QI am 60 and my husband is 12 years older. Together we own two units mortgage-free, one being our home, the other a rental. I myself have KiwiSaver of $100,000 in a growth fund and $400,000 in term deposits.
We both plan to leave our jobs and start using our motorhome for long trips around New Zealand, with our dog.
I have part-time work of up to 10 hours a week that I can take on the road but will need to top that up from savings and interest. Am I best to leave the $400,000 in term deposits or invest in a managed fund? Or both?
ALet me just say first that the investment suggestions below apply to anyone at any age — including people saving for a first home, car, appliance or retirement.
Okay, now let’s look at your situation. Good on you with your plans! Too many people reach their eighties and wish they had spent more of their time and money on fun and adventures in their sixties and seventies, while they were still healthy and energetic enough to enjoy it.
And you’re pretty well set up financially, with a rental property you can sell if you need more cash later on.
On what you should be doing with your term deposits in the meantime — or what others should do with their savings — you need to work out roughly when you plan to spend the money:
- Put what you expect to spend in the next three years or so in bank term deposits, a cash fund or your provider’s lowest-risk KiwiSaver fund.
- The three-to-ten year money should ideally be in a bond fund, although a balanced fund is another option. These funds have medium volatility, and will usually recover from a downturn within three years.
- The money you don’t expect to spend within the next ten years should be in a growth or aggressive or share fund, or a wide range of individual shares. This could include your KiwiSaver money. These investments will almost certainly grow more in the long term, but they are volatile. You don’t want to find your balance has fallen, and perhaps taken a long time to recover, when you want to spend the money.
Cash funds invest in term deposits and the like. You will probably get a higher return, on average, than directly using term deposits, and you can withdraw money whenever you want to.
To find a cash fund, go to the Smart Investor tool on sorted.org.nz. You can choose between KiwiSaver funds or managed funds. The latter are similar to KiwiSaver funds but without the government and employer contributions or lock-in of your money.
Click on the lowest-risk defensive funds, and sort by “Growth Assets (lowest first)”. Look for funds with “cash” in their name, then check they hold only cash by clicking on “Details” in the Mix section. Some so-called cash funds also hold bonds, and that’s not ideal for short-term money.
For your three-to-ten year money, you can find a bond fund by the same process. But this time look for funds that don’t have “cash” in their name, then check they hold only bonds, or largely bonds, by clicking on “Details” in the Mix section.
Whether you’re searching for cash or bond funds, I would tend to favour the lower-fee funds.
I realise you may be unsure about when you might spend some of your savings. Err on the cautious side and put more in the short-term category until you are clearer about your spending plans.
Every year or so, move money so you maintain the time horizons.
P.S. Have fun. I’m sure your dog will.
QI have opened a growth fund account a year ago with $10,000, and added $650 since then. Because of the current markets it is now down to $9,700 (it has been lower this year).
We are thinking to use the money for an overseas trip next year. I don’t want to lose any of the money invested. Should I keep adding to the fund or leave it as is? Or withdraw it into a different type of investment?
I have also recently received a $5,000 lump sum which I want to invest. What would you recommend I do?
AIf only you had read the above Q&A — or another in this column along the same lines — before you invested money in a growth fund that you plan to spend within a few years!
There’s no guarantee the account balance won’t drop further before your trip. If you want that guarantee, move the money into a cash fund, as described above, or a bank term deposit that matures when you plan to spend it.
I’m afraid you’ll just have to accept the loss you’ve already made — although your recent $5,000 could help with that. If you are planning to spend roughly $10,000 on the trip, make the $5,000 part of that, by investing it a cash fund or term deposits alongside $5,000 from the growth fund.
Then you can leave the other $4,700 in the growth fund as a ten-year-plus investment for later on. It means you’ll make the unhappy loss-making move — out of a higher-risk investment after a downturn — with only about half the money.
On the positive side, you’ve been saving for something with a flexible cost, unlike, say, a house deposit. You can simply have a less expensive trip. I reckon cheaper countries are often more interesting anyway.
QI’m a bit concerned about the discussion of share market losses and the disingenuous terms such as “paper losses”, “locked in”, “set in concrete”.
The fact is that a market loss is a real genuine loss (not a paper loss) and is locked in no matter what you do. It’s already concrete. The money is goneburger.
So fear of locking in losses should not be a feature of your investment decisions. Instead you should ask, “where should I be in the market going forward?”
If being in the market prior to your losses was the best place for you then it is probably an even better place now that the market is down.
