Q: I question your advice during this pandemic/economic crisis. The mantra "stay in shares for the long run" doesn't work in a long-term crisis. Nobody doubts there will be huge job losses.
Shares will decline for months, not weeks, so people with limited capital will minimise losses by switching super funds to cash until prospects are clearer.
The same is true of housing. When many people lose jobs, house prices will drop — that's inescapable reality.
A generation of young people with average jobs have missed out on owning a home, while older people made hundreds of thousands for nothing. Investors piled into housing to create a self-fuelled boom, then refused to sell for less than "what it's worth" at the unsustainable peak.
Young buyers should do the same — refuse to buy until the lack of buyers forces house prices down to where families can afford them.
These are not normal times. Don't you have any doubts about offering "normal" advice to people who can't afford to lose more than they already have, after years of stagnant real incomes and high rents?
A: They say that the four most dangerous words in the financial world are, "This time it's different". People tend to think, when markets are rising or falling particularly fast, that the usual braking won't happen.
But if you look back, it always does. The tech boom that people said would "go on forever" collapsed. The Global Financial Crisis that was "unlike anything before, and unstoppable" stopped.
True, this Covid-19 market downturn seems "extra different", with governments giving priority to health over economics — and rightly so. And I'm not denying there will be big job losses.
But I define the long run as 10 years or more. And no expert is saying that it will be anything like a decade before we're back buying goods and services from most current companies — as well as some new ones.
Even the Great Depression of the early 1930s lasted only a few years, and economists know so much more now about how to avoid prolonged downturns.
I'm not saying this is not a big deal. Just that it's not the end of the financial world as we know it.
But you're a lot more confident than I am about one thing — your ability to forecast that shares will decline for months, not weeks. I really don't know.
Share prices don't fall and rise with economies; they fall and rise with people's expectations of what those economies will do in the near future.
If the professionals who do most of the share trading — the people who run KiwiSaver funds and the like — think companies will perform badly in the months to come, they sell those shares now. That's what happened in late February and early March.
But since March 23, enough people have apparently thought that investors over-reacted, and have started buying again, as our graph shows. As I write, the NZX50 index has regained more than 40 per cent of what it lost from late February to late March — something I think a lot of people don't realise.
Of course, by the time you read this, the NZ market might have turned downwards again. Who knows?
In any case, I disagree that most people should at this stage move their retirement money to cash.
You're right that that would minimise further losses. And I've always said that people who can't bear the thought of their savings balance dropping should stay in cash or the lowest-risk defensive funds.
But they pay a pretty big price for that security. Over periods of 10 years or more, people in higher-risk funds almost always end up with more, usually much more.
The other factor in risk choice is when you plan to spend your savings.
Money that you expect to spend in the next few years should have been in low risk already. If it's not, move it gradually. And spending money for three to 10 years should be in a bond fund or balanced fund.
But if you have 10 years or more to go, I still say stick with a higher-risk fund if you can tolerate volatility. If you're not sure about that in the current climate, try putting at least some of the money in higher risk and watch how you cope with the ups and downs.
House prices are a different issue. All the experts seem to think they will fall a bit, although nobody I've read is predicting a drop of more than 10 per cent. So it's probably not a bad idea for would-be new homeowners to wait a while.
But with house purchases there are usually other factors to consider — buying before a baby is born, wanting to establish a garden, no longer wanting a landlord to control your life, and so on.
As I said three weeks ago, people with strong job security and financial backup who are keen to buy might be able to bargain hard in the current environment — once we are free to again walk through houses for sale.
Don't get stuck on buying at the bottom of a house price dip that nobody can pick anyway. Get on with your life.
By the way, you write of years of stagnant "real" — or inflation-adjusted — incomes. Not so. According to the Reserve Bank's inflation calculator, over the last 10 years inflation was 17 per cent while wages grew 30 per cent. Over the last two years, inflation was 3.8 per cent while wages grew 6.9 per cent.
Time to subdivide
Q: We have a family home sitting on a large section that is easily subdividable. Our adult kids have talked about subdividing it for years.
Given that two of our kids are in some financial difficulty with the coronavirus lockdown, would now be a good time to consider subdividing our land to free up cash to help them?
A: Probably yes. As I said above, economists are predicting a fall in property prices, so get in now.
Just as importantly, you have other reasons for selling now. This is a good example of the family factors I was talking about when it comes to property buying and selling.
Don't rush to sell, though. You're likely to get a lower price if you feel under pressure.
If your offspring need urgent financial support, you may have savings you can lend them in the meantime, knowing that the subdivision proceeds will come eventually.
