are mortgage-free and intend to remain in our home until we die. We also own a seaside cottage worth about $400,000. We intend to divide our home into two flats, live in the larger one and let the other.
I have about $700,000 in a work-subsidised superannuation scheme. Because of my concerns about a possible financial downturn, it has been invested in the conservative (cash) option since 2015, and consequently we have not benefited from the rising market values in recent years, but also have not lost value with the recent downturn.
I see this downturn as an opportunity to invest wisely when prices are low, and increase the value of our nest-egg for the years ahead. How should we manage our superannuation funds wisely?
A: As I've said before, buying shares now that the market has fallen is better than selling now. But to do "contrarian investing", well, you have to get lucky with your timing.
If you buy too soon, the markets might keep falling as you watch in dismay. But if you wait too long, you're likely to miss most of the upturn — which can be sudden.
You've already had bad luck with your timing. There's been so much fuss about the recent downturn, and much less about the preceding long share climb, that many people seem to have things out of proportion.
The truth is — sorry to tell you this — that even after this downturn, you would have been much better off if you had been in a higher-risk investment throughout. See the graph on the right.
According to an investment expert using reasonable assumptions, if you had invested $100,000 on July 1, 2015, you would have the following, after tax but before fees, on Wednesday (April 1):
• About $107,000 in cash.
• $148,000 in half-NZ and half-overseas shares.
• $169,000 in all NZ shares.
Do you really want to try your luck again by making a big move now?
I suggest you work out how much of your savings you will spend in the next three years and leave that where it is. Then put your three-to-10-year money in middle risk, and longer-term money in higher risk. That removes the chance your balance will drop lots close to your spending time.
For both moves, transfer the money in, say, three lots — some now, some in a month or two, and some maybe two months later. I'm vague because nobody knows when the market will hit bottom. But by moving gradually, at least some of your timing should turn out to be good.
There's lots more on setting up your money for retirement in my book Rich Enough? A Laid-back Guide for Every Kiwi.
PS. Despite your bad lack with earlier timing, you are — as you say — financially fine. And I like your idea of turning your home into two flats. It's a great way of staying put but making use of all the money tied up in the property.
Q: I'm 20 years old and work full-time. Since starting this job at the end of last year, I have begun planning to save for a deposit on a house. I figure it will take me at least four years if my salary remains the same.
I have $8000 in savings. With share prices dropping significantly, I was wondering if it could be profitable to invest in some shares while the prices are low.
What shares would you recommend to invest in at the moment?
A: Another young one with your financial act together — see first Q&A at the top of the page. That's great.
I like your idea of getting into shares, but I wouldn't recommend buying shares directly, for two reasons:
• There's no good way to pick which shares will do well — now or ever. The prices of the ones with good prospects will already have been pushed up to the point where they are not necessarily good buys. The best way around this is to get into a wide range of shares in a fund.
• Your time horizon is too short to invest purely in shares. As I said above, money you plan to spend within three to 10 years should be in a middle-risk or balanced fund. This holds some shares but also bonds — which waters down the volatility. And when you are within two or three years of buying your house, move to a low-risk fund for the same reason.
As I write this, I suspect you won't like it. If you want to charge ahead, fully into shares, good luck! After all, if the markets flounder for a while, you can always postpone your house purchase.
But whatever you do, be in KiwiSaver. It's a great place to save for a first home because you get employer and Government contributions added to your own savings.
After three years you can withdraw all but $1000 to buy the home, and you may get an extra grant from the Government. See kaingaora.govt.nz
Realising a loss?
Q: I have listened to your advice to not change to a lower-risk fund because shares have fallen, or you realise the loss. I think it's a great time to instead move to a growth fund from my current balanced fund.
But am I right in thinking that moving to any other fund realises the current losses, and one should just stay in whatever fund you are in until your present fund has recovered all the gains currently lost? I am just worried that could be some time away.
A: It's true you make a loss real — or "realise" it — if you cash up an investment or move to a lower-risk fund when shares have fallen. If you hadn't, the markets would eventually recover and the loss would disappear.
But you're considering moving to higher risk. True, you'll be selling the units in your balanced fund for less than before the downturn. But the price of the units in a growth fund — with its heavier investments in shares — will have dropped even further.
So it's a good move to make. You'll realise a loss, but more than make up for that by buying a bargain.
Your thinking shows that you can cope with market volatility — which is one of the "qualifications" for investing in a growth fund. The other is that you don't plan to spend the money within 10 years. If that's true, go for it!
- 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.