- Who’s right about fund choice — husband or wife or neither?
- Which bank products are subject to haircut if bank fails?
- What about government bonds, Bonus Bonds and safe deposit boxes?
- Halt to dividend payments should strengthen banks
- ETF tax problem no big deal
- It’s great to continue contributions to KiwiSaver and other funds in down markets
- Don’t assume gloom will continue — and a look at past recoveries
- Drip feeding not quite so good with lump sums
QMy husband wishes me to acknowledge that I am wrong, and I want your opinion.
A year ago he decided to reduce our risk in KiwiSaver and transfer 100 per cent of our funds into a cash fund. But instead I placed them into a conservative fund following the advice of our adviser.
The philosophy of my husband was that we would at least keep the value of contributions made. There would be no growth, but it would have avoided the personal pain of losing savings if I had done exactly what he wished.
My philosophy is it is irrelevant to look at the short-term loss because we are so far away from withdrawing funds, and we would not cover fees etc. in the cash fund.
The reason for change was we felt that the rising share market wasn’t going to last as there were too many economic clouds on horizon. But Covid-19 was a black swan event unforeseen a year ago.
Obviously we have lost a few thousand dollars in the value of the fund over the past weeks. We are mid fifties in secure high-paying jobs with no plans to retire early. What would you have done?
AOh no! There’s nothing more dangerous in investing than someone who thinks they’ve made a good call on timing the markets. More on that in a minute.
My first reaction to your letter was, “Hang on a minute. KiwiSaver is an individual investment, not a joint one. There’s no reason why your husband can’t do what he wants with his money, and you with yours.”
But within a marriage it’s obviously good to agree on your finances. So let’s try to make that work.
The two of you decided, a year ago, that shares were headed for a fall. What you should have done about that?
If you’re in the right funds for you, absolutely nothing. Everyone in KiwiSaver, and any other investment fund, should always be comfortable with their risk level regardless of what they think the markets might do.
If you’re not planning to spend the money for a decade or more, it doesn’t matter about the ups and downs — or even the black swans — in the meantime. In the long run you will almost always do better staying in a higher-risk fund.
On the other hand, if you plan to spend your savings in the short term, use a low-risk fund that will be little affected by market movements. And in the medium term, use something in between, such as a bond fund or balanced fund.
It seems you understand this distinction better than your hubby — although if he is uncomfortable with risk, you as a couple should tone down your investing to accommodate that.
Within the next year or two, though, it would be good if you gradually move to at least middle-risk balanced funds — and stay there — given your time frame and good job security.
A couple of other issues:
- Are you, in fact, worse off because you didn’t move to the cash fund a year ago?
Sure you’ve lost a few thousand dollars recently. But you have probably regained a good chunk of that since you wrote. Conservative funds hold some shares, and the share markets have recovered around half their big losses.
Also, if you had moved to cash a year ago, you would have missed out on considerable gains before the Covid-19 downturn. It’s quite possible you are better off now than you would have been in the cash fund, despite recent falls.
- Is trying to time markets wise?
In a word, no. Not even the experts are good at market timing.
As Warren Buffett, one of the world’s most successful share investors has said, “We make no attempt to time an entry to the market as we have no future knowledge of market prices — and for that matter neither does anyone else.”
Funnily enough, I could claim that I made a good timing call recently! A listener to my RNZ podcasts with Jesse Mulligan wrote to point out that on February 13 — just seven days before the big downturn began — I said we shouldn’t expect the fantastic recent share returns to continue.
“You must have had some insight of what was going to happen,” the man wrote, “for the theme was ‘we’ve had a great decade with shares but be aware of your risk tolerance and change now’,” if you couldn’t cope with a big fall.
“Hopefully your listeners listened to you! Just wanted to say well done, and now you just have to predict the ‘bottom’ haha…”
Thanks! But that was sheer luck on my part. I’d been issuing similar warnings for several years, and finally it happened. There’s no way I’ll even begin to guess at when we’ve hit the trough.
- It’s not true that your return wouldn’t cover your fees in a cash fund. The returns are low, but not that low.
QI have been following the comments about bank deposits if banks run into difficulty. I have a few questions:
- How are PIE term deposits and savings accounts treated under Open Bank Resolution? PIEs have a separate legal structure so are they considered bank deposits or something else that leaves them unaffected?
- What about putting credit cards into credit? Does the bank or government have any clawback ability with those funds? Putting money on credit cards may not pay any interest but it could potentially save you having to pay very high interest rates on any credit card debt you may have if you don’t have access to cash to pay your cards off in time.
- What also concerns me is if banks can access PIE deposits can they also take funds out of your KiwiSaver? So how safe are your KiwiSaver funds really?
ATo jog everyone’s memories, “Open Bank Resolution (OBR) is a long-standing Reserve Bank policy aimed at allowing a distressed bank to be kept open for business, while placing the cost of a bank failure primarily on the bank’s shareholders and creditors, rather than the taxpayer,” says a Reserve Bank spokesperson.
