There is a psychological appeal in topping up losses. Photo / Thinkstock
One reader thinks he's cracked it through by topping up monthly KiwiSaver losses and at lower prices
Q: I read with interest the letter about sharemarket fluctuations in last Saturday's Herald.
I agree that regular contributions to KiwiSaver mean dollar cost averaging works to your advantage. But there is another way that should be used in conjunction with regular contributions. Here is how I do it, and it has worked really well for me.
First, make regular contributions to KiwiSaver in the normal way.
Second, I pick a day every month - usually the last day of that month. I then deduct any contributions made by me, my employer and the government during that month. This shows me the number of dollars my KiwiSaver fund has actually gained or lost compared with the previous month.
If it has gained I do nothing. If it has lost money I then put in a contribution to make up the loss. This means you are always buying units in your KiwiSaver fund that are cheaper than the previous month.
It's also easy to follow how your fund might be going. It's really only the sharemarket portion of any KiwiSaver fund that varies over short spaces of time.
I have been doing this for years and it really works. During the global financial crisis it was a real test of confidence. I was told I was mad to increase my contributions. But I persisted, and it all has worked out for the very best.
A: I got all excited when I read your letter. (I know, I know, it's a worry!). Have you found the secret to beating the market - investing in a way that guarantees a higher return than the market average?
Many share fund managers claim they do that, but research suggests it's impossible to consistently beat the market over time.
So I sent your letter to a friend who's an actuary and investment expert.
His response, "Of course he'll always have more money at the end because he's put more in. The question is whether he'll get an enhanced average return over time.
"His underlying hypothesis" - in other words your basic idea - "is that when there has been a negative return in one month, the returns in succeeding months will be higher to compensate."
We do expect share prices to rise over time. Shares are risky investments, and so returns are higher than on low-risk investments to compensate for the risk. "However, will the higher returns arrive just after or soon after a loss?" he asks. You need that to happen for your top-up deposits to do better than random top-ups at any old time - or top-ups every month.
I'm afraid number crunching shows that there's no advantage to what you're doing.
So, asks my friend, "why is this guy so convinced it works? Let's look at the MSCI index of world share prices [see graph].
"KiwiSaver started in July 2007, so it wouldn't have worked for a year, because he would have just been investing into a falling market. But after that, the market has risen steadily. So returns would have looked great" - regardless of whether you used your strategy.
My friend adds, though, "On the other hand, he's unlikely to lose on average, and his account will always go up. But there's no magic gain."
So keep at it. There's a psychological appeal in topping up losses. And it should give you a healthy balance at retirement, even if you haven't discovered that elusive market beater.
Q: Your columns a while back on the OBR and liability of creditors (including bank depositors) has left me somewhat nervous. Where do KiwiSaver account holders with a particular bank's KiwiSaver account stand in case of the bank's failure. Are they liable creditors too?
A: First, for other readers, a reminder about how OBR - or Open Bank Resolution - works in the unlikely event of a bank failure.
If that should happen, the Reserve Bank can freeze a portion of customers' bank deposits - although customers may get some or all of that money back eventually.
OBR is designed to protect New Zealand bank customers from losing access to all their bank deposits. The bank would open the next day, and customers would be able to withdraw most of their money - or leave it in the bank, as in those circumstances the government would guarantee the accessible money.
So on to your question. Could KiwiSaver money be frozen? Yes and no.
"Funds invested in KiwiSaver accounts that are managed by a bank are not direct investments in the bank and are not a liability of the bank, so they are not affected directly by the OBR policy," says a Reserve Bank spokeswoman.
"However, where a KiwiSaver fund invests its customers' funds in bank deposits, that investment is a liability of the bank and would be exposed to potential losses if the bank were to fail and become subject to the OBR policy.
"As a result, the value of the KiwiSaver fund may fall if that bank were to fail, just as it may fall if any other investment that it makes drops in value."
But the spokeswoman makes an important further point. "The same treatment applies to all KiwiSaver funds, so a non-bank provider that holds deposits in a bank that is subject to OBR would also be exposed to a loss."