Whatever you decide, you should decide it by looking forward and not whether or not you incurred any losses on your journey to where you are today.
AI understand where you’re coming from. If I invest in, say, a KiwiSaver growth fund or through an online share platform, and my account balance has gone down from $10,000 to $9,000, that’s because the value of the investments has dropped. No two ways about it.
The point is that if I ignore what’s happened and get on with my life, the markets will inevitably recover and after a while — maybe in a month or two or a year or two — my balance will be grow back to more than $10,000.
I haven’t suffered. The loss was on paper, back then, but my account is no longer a loss maker.
However, let’s say I panicked when the balance fell, and moved to a less volatile lower-risk KiwiSaver fund, or sold my shares and moved to bank term deposits. I would then have $9,000 in KiwiSaver or term deposits. My $1,000 loss is locked in, or set in concrete. The money really is goneburger.
I agree with you that, as long as you have weathered a downturn, it’s best to look forward.
But if you have made a panicky move to reduce volatility, that means you can’t cope with downturns. The markets will eventually recover, but it would be unwise for you to move back into shares or a higher-risk fund at that stage. People who jump in and out of markets are the ones who suffer the real goneburger losses.
QI will soon receive $200,000 and would like to invest in an index fund, the majority of it in the US S&P500. I would like to make it as easy as possible and also at the lowest cost.
Do you have any opinion on whether it would be best and cheapest to use Sharesies, InvestNow or Hatch?
AI don’t know enough about the different platforms, but I suggest you go to this page on the MoneyHub website, which compares the three platforms you’ve named, plus Stake, ASB Securities and Jarden Direct.
QI invested in the share market in 2020. Good performers (Port of Tauranga, Ryman Healthcare, Fisher & Paykel Healthcare and Restaurant Brands), or at least they were at the time.
The last six months are a constant downward trend. Now 25 per cent below cost price.
These companies are, in general, posting healthy profits. Why is this not reflected in the share price?
AOver the short term — which in the world of shares can be several years — share prices often fall.
They can be affected by all sorts of things. Your companies may have hit particular problems. But there are also factors that move the whole share market.
Rising interest rates, for example, make it more expensive for companies to borrow money to grow. They also make alternative investments, such as newly issued bonds, more attractive, which leads some people to sell their shares and buy bonds. And when there are more sellers, prices fall.
The release of unexpected negative economic numbers can also push share prices down.
Then there’s market sentiment. If share investors see prices dropping, some will rush to sell, which in turn drops prices further. This can escalate into a major downturn — until one day enough people say, “This is silly, these companies are worth more than that!”, and they start buying again, pushing prices back up.
As I said above, over the long term — ten years or more — the majority of share prices rise. Investors who hold a wide range of shares pretty much always end up better off than if they had used lower-volatility investments. You’re rewarded for your patience.
Your four companies are all in the NZX50 share market index, ranging from F&P Healthcare as the biggest company in the index to Restaurant Brands as the second smallest.
S&P/NZX 50 Index
And, as our graph shows, the index is currently below its levels in most of 2020 — except in the March-to-June Covid downturn and early recovery. If you bought your shares outside that three-month period, the fall in their value might just reflect the broader market movements.
Don’t forget, too, that you will have received dividends. To find your total return on the investment, you need to add those back in — even if you’ve spent the dividend money on whisky! (see next Q&A).
It’s great that you’ve invested in four companies as opposed to one or two — although 20 or 30, perhaps through a share fund, would be even better. The wider your diversification, the less you will be affected by a single company’s misfortunes or mismanagement.
And your four shares are in different industries, despite the word “Healthcare” in two of the names. So they won’t all be affected by problems specific to an industry.
As it happens, next week is World Investor Week, and the Financial Markets Authority is using the theme “good investing is long-term investing.”
The FMA says recent research shows that for the first time more New Zealanders are investing in shares than term deposits. It’s focusing on “the many thousands of New Zealanders who have gotten into share investing within the last two years and may be experiencing market volatility for the first time.” Sounds like you!
Look out for various FMA content in the media and on social media. And stay invested.
QI loved your comment last week about the whisky in your reply to the person who has a conspiracy theory about the NZX, because the exchange chooses to use a total return rather than a price index (as I think all exchanges should).
No doubt your comment will go over their head, as the said whisky has clearly already gone to it!
You’re referring to my saying to the correspondent, “Maybe you don’t reinvest your dividends, but spend them on whisky. But you still receive them.”
I was being cheeky, and you are being cheekier. But I’m sure last week’s correspondent has a sense of humour.
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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 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.