Sometimes, market downturns hit you from one side, sometimes from the other. And every now and then, they whack you from both sides at once. Photo / 123RF
OPINION:
Q: I read recently that the total value of all KiwiSaver balances dropped $3 billion during 2022, according to the Reserve Bank. Meanwhile, Inland Revenue says members contributed $9.3 billion.
So KiwiSaver managers lost $12.3b for us during the year — out of a total of nearly $95b at the start of the year.
That doesn’t of course include me. I got out when the Fed (US Federal Reserve Bank) — which can’t be fought — clearly signalled it would raise interest rates for as long as it took, which will be a while longer.
A: Oh, the smugness of the successful market timer! Be careful, though. Not many people keep doing it well.
Last year was exceptionally bad for KiwiSaver balances. We got hit from both sides.
But first, some basics:
When shares fall, most of the time there’s a tendency for bonds to rise, lessening the blow to a fund — especially for the bond-heavy lower-risk funds.
In 2022, though, the values of both bonds and shares dropped. This is rare. Globally, it has happened only three times in the past 100 years, according to Morningstar. And our graph, of New Zealand bonds and shares, shows that over the past 50 years it happened only in 1994 and 2022 — the red dots.
The more numerous orange dots are years when shares made losses but that was offset by bonds making gains. Phew!
The green dots are also of interest — years when bond losses were offset by share gains. Again, investors in funds holding both would be glad about the diversification.
Finally we have the common blue dots, when both markets grew and everyone was happy.
What all this tells us is that we’re unlikely to get many more 2022s, with double losses.
There will, of course, continue to be quite a few years when shares fall — but that’s not usually accompanied by a fall in bonds.
What happened last year was that interest rates had been abnormally low for several years. Then suddenly, with fears of inflation looming, central banks around the world started raising interest rates quickly.
This made the older bonds held by KiwiSaver funds lose their appeal. Who wants to buy a bond paying 2 per cent when you can get an equally safe newer one paying 4 per cent? The older bonds’ value fell, and with them the balances in middle- and lower-risk funds — the ones that rarely fall.
Meanwhile, shares were doing their “usually up but fairly often down” thing, and last year was down.
Will we see another almost across-the-board drop in KiwiSaver balances? Who knows? But history tells us it’s not common. People who have been in KiwiSaver for more than a few years have, for the most part, done really well. I’m sure that will continue.
You are presumably over 65, and so have been able to jump in and out of your fund. If you enjoy it, good on you, but I wouldn’t bother.
Q: There has been recent discussion on laddering term deposits, and the ignorance of banks (that should surprise no one).
But why should bank staff know about laddering? How difficult is it to split one’s savings and set up a number of term deposit accounts without enlisting help from the bank? I think many people are just helpless; they should probably not be allowed out.
On the wider topic of laddering, I still disagree with you on the concept. Anyone laddering six months ago would be feeling pretty sick by now. As I recall, the five-year rate has doubled in that time. Why would you want to be locked in for five years?
If you must ladder the accounts, the time to do it is when interest rates are peaking and likely to drop. However, that requires some effort like listening to RBNZ policy statements.
I would also argue that if interest rates and inflation are dropping, then is the time to invest in the share market. But again, this requires some effort, and someone so helpless that they rely on the bank for laddering is probably better off shoving their cash under the mattress.
A: You’re missing the point of laddering.
Let’s say that six months ago you laddered some term deposits, by investing a fifth of your money for one year, a fifth for two years, and so on, with the last fifth for five years. Then, as each deposit matures, you will reinvest it for five years.
This means you will get access to some money every year, while benefiting from the higher interest you can usually get over a longer term.
Now, half a year later, you will indeed have seen interest rates rising. But that’s okay. Your one-year money matures soon, so it can be reinvested at a higher rate. Likewise with the two-year money — assuming interest rates keep rising. You’ll be glad you didn’t tie up all the money for five years.
On the other hand, if interest rates start to fall — or I should say when interest rates start to fall — you will be glad that some of your money is invested for five years, and some for four years, at what now seem like really good interest rates.
