If you can trust yourself not to splurge, there's no gain in locking up your money. Photo / 123RF
OPINION:
Q: For the past three years, I've been living in New Zealand but have been unable to join KiwiSaver due to my "non-resident" status. In the meantime, I've been contributing part of my wage into a Sharesies account, with 80 per cent being placed in managed funds.
Now that I'm technically a "resident", due to changes in my immigration status, would I be best to transfer my Sharesies money into my new KiwiSaver account to best benefit from compound interest and government contributions? Or keep the accounts separate?
I'm 30, not a home owner and have $25,000 in my Sharesies account.
A: It depends on whether you're likely to go on a spending spree with the Sharesies money, perhaps blowing it on unnecessary clothes or a flasher car or high-life restaurant meals.
If so, it would be good to transfer the money into KiwiSaver to keep it locked away until you buy a first home or retire — assuming you have been regarding it as retirement savings.
But if you're more disciplined — and it sounds as if you are — there's no need to move the money. You won't get any extra KiwiSaver government contributions. They max out at $521 a year if you contribute $1042 or more, and you will be doing that with your regular contributions.
On compounding returns, you won't do any better with your money all in one place. The $25,000 will grow at the same pace whether or not it's added to a KiwiSaver account.
That's a common misconception. Twenty dollars at 10 per cent plus another $20 elsewhere at 10 per cent will grow just as fast as $40 at 10 per cent.
And there are three clear advantages to leaving your Sharesies money where it is:
• You have ready access to the money if you suddenly need it.
• You're diversifying your investments.
• You'll learn more about how markets work.
Q: I switched my KiwiSaver provider to Simplicity as I wanted to earn average returns — i.e. it won't be the best but it won't be the worst, and at least it's cheap!
However, I am quite perplexed that all of its funds are bottom of the Morningstar rankings for the recent three months and one-year periods. Granted, they are brilliantly average over three and five years, but why aren't they average during the short term, too?
This is surely the downside with a non-managed approach during a bear market. It's just a race to the bottom. If I earn average returns during the good times and lose most compared to other funds during the bad times, are non-managed funds the way to go?
A: Yes, they are.
For other readers, by "non-managed funds" our correspondent means passive or index funds. The managers of these funds simply invest in all the shares in a market index, unlike active managers who pick investments and when to get in and out of them.
Over the short term, passive funds tend to produce about average returns, while some active funds — through skill or luck — do really well while others put in dismal performances.
But the active winners often don't last. Over the longer run, passive funds typically do as well as active ones before fees. And because they tend to charge lower fees — being cheaper to run — they usually perform better after fees. That makes them better long-term investments.
However, there's an old saying that passive funds perform worse in down markets, and clearly our correspondent has heard that — even though it has been proven wrong.
So what's going on with Simplicity?
You're right that their short-term results are awful. In the three months ending June 30, their default fund and conservative fund came last on Morningstar's lists, and their balanced and growth funds didn't do a lot better. The one-year results were only marginally stronger.
Over five years, though, the conservative fund came 8th out of 21 funds, the balanced fund came 8th out of 28, and the growth fund came 6th out of 29 — somewhat better than your "brilliantly average".
What happened lately?
"The reason short-term performance is bad is that we always keep very little cash (an underperforming asset long term), and invest in long-term investment grade bonds (versus lower interest shorter-term bonds)," says Simplicity managing director Sam Stubbs.
"If we held more cash, and shorter-term fixed interest investments, both theory and practice show that long-term returns would be lower. We aren't here to do that!"
However, he says, "when interest rates rise sharply — as they have just done — we will underperform short term. We accept that this higher returning long-term strategy does involve short-term periods of underperformance.
"But when interest rates fall again, we would expect to significantly outperform in the short term, and further improve long term.
"All the bonds we invest in are investment grade, and the theory and practice of this approach are well proven. It just requires patience.
"Most of our investors are here for the long term and deserve to be rewarded for that."
Fair enough. But, I asked Stubbs, "have you thought of setting up a cash fund for people who are planning to withdraw their KiwiSaver money soon?" His reply: "Yes, indeed, we are working on a product for cash investors, first home savers and those in retirement looking for a reliable income that pays better than term deposits, which is just as safe."
The new fund is likely to be launched early next year, says Stubbs.
Still not convinced that passive funds can do just fine in declining markets?
I asked two KiwiSaver providers often regarded as passive managers whether their main KiwiSaver funds are passively run.
Says ASB: "Through ASB's partnership with BlackRock, we develop and regularly review target asset allocation (the proportion of funds invested in each asset class) to drive better investment outcomes for our customers. Investments within these asset classes in our Conservative, Balanced and Growth KiwiSaver Scheme funds are passively managed, with the exception of investments in cash assets."
