“A final thought: Maybe a rental appeals because he loves handyman work. If so, he could hire out his time in the neighbourhood – meet people, have a few laughs, and supplement his income.” Photo / 123RF
Q: My father has never been into the money part. He is 69, a single pensioner in a fully paid-for home, and has around $30,000 of savings he’s itching to do something with. He mentions a lot wanting to mortgage his house to buy a rental.
I don’t think this is a good idea. Do you agree? Given his age, he’d have to top up the costs with his pension, and for how long? He may never see the fruit. I’ve mentioned the possibility of a well-diversified low-cost balanced index fund, and he takes a portion out once a year for “fun” money, thereby keeping a roof over his head, risk-free, and living off his pension. Given his runway, and his love of life, can we get your thoughts?
A: I like the sound of your dad. But not his investment plans.
I’ve written recently about why I think people in retirement should sell their rentals - unless they have plenty of income and enjoy being landlords. Otherwise, they might as well have the money to live more comfortably.
Now we have your father planning to get into the landlord game at 69!
Getting a mortgage might be tricky. Even if he did, he could easily find the rental income, minus rates, insurance and maintenance, wouldn’t cover his mortgage payments. His $30,000 could disappear fast, and he would be left eating into his NZ Super payments.
What’s more, as you say, he may never benefit from all this. Borrowing to invest – often called gearing or leveraging – sometimes works really well. If the value rises, you get the gain not only on the money you invested but also on the money you borrowed. That’s how some people get rich from rentals.
But any investment with potentially high returns also comes with high risk. If you’re forced to sell when prices are down, you may find the proceeds – after selling expenses – are less than the mortgage. You end up with no investment and you still owe the bank. Horrible.
Let’s say that, after a few years, your father got sick of struggling on NZ Super minus the mortgage payments. He might get lucky and sell the rental at a gain. But he might not. Quite a few experts are forecasting small – if any – rises in house prices over the next few years.
And we haven’t even considered how he would cope if he suddenly needed to replace a roof or fix extensive leaks, or his tenants didn’t pay, or he had periods with no tenants.
I much prefer your idea of a low-cost balanced fund. Or your dad could put half his $30,000 in a low-risk defensive fund, from which to take his regular “fun” withdrawals. The rest could be in a medium to higher-risk fund for spending later in his retirement, with the risk gradually reducing over the years.
A final thought: Maybe a rental appeals because he loves handyman work. If so, he could hire out his time in the neighbourhood – meet people, have a few laughs, and supplement his income.
Q: What are your views on employing leverage in KiwiSaver for young investors?
US research suggests that such a strategy generates superior long-term returns, but volatility will be higher. Leverage is reduced and then eliminated as the investor ages.
Do any KiwiSaver providers offer such a strategy? Obviously, the young investor would need to hold the course during testing times and not withdraw to purchase a property. I’d seriously consider placing my children’s KiwiSavers into such a fund.
Below is an abstract from academic research published by the US National Bureau of Economic Research.
“By employing leverage to gain more exposure to stocks when young, individuals can achieve better diversification across time. Using stock data going back to 1871, we show that buying stock on margin when young, combined with more conservative investments when older, stochastically dominates standard investment strategies - both traditional life-cycle investments and 100%-stock investments.
“The expected retirement wealth is 90% higher compared to life-cycle funds, and 19% higher compared to 100%-stock investments. The expected gain would allow workers to retire almost six years earlier or extend their standard of living during retirement by 27 years.”
A: That last bit sounds very appealing! As I said above, leveraging - more commonly called gearing in New Zealand – is investing with borrowed money. It’s a high-risk strategy with potentially high returns if all goes well.
The chances of success are greatly increased if you commit to investing over decades and, as you say, hold your course in downturns. In a geared share fund, your gains are exaggerated when share prices rise, but your losses are exaggerated when markets fall. It wouldn’t be uncommon for your account balance to halve in a downturn.
Picture $100,000 turning into $50,000 or less. Could you cope?
Still, over long periods, shares always rise more than they fall, so those who don’t bail out can do really well.
The researchers you quote compare:
In a life-cycle fund, you don’t start with as much risk as when gearing, and that matters. High average returns early in a long-term investment make a huge difference.
I know of two KiwiSaver funds that use gearing: Booster’s Geared Growth Fund and its Socially Responsible Geared Growth Fund.
Says Booster, “The Geared Growth Fund increases the effective size of your invested funds by purchasing additional investments with borrowed funds. This magnifies the returns for the investor, both up and down, but also comes at a cost (eg, interest on borrowing).”
For example, “Using the Geared Growth Fund’s target gearing ratio of 35%, and if the underlying investments were to increase by 10%, an investor in the Geared Growth Fund would receive a 13.5% return. While, if the underlying investments were to fall by 10%, the balance of an investor in the Geared Growth would fall by 13.5%. The costs of gearing (eg, interest) would be additional to this.”
