This article was published on 10 August 2013. Some information may be out of date.

Q&As

  • Retiree needs patience, but also needs to ask his adviser some hard questions
  • How assets would be valued if capital gains tax is introduced
  • Share investor’s success not quite so impressive when you look at how the whole market has performed
  • Raising NZ Super age would affect some more than others

QOn retiring from farming at 70, I was tempted to invest in houses and live off the rental income. Property had always been a good investment so far.

Instead, after regarding the advice of financial gurus such as Gareth Morgan, Brian Gaynor and Mary Holm — and being a cautious person — I decided that the prudent thing to do would be to get advice from a recommended qualified financial adviser.

This resulted in the construction of a conservative balanced portfolio — 60 per cent bonds, 10 per cent property and 30 per cent shares.

The half yearly return on this recently showed a return after fees of 0.7 per cent. What do I learn from this?

ATwo things: To have patience. And to ask some hard questions of your adviser — who emphatically was not Gareth Morgan, Brian Gaynor or me.

Firstly, the patience. I’m assuming you’re talking about money you plan to spend in three years or more. Shorter-term money is best kept in bank term deposits — where its value won’t drop right when you want to spend it.

If this is indeed longer-term money, it’s not wise to take much notice of short-term returns. They are likely to be all over the place and reasonably often negative.

This is especially true in shares or property, but bond values can fall too. If there are newly issued bonds — of similar risk to your bonds — that pay higher interest, new investors would prefer to buy the new ones, so the value of your bonds will fall.

However, over the longer term a portfolio like yours should perform reasonably well, as long as there’s a good range of shares and well chosen bonds and property — and your expenses are reasonable. Note that last bit, though. More in a minute.

I thought Morgan and Gaynor should also have their