Market downturns over short periods are common. But if we look at the past decade, from August 2014, the S&P/NZX50 index has more than doubled, writes Mary Holm. Photo / 123RF
Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance.
OPINION
Q: Would you consider investing in growth assets for 4.5 years for a total return of 1.8%? Most likely no. However, from January 1, 2020 to May 2024 that is the return of the NZX50 index. So I think there are a few lessons to learn here:
Regards, Grumpy Investor
A: Sorry Grumpy, but I just rediscovered your email, which you sent in mid-May. I wonder if you’re still feeling the same way, given that since then the S&P/NZX50 index has risen more than 6% – not bad over three and a half months. If that pace continues – a big “if” – it would be an annual rate of about 20%!
Nevertheless, it’s true that the index of our biggest companies – which includes reinvested dividends – hasn’t performed well over the last few years. In fact, by my calculations the growth over the period you measured is less than 1%. Which brings me to my main response to your letter: it’s risky to invest in shares or a share fund for less than 10 years.
Market downturns over short periods are common. Occasionally a market will fall even over a decade, but that’s rare. If we look at the past decade, from August 2014, the index has more than doubled. And in the decade before that, it came close to doubling.
Whenever the value of an investment roughly doubles over a period, we can use the handy Rule of 72 to work out the annual return. In this case, the investment has doubled over 10 years. So you divide 10 into 72, and get an approximate return of 7% a year.
If another investment doubled over six years, divide six into 72 and the annual return is about 12%. If it doubled over eight years, the return is about 9% a year.
You can also use the rule to find out how many years it will take for an investment to double. If you know the annual return will be about 6%, it will double in about 12 years. We should note, though, that it’s almost always impossible to predict an annual return except when investing in long-term deposits or bonds.
Two more things about the Rule of 72. Firstly, it works only for one-off investments, not for investments like KiwiSaver that are drip-fed over time. Secondly, it’s pretty accurate for returns around 6% to 10%. By the time you get to less than 4% or more than 14%, it’s a pretty approximate estimate.
On your point about investing in New Zealand shares versus international shares, in some periods one market has done better, in other periods it’s the other one. But I do agree that it’s wiser to spread your money around the world, to get as much diversification as possible. The easy way to do this is to use a New Zealand-based fund that invests in the shares in a global share index. There are several KiwiSaver and other funds that invest that way.
I also agree that for some people, the fluctuations of the share market are too uncomfortable. Still, I urge people who have money they don’t plan to spend for more than 10 years to invest at least some of it in a low-fee share fund. It’s highly likely it will do better over the whole period than money in a lower-risk fund or bank deposits.
Your point about rising interest rates is, of course, no longer relevant. But in any case, it’s not a good idea to flick in and out of shares, depending on interest rates or any other market factors. Just put your money in and leave it there.
Q: We want to set up KiwiSaver accounts for our very young grandchildren. Will kick them off with a lump sum, and thinking of a high-risk fund given the long timeframe.
You have consistently suggested aiming for low-fee providers. Can you please remind me where the best place is to compare these?
A: We seem to have a bit of a “Help the kids financially” theme lately. Great! And I really like your idea. The easiest way to find low-fee funds – in and out of KiwiSaver – is to use the Smart Investor tool on sorted.org.nz. Given that you want high-risk funds, click on Aggressive Funds, and sort by “Fees (lowest first)”.
Then have a look at the first five or 10 funds. Some aggressive funds are specialised, such as InvestNow’s US 500 Fund, or Kernel’s Global Infrastructure Fund. I would go for one with a broader range of investments, such as a global share fund. If you click on a fund name and scroll down to Key Facts, you’ll get an idea of its range of investments.
Some other comments:
Q: Twelve years ago I met a wonderful lady. At the time she was in financial difficulty, living in rental accommodation with considerable debt. However, against her own advice we got together and slowly paid off her debt, she moved into my house, and we kept our finances separate. I always wondered why her family never helped her financially. She had four adult children.
Not long ago my partner died after a long illness. This is when her family appeared, thinking there would somehow be a chance they would benefit financially from her death. They even employed a lawyer to seek the money from a small insurance policy on my partner’s life that I was the beneficiary of, and I had paid the premiums. I didn’t expect that scenario.
Fortunately, we had moved to a retirement home where I had purchased a right to occupy in my name. I was also fortunate to have an excellent lawyer, who made sure I was protected.
My advice is make sure you are protected, and expect the worst, especially in a situation where there are children from a previous relationship. Her family have now disappeared off the scene, having been unsuccessful.
Answer: Thanks for the warning – although the children of previous relationships by no means always behave badly in these situations.
I’m running your letter partly to balance last week’s letter from the adult child of a man in a new relationship. There are always at least two sides to these sad stories.
Q: What a pleasure to read your reply to the landlord last week. Thank you for pointing out his greedy, uncaring attitude (ever so gently) to him. I hope it gives other landlords reading it pause for thought.
A: Thanks, but let’s not make assumptions here. I haven’t received any protests from landlords, who are usually not shy about complaining if they think I’ve been unfair to them. So let’s conclude that most landlords agree with what I said - that the Healthy Homes legislation benefits both tenants and landlords.
Q: Just thought you might want to clarify for your readers: as long as MSD are notified well in advance, you can still receive NZ Super if travelling for more than 26 weeks. And you can still receive it even if you permanently shift to a foreign country. I think many people are not aware of this, and your last column might have added to this misconception.
A: You’re right, I should have made that clearer last week. If you go overseas for less than 26 weeks, your NZ Super payments simply continue. If you will be overseas for longer – or if you are moving overseas - you may still be able to receive payments, but you must apply at least six weeks before you leave New Zealand.
The amounts you receive, if away for more than 26 weeks, vary depending on circumstances. Te Ara Ahunga Ora, the Retirement Commission, has written a helpful guide to this. See tinyurl.com/SuperOverseas
Q: I lived in another country for a few years a while back, but it was for an overseas posting for my current NZ-based company. Unfortunately my company wouldn’t pay for the 3% KiwiSaver employer contribution, but I had been making voluntary contributions to still make myself eligible for the government contribution.
So I was surprised to read in your column last week that I shouldn’t have been eligible for the government contribution while overseas. I had a brief consultation with an internal KiwiSaver representative before my departure, but this was never brought up during our session.
If working for a NZ-based company internationally, would this by any chance be under an exemption?
A: Sorry, but no. You can continue to get the government contribution when you’re overseas under just two circumstances:
Working for a locally-based company doesn’t cut the mustard. That means, as explained last week, that when you start withdrawing from KiwiSaver after you turn 65, you will need to sign a statutory declaration, and you’ll lose the government contributions made while you were away.
Another comment in your letter caught my eye, though – that your New Zealand-based employer stopped its KiwiSaver contributions when you were overseas working for them. I asked Inland Revenue if that was okay.
“We can’t answer the question because we don’t know the employer’s circumstances,” says a spokesperson.
“Generally, the KiwiSaver Act only applies to an employer if the employer is a New Zealand resident or carries on business from a fixed establishment in New Zealand (unless the employer chooses to apply the Act). While the correspondent says that the employer is NZ-based it is not uncommon for an employment agreement to actually be signed with the parent company, which may not be within the scope of the KiwiSaver Act.”
So maybe your employer wasn’t obliged to contribute. But it still sounds a bit mean to me.
- 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 or click here. 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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