Q: My pennyworth on your last week item encouraging the 21-year-old to have her mother jump back, boots and all, from the cash to the growth fund.
Her precipitous switch reaction suggests her earlier 100 per cent growth fund exposure, whilst logical for many late thirties, was probably always too high-risk for her, there being no disgrace in acknowledging that.
You've been steadfast, Mary, over the years at emphasising that the real trick for "small investors" is not to let fear shake them out of plummeting sharemarkets, all too often near the bottom. Is it possible that your devotion to that message has prompted a bit of a knee-jerk reaction to this woman's circumstance?
My recommendation would be to immediately switch back — but only, say, 40 per cent into the original growth fund and split the rest between cash and balanced.
From that position she'd be able to then talk to her daughter or do research so as to become more confident about her true tolerance for volatility and thus her most suitable fund choice.
Were she then to decide that she was "moderate", she could consider feeding some of the cash fund equally over the next year or two, in evenly spaced tranches, into the balanced and growth funds.
A: Good point. In my reply last week I should have taken more note of the mother's apparent nervousness about the drop in her KiwiSaver balance.
I think and hope, though, that she and many others in KiwiSaver who have never seen much of a downturn before will try to get braver, and park at least some of their savings in higher risk.
Go for gold?
Q: In your March 28 Weekend Herald edition, you say about gold, "absolutely not".
I'd like to argue that even gold, when invested over time at a consistent amount, can be beneficial in one's portfolio, even if it's just to help you sleep at night.
After all gold, like houses, will always have some value — but without the tenants.
Per the attached spreadsheet, if you invested $10,000 every six months for the last seven years with a 2.5 per cent annual increase, your gold would be worth $261,000, while the same investments in the top 50 NZ shares would be worth, before Covid, $243,000 and after Covid, $192,000.
You may argue that gold has had a recent rally, and the NZ dollar has dropped. But even dropping gold to US$1450 per ounce, and raising our dollar to 0.65, that still gives you a healthy $212,000.
Like all things gold will trend up eventually.
New Zealand has been saved from Covid catastrophe by pumping more billions into debts, and bringing interest rates close to 0 per cent. We now stare down the barrel of negative interest rates. A 10 to 20 per cent portion of your portfolio in gold may not be such a bad idea after all.
A: I'm not totally convinced.
In the column two weeks ago I said "absolutely not" to someone who has $500,000 in bank term deposits that he can't afford to lose. He was worried that banks might be about to collapse. Hardly a gold investor! But is it a bright idea for others?
While your numbers look roughly right at first glance, I've got several issues: you acknowledge that you've been lucky with the period you chose, in that gold rallied recently and the Kiwi dollar has fallen.
But there's more to it than that. The particular pattern of prices suits you well. You're drip-feeding money in and buying gold cheaply early in the period, and then valuing it at a high price at the end.
If, instead, you had invested the whole lot in early 2013, you would be losing now, as our graph shows. And what if you had put the lot in at the 2011 peak?
And you underplay the big drop in the exchange rate between the New Zealand and US dollars over the period — from about 80 to 60 cents. That greatly affected your results. In any future period, the opposite could occur. Also:
• You ignore dividends, which is like ignoring rent when you look at a property investment. And it makes a particularly big difference when we're looking at NZ shares, which tend to pay higher dividends than in other countries.
• You ignore tax, which favours NZ shares over gold. A tax expert tells me that after taking dividends and tax into account, we should add $35,000 to the shares and subtract $30,000 from the gold.
• You ignore fees. These can be low for shares if you use an ETF (exchange traded fund) or index fund. For gold, either you have to pay for storage or you invest in a gold ETF and the manager has to pay for storage — a fee that is typically 1 per cent.
By the time we adjust for all that, NZ shares beat gold over the period. And that's over a particularly strong period for gold!
Another problem with gold is that you don't receive any ongoing income — like interest, dividends or rent. You have to come up with other money to pay your tax.
Gold is particularly favoured by some people in unsettling times. They make comments like yours, that it will always have value — whatever happens to a government or an economy. That's true, but if you put the bulk of your savings in gold and later need to turn it into spending money, it will be worth only what somebody else wants to pay for it at that time. It's quite a gamble.
What if you put just your suggested 10 or 20 per cent of your investments in gold? That does give you some diversification, but it's not going to make that much difference if the rest of your savings either plummet or soar.
If holding some gold helps you sleep at night, go for it. But it's not for the nervous March 28 correspondent, and I think I'll give it a miss!
- 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.