“A key feature of the policy is that a failed bank’s customers can access some of their funds very quickly. This means that day-to-day transactions can continue in the wider economy.”
However, a portion of bank accounts with balances above a certain point — called the de minimus amount — may be frozen. Customers may get some of that “haircut” money back later.
Now, on to your questions. Here are responses from the Reserve Bank:
- “PIE term, savings, and other deposits are treated like other customer accounts and subject to the haircut if invested in the bank’s products.”
- “Credit cards with credit balances are likewise subject to the haircut as they represent a liability of the bank to the card holder.” But “the unfrozen portion (net of haircut) of credit cards with credit balances would be available the next business day when the bank re-opens.”
- “To the extent that KiwiSaver accounts (whether these are KiwiSaver accounts run by the bank or run by other fund managers) are invested in a bank’s products such as deposits, they are subject to the haircut under OBR.”
It wouldn’t be a case of the bank — or more accurately the statutory manager brought in to sort out the mess — taking money out of KiwiSaver accounts. Instead, the value of the bank’s deposits held by any KiwiSaver fund would fall, in much the same way as the values of shares or property in a KiwiSaver fund fall sometimes. That would reduce KiwiSaver returns.
QWe are both in our mid seventies with $600,000 in Westpac. Are New Zealand government bonds or Bonus Bonds 100 per cent guaranteed?
We are also thinking of putting our money in a safe deposit box. We are not worried about interest on our money, just keeping it safe.
ABonus Bonds are very different creatures from government bonds. The latter are, indeed, 100 per cent guaranteed by the government. You might want to look into buying Kiwi Bonds. But Bonus Bonds are a scheme run by ANZ Bank in which you get no interest, but you may win a cash prize.
Bonus Bond investments are not deposits in ANZ Bank or the wider company, ANZ Group. And ANZ Group does not stand behind or guarantee the scheme. I don’t think they are what you want.
What about money in a bank safe deposit box? That money is not subject to Open Bank Resolution, says the Reserve Bank. So it’s pretty secure. But you earn no interest, and with $600,000 that’s a big sacrifice, even at low interest rates.
QWith all the Covid-19 stuff going on I almost missed the NZ Reserve Bank move to put a halt to the New Zealand subsidiaries of the big four Australian banks making dividend payments to their Aussie parents. This may be relevant to your readers?
AThanks for pointing that out. The restriction applies to all banks incorporated in New Zealand.
It should bring some comfort to people worried about bank stability. It means that until the economic outlook improves, banks are being forced to keep their profits, in case they need the money in the future.
Anyone who is still worried can check out all the steps the Reserve Bank and the government have taken “to keep our financial system stable” at rbnz.govt.nz/covid-19. It’s brief and written in layperson’s language.
One quote: “Our financial system is in good shape, with our trading banks having lots of capital and plenty of cash to help customers through these testing times. The Reserve Bank stands ready to act further, with more firepower in reserve to keep the financial taps turned on.”
QIs it the case that your recent discussions re passive versus active investments have all been on the pre-tax side of the equation?
An ETF (exchange traded fund) in New Zealand that is a PIE entity is a “listed PIE” according to IRD. It is taxed at a non-variable PIR rate of 28 per cent even if you are a child who would be on a PIR rate of 10.5 per cent in a managed fund.
This extra tax burden is effectively a hidden “fee” for passive PIEs.
AThat’s not quite right.
Firstly, yes, in the recent Q&As about index or passive versus active funds I’ve been looking at pre-tax numbers.
But the tax issue you talk about applies only to PIE funds that are exchange traded. Many are not.
For example, NZX, the main provider of ETFs in this country, also offers 23 unlisted funds — mostly passive — via its SuperLife Invest scheme. These charge similar fees to the ETFs.
Furthermore, says a spokesperson, “It’s true that our ETFs are taxed at 28 per cent. However, lower rate taxpayers can reclaim any overpaid tax at the end of each tax year.” And they may not even have to do that in future.
Inland Revenue confirms the current treatment. If you are in the 30 or 33 per cent tax bracket, you don’t have to do anything.
“However, an investor may choose to include income from the listed PIE in their tax return. Where the investor’s tax rate is below 28 per cent, including the listed PIE income in their tax return means any overpaid tax will be refunded to them,” says an IR spokesperson.
She adds, “IR is looking at a solution to capture listed PIE income in individual pre-populated accounts as taxable income, but only where they’re on a tax rate lower than 28 per cent.
“This will remove the need for investors to report the income in their tax return in order to claim the repayment of tax.
“Instead the refund would flow automatically via the annual automatic calculation process. Listed PIE income would remain excluded income for all other investors.”
When is that likely to happen? “We will look at it as soon as resources permit,” says the spokesperson. “IR had planned to work on it this year but given the COVID-19 work we are engaged in, it may not be possible that soon.”
QThirty-odd years ago I set up an MFL Mutual Fund account. I have not been a regular contributor, often taking long breaks due to changes in my financial circumstances. The fund is a fixed fund, so I am not in a position to move the money to, say, a more conservative fund.