In the years to come, sometimes you’ll be happy to reinvest a fifth of your money at a higher rate, and sometimes you’ll be grumpy because rates have fallen.
Overall, you’ll get it right about half the time. It’s not as good as all the time, but much better than rarely or never.
You seem to be saying that you could do better than that, by picking when to invest in both term deposits and shares. Perhaps you should form a Market Timers Club with our previous correspondent. Count me out!
Footnotes:
Q: It is not only Westpac that is giving the shudders to its Visa card holders (see last week’s column). This week I tried to pay a bill of about $4000 to a cruise company’s NZ website using my ANZ Visa card, with around $11,500 available credit.
Up popped a message from ANZ telling me to phone them. More than half an hour later I found a human being who could tell me what I’d done wrong to get such a message (nothing, it seems) and who told me she would put a half-hour window open to me to complete the payment, all in the name of anti-money laundering.
This “trip of a lifetime” still has a couple of accommodation bills owing — well within the credit limit — but I was unable to get an assurance that when the accommodation providers put their payments through, these would be made without hindrance. The best I could get was to “telephone us if there is any difficulty”.
You can imagine our concern that we might end up in booked accommodation in Europe only to be told “your payments did not go through so we’ve let the place to someone else”. Expensive international calls and long waits definitely do not appeal.
We have already lodged our travel dates with ANZ, and they have connected these to our Visa cards. Surely, the banks can do better.
A: That sounds so annoying, but for once I have some sympathy for the banks.
“There’s been a significant increase in fraud and scams within New Zealand in the last year, so protecting our customers is something we continue to focus on and invest in strongly,” says an ANZ spokesperson.
“The bank has sophisticated algorithms and controls in place to identify and stop fraudulent transactions, which are constantly evolving. We’re also focused on reducing the impact any payment blocks have on legitimate transactions.”
It must be a tough balancing act — between inconveniencing customers and leaving them exposed to baddies.
The spokesperson continues, “The situation described by your reader generally occurs when a transaction is challenged by the Visa 3D Secure service that ANZ uses to help protect customers from unauthorised use of their card online.
“When a transaction is challenged and ANZ holds a valid phone number, we provide customers with a one-time use passcode, enabling the transaction to be authenticated by the authorised user of the card.
“In the case described it appears ANZ may not have held a valid phone number within our systems, and as a result the transaction was not able to be authenticated, so the merchant did not complete the transaction.” There’s a clear message here that might apply for many of us who have dropped our landlines in recent years. Tell the bank your current phone number.
The spokeswoman adds that customers can also protect their digital banking by registering for OnlineCode through ANZ Internet Banking, or sign up for Voice ID by calling 0800 269 296.
I expect other banks have similar services. If you can’t find info on your bank’s website, ask them.
Q: I’m surprised that you did not point out last week the big issue with Australian shares — that the dividends have a stamped part, equivalent to NZ imputation credits, which cannot be claimed by NZ taxpayers.
A: You’re right about the dividends, although that wasn’t the main point of last week’s Q&A.
Let’s start with the situation in New Zealand. Shareholders in local companies are given credit for the tax the companies have already paid on their profits. This is called dividend imputation. It means that shareholders often pay no further tax on the dividends they receive. And investors in lower tax brackets sometimes end up with excess imputation credits, which they can use to reduce their other tax.
There’s a similar system in Australia, called franking. But as you say, New Zealanders can’t benefit from it. The Aussie dividends we receive are fully taxed.
So if we’re comparing investing in the two countries, that’s one point against Australian shares. But the gains in diversification from including Aussie shares outweigh that.
Last week, though, we were looking at investing across the Tasman versus around the world. When you invest in countries beyond Australia, the tax situation is different again. In some years, you will be better off taxwise with Aussie shares, and in other years other overseas shares will be better.
Overall, though, it’s not clever to let tax govern your investment choices. For one thing, taxes can be changed. It’s wiser to concentrate on getting the broadest diversification — which you can easily do with a global share fund.
- 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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