And she adds a reassurance. "It should be noted that investments in bank deposits remain low risk relative to many other investments that KiwiSaver funds may invest in and therefore the probability of incurring a loss through this route remains low."
Q: Given that ANZ administers Bonus Bonds, would an OBR "haircut" apply to Bonus Bonds as well?
A: The situation for Bonus Bonds is similar, says the Reserve Bank spokeswoman.
"Investments in Bonus Bonds are not direct investments into ANZ and are not a liability of ANZ. As such, if ANZ were to fail and become subject to OBR, there would not be a direct impact on Bonus Bond investors."
However, you might not realise that the money put into Bonus Bonds is conservatively invested by a trust in other securities, usually issued by various banks including ANZ.
That means that "as with KiwiSaver, any funds invested by Bonus Bonds in ANZ deposits are a liability of the bank and would be exposed to the OBR process, as would its investments in other banks should they be subject to OBR", says the spokeswoman.
"Investors in Bonus Bonds are therefore indirectly exposed to a loss on deposits in any bank that Bonus Bonds has invested in, just as they are indirectly exposed to losses on any of its investments, as set out in the Bonus Bonds prospectus."
Q: I have money invested with Adviser Firm X and am more than happy with it. It does everything it can to keep my money safe (which might mean a lower return, but 10 per cent of everything lost is nil).
It reports to me regularly both from a financial point of view and from a running its business point of view. It has professional accreditation that others struggle with. Someone at its office is always available. Each year my financial manager has a telephone conversation with me to ensure everything is okay. It employs top-class people.
I am not in KiwiSaver as I was too old to join when I came to New Zealand.
On top of all this, every year there is a lunch at various towns in New Zealand where we get to meet the staff.
A: Thanks for yours and others' replies to the government's request, through this column, for information about people's experiences with financial advisers. Other readers are welcome to take part, up until July 22. I won't print all letters, but I will forward them all to the Ministry of Business, Innovation and Employment (MBIE).
You seem very happy with the services offered by X. But the next reader is no fan of that same firm - which is why I've changed its name. Otherwise I'm obliged to give it a chance to respond. And I'm sure it would say, "That's unusual. Most of our clients love us," so there isn't much point. In any case, we're looking here at general issues with advisers, rather than with specific people or firms.
Q: You asked for good or bad experiences with advisers, so I thought I would share mine.
We sold our business some 15 years ago and lacking experience with investing we did what I believe most people do and went to our bank. Unsurprisingly it recommended its own private banking department. This was in the early 2000s and the market was buoyant and everyone did well.
After about six years the private banking personal bankers were downgraded to what I would call relationship managers, and the whole thing became more about the bank than about us.
So we looked around and moved, this time to Adviser Firm X.
Shortly after joining X the world fell into the global financial crisis, and it would be fair to say that things did not look so good. Worse though was that X never really made progress above the index which, coupled with its fees, lots of "churn" and quite a few hidden costs (brokerage, hedging, etc) gave us quite a bit of heartburn.
Three years ago we moved to Brent Sheather at Private Asset Management, where we pay a fee for advice and the assets are in our names.
The most notable differences are Sheather's bias to low fees and index funds (about which he writes frequently in the Herald). Best of all we now have full visibility into all transactions, we actually make all decisions, and there is way less "churn" recommended on our investments.
The truth is that no one cares about your money as much as you, and leaving your investment management to others just does not deliver.
A: I like your comparing the returns you made at X with the sharemarket index. As noted in today's first Q&A, everyone with investments in world - or New Zealand - shares in recent years should have done well, as the markets have risen impressively. You don't want to be paying expenses when your money isn't doing any better than it would in a low-fee index fund, which invests in all the shares in a market index.
I agree, too, that we can't really expect a bank to make an unbiased adviser recommendation when it offers an adviser service itself.
Your final choice seems to be based on sound reasons - you're paying fees as opposed to the adviser receiving commissions; an emphasis on low-fee investments; visibility of transactions; and low churn - which is buying and selling investments, often at a cost that exceeds any advantages gained.
• Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. 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 mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. 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.
OPINION: You need to consider interest, taxes and fees.