Given the current times, the fund is losing significant amounts of money quite rapidly — $20,000 in the last few weeks. My question is, should I stop, or at least reduce my contributions at present until the market starts to recover? I currently direct debit $100 per week.
ABefore most readers skip past this Q&A because they know nothing about MFL Mutual Fund, it’s basically just another savings fund. What I say also applies to KiwiSaver and any other investment to which people make regular contributions.
As long as a fund’s returns are volatile — they move up and down with market movements — investors benefit from continuing to contribute a regular amount regardless of what the markets are doing.
Your fund, which invests mainly in shares and listed property, certainly qualifies as volatile. So let’s look at what happens when you regularly drip feed $100 into it.
Making up some numbers to keep it simple, we’ll say units in the fund were worth $10 each earlier in the year. So one of your $100 deposits bought you 10 units.
Now, though, the units are worth only $5, because of the downturn. So your $100 buys you 20 units.
So where are we?
- Over the two deposit periods, you’ve bought a total of 30 units.
- You’ve paid $200.
- The average unit price is $7.50 — halfway between $10 and $5.
- But your average price is $200 divided by 30 units, which is $6.67.
How come you got such a good deal? Because you bought more when they were cheaper.
This is sometimes called dollar cost averaging. Real world examples are of course more complicated, but the principle is always the same. If the unit price fluctuates, as long as you keep putting in the same amount regularly you’ll end up buying bargains when the market falls.
It means that when the market recovers you’ve got a lot more units than if the market had just sailed along smoothly. And more units means higher returns. Ups and downs are good — but only if you keep making those regular deposits.
The same thing applies if you’re buying shares in a company.
Other reasons for continuing regular contributions:
- You’re getting the money into the fund, rather than having it sit around earning next to nothing in a bank account, or being spent. That’s how to build up a decent sum for retirement.
- It’s good to keep a savings habit going. Once you break it, you might not get around to starting the contributions again.
QMy super funds have reduced by 7 per cent in the last two months and the fund is spread across 60 per cent High Growth and 40 per cent Conservative. I am paying an 8 per cent contribution via my salary.
I seem to be paying in contributions for them to lose money? Should I reduce my contribution rate to the minimum until the fund recovers, then make a lump sum catch-up contribution?
ANo! See the Q&A above.
But I also wanted to address your worry about your contributions losing value. If we go back a few weeks, sure you would have seen that your balance had declined week by week. But never assume that will continue.
In fact, by now it’s quite likely your balance has been growing again. As I said above, share markets have regained about half of their losses, and even more in New Zealand.
What will happen next? A while back I was looking at NZX50 data back to 1991. (See table below). In six of the 29 years, the New Zealand market went down, although losses were only 8 per cent or less in all but one downturn — the global financial crisis (GFC).
1991 to 2019 NZX50 Gross Index
|Loss year||Next year|
|1994: - 7%||+ 20%|
|1998: - 4%||+ 13%|
|2000: - 8%||+ 13%|
|2007: - 0.4%||- 33% ouch!|
|2008: - 33%||+16% phew!|
|2011: - 1%||+ 24%|
And then, in all but the GFC, there were really strong gains the following year, ranging from 13 to 24 per cent. Big relief all round.
In the GFC the index dropped a smidgen in 2007 but then a horrible 33 per cent in 2008. But the year after saw a very healthy 16 per cent rise.
I’m not saying we’re going to get out of this downturn fast. There could be another big fall first, but maybe not. Nobody knows. In the end, though, the market always heads back upwards.
By stopping contributions, and then picking when to put in that lump sum, you’re trying to time the markets. That’s not a winning strategy, as explained in today’s first Q&A.
Just keep up the regular contributions through thick and thin. In the long run, it’s great to be able to look back and say, “I bought some cheaply.”
You should get credit, though, for planning to make a catch-up contribution, rather than just stopping altogether.
QI’m a 30-year-old who has recently received a $17,000 windfall.
I want to invest it in index funds, but feel nervous about dropping it all in at once. I’ve started with $2000 a week (via InvestNow, half domestic equities, half international equities), and plan to keep doing that until I’ve spent $16,000, at which point I’ll revert to my usual $100 to $200 a week.
Am I mad? Should I just put it all in at once, or should I space it out over more time?
AFar from being mad, you’re doing really well.
When you have a lump sum to invest, the argument for drip feeding the money is not as strong as when you’re making regular investments into KiwiSaver or other funds.
That’s because you’ve got money sitting there, in the meantime, probably in a bank account earning next to nothing. On average, it would earn more in the index funds.
The trouble is, particularly in volatile markets, that you might deposit the whole lot right before a market downturn.
In the long run this won’t make all that much difference — and if you’re investing in share funds it should always be for the long run. But in the short term it would be really annoying to see that happen. So it’s partly for psychological reasons that I recommend drip feeding a lump sum.
If you do that, though, do it over just a couple of months — as you’re doing — so you don’t miss out on the likely higher returns for long.
You’re also doing well by investing partly in New Zealand shares and partly in international ones. That gives you good diversification.
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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. 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 [email protected] 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.