Should you use one of those funds for your children? You can read more about them in the Smart Investor tool on sorted.org.nz. Note that the fees are 1.5%, compared with an average of 0.9% for aggressive funds. This may be because of interest payments.
If you go ahead, you – or your kids – would probably want to move to a lower-risk fund as they approach retirement.
Q: I purchase units in various index funds to save for my retirement. But my provider, Kernel Wealth, recently informed me that they would no longer be offering two of the funds, and all my existing units in those funds would be sold on the date advised.
I bought into the funds with a long-term expectation, so their closure has revealed an investment risk that I hadn’t anticipated. Now I feel lost as to how to effectively set aside money for use in a few decades’ time.
Kernel Wealth was still offering units in both aggressive funds right up to their announcement to close them.
We often hear that KiwiSaver and similar non-KiwiSaver schemes use a custodian to ring-fence investments so we wouldn’t lose our money if the company went out of business, but I hadn’t heard that we could be forced to sell at a time of the company’s choice.
Are there low-cost investment options where this risk is minimised?
A: The funds you refer to are Kernel’s Kensho Moonshots and Kensho Electric Vehicles Innovation funds.
“These two funds represented a very small portion of our overall offerings - less than 0.50% - and, despite being available for several years, they simply weren’t resonating with enough of our investors,” says Kernel Wealth CEO Dean Anderson.
“While it was a tough call, we believe this was the best path forward for these smaller funds.
“As thematic funds, we have always been clear that they are generally best suited as smaller ‘satellite’ positions rather than as core portfolio holdings. Although fund closures are understandably frustrating, they remain uncommon in index investing, particularly outside of highly niche or thematic areas. Importantly, Kernel has no intention of closing other funds.”
What should you do? One easy solution is to move to another Kernel aggressive fund. Or you could switch to a similar fund with another provider. While it’s an inconvenience, you won’t necessarily lose money. You’re selling and then buying much the same types of assets. It’s not like moving from aggressive to low-risk right after a crash.
Still, I understand your discomfort. So I asked Anderson whether he thought Kernel had handled the public relations of this change well.
“Our priority was to ensure our investors felt informed and supported. Our team sent multiple notices well in advance, clearly outlining the potential changes and providing various options, including switching to other funds,” he says.
“For those outside KiwiSaver, we went a step further by offering direct support to help them move into similar ETFs available through our new US Shares and ETFs feature. This new feature was actually another factor in our decision, as it now empowers investors with thematic interests to access a much wider selection of US ETFs and shares directly.”
Providers must have the right to close funds, and many do. A recent S&P Dow Jones Indices report on New Zealand-based managed funds says only 50% of NZ share funds and 33% of global share funds have survived over the last 15 years.
“Closures are often linked to acquisitions, shifting investment managers, or performance issues,” says Anderson.
“By contrast, index funds have significantly higher survivorship rates. Closures are rare, particularly when it comes to well-diversified, core KiwiSaver funds that form the foundation of investors’ portfolios.”
It’s a pity, though, that you didn’t feel well supported in this change.
In answer to your question, I’m sure providers won’t close their most popular funds. You could ask which ones they are. But really, in the end, the problems that arise from a fund closing are not usually major.
Q: I’ve got a question about the Depositor Compensation Scheme, protecting up to $100,000 of deposits. I am on the board of two charitable trusts, with both having cash and term deposits of around $300,000 with one bank. Should I recommend splitting this amount between three financial institutions who are part of the DCS scheme to protect these funds?
A: Trusts are covered by the scheme. So yes, that would be a good idea.
“Each trust is considered a single ‘depositor’ and therefore is entitled to up to $100,000 compensation in the event of a deposit taker failure,” says the Reserve Bank, adding, “Most transaction, savings, notice, and term deposit accounts in Aotearoa New Zealand will be protected by the DCS. We recommend checking with your deposit taker whether your deposit is protected.”
A wide range of types of depositors are covered.
“Eligible depositors include businesses, trusts, and individuals.” However, a small group are not covered, including government agencies.
Q: You may be interested to know that Rabobank will not open accounts for customers who do not have smartphones.
A: In last week’s column, a reader was having trouble opening an account with a finance company without owning a smartphone. Is Rabobank the same?
“Since late last year, a smart device (such as a mobile phone or tablet) has been required to open a new account with Rabobank Online Savings (ROS),” says the bank. It adds, “This requirement does not apply to accounts opened through our Food and Agribusiness division.”
Why require a smartphone?
“Rabobank Online Savings is a fully online service, and most of our customers already use smart devices. In late 2024, we replaced the Digipass (a physical security token) with a new secure code accessed via an app on smart devices,” says the bank.
“This change was made as the new secure code provides strong security and added convenience for our customers when accessing internet banking and authorising transactions.”
However, customers at that time who didn’t want to use the secure code could, instead, get a new physical security token. And while new ROS customers must use the secure code, if they later become unable to use a smart device, they may be able to get a physical security token.
The bank adds that “the requirement to have a smart device is made clear at the start of the ROS application process”. That’s good to know.
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 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.com. 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.
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