Says SuperLife: "Stock selection in our KiwiSaver Default, Balanced and Growth funds is predominantly passive, however we add value through currency hedging and asset allocation."
In other words, these funds are partly passive. And how did they perform recently?
ASB's three funds ranked well within the top half over the three months. Over the last year, the conservative and balanced were a little below average, while the growth fund remained above average.
Meanwhile, SuperLife's default fund was the top performer over the three months. Its balanced fund was average, and its growth fund in the top third. Over the last year, its balanced and growth funds were in the top quarter.
There was no racing to the bottom among any of those two providers' funds.
Q: In the first question last week, was the young couple referring to "property growth" or "family growth"? I assumed the latter while your answer focused on the former. In other words, should they buy a home now and have to sell up and buy again when the family "grew"? A different but interesting question, with the first child already 2 years old.
A: It never occurred to me to read the question that way, but perhaps you're right.
The couple were wondering whether to buy a new two-bedroom terrace house they like or continue to rent for a while and then buy an existing three-bedroom cross lease house.
If the issue is the number of bedrooms, clearly the bigger house wins. But as I said last week, a cross lease property comes with complications. You and other leaseholders are all part-owners of every building on a piece of land, including the building you occupy. This complexity no doubt makes these properties cheaper, but worrisome.
Even if the couple have, say, two more children, they can make do with two bedrooms for a few years. I saw a two-bedroom early settler's house recently where they raised six kids!
The couple's hearts seemed set on the terrace house, so I still think that should be their choice.
Q: I have the misfortune to be in a dysfunctional cross lease syndicate where the double standards simply beggar belief.
I cannot afford to sell and buy elsewhere so am stuck in this unbelievable situation until I die. My family know about the difficulties here. I have advised my family to sell my property and get out and away from here as quickly as possible.
The stress of living in a toxic cross lease syndicate is just not worth it. To anyone considering buying into such an unrealistic and unworkable legal framework, I would suggest: "Turn away and run as fast as you can without looking back."
A: Gosh, you sound desperately unhappy. There's got to be a way you can sell your place and buy elsewhere, even if it's a tiny house or an apartment in a lower-priced area. Nobody should feel that unhappy about their home.
Q: I know you don't like letters from we DIYers, but I can't let your praise of the NZX50's performance go unchallenged. The NZX is a gross index and includes dividends, unlike where most people invest their money, which are capital markets. And they don't look anything like as healthy. Those of us who live or starve by our daily decisions have a far more cynical view of the NZX.
Why, for example, do they continue to ignore a share's fall in value when they go ex-dividend?
Your esteemed newspaper doesn't do that, neither does ASB Securities. But the NZX, if say a $3.00 share pays a 10 cent dividend and falls to $2.92, which most of us would see as an 8cent fall, the NZX calls it a 2cent rise. Is that how they get their 9.4 per cent increase?
Even Robertson/Ardern would blanch at that. I think. Why don't you ask the NZX to explain Mary? They wouldn't dare tell you porkies. Good luck.
A: You're referring to my comment two weeks ago: "Since its low in June, the [NZX50] index has risen a very healthy 9.4 per cent in less than three months."
Sorry, but I don't understand your objection to the index's inclusion of dividends. You receive the dividends, so how come you don't include them in your return — along with any gains you make when you sell the shares?
Maybe you don't reinvest your dividends, but spend them on whisky. But you still receive them.
Hugh Stevens of NZX suggests you think about a bank account.
"What if I started the year with $3 in the bank, withdrew 10 cents in July and put it in a jar, and received 2 cents interest. At the end of the year I would have $2.92 in the bank and 10 cents in the jar. You haven't lost 8 cents.
"Likewise in your share example, if you have a share worth $2.92 and 10 cents in cash (dividend) then you've not lost 8 cents."
Similarly, would you say the return on a rental property was only the gain when you sold, not the rent — minus expenses — as well?
Back when the NZX50 became the headline index in 2003, I applauded the fact that it included dividends, unlike its predecessors, because it covered total returns that investors receive.
The vast majority of New Zealanders with a stake in shares hold them through KiwiSaver or other funds. And almost all funds automatically reinvest dividends. Some direct share investors also ask for their dividends to be reinvested.
Those who don't — obviously including you — still receive the money.
These days, the index is calculated by S&P Dow Jones Indices, a global company that I can't imagine would get involved in shonky indexes.
There are several versions, including a "Price Return" index that excludes dividends, which you could use if you prefer it. For more info see tinyurl.com/NZIndexInfo
P.S. Where did you get the idea that I don't like to hear from DIY investors? Your letters are welcome.
- 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.
Prices and interest rates have fallen, offering a window to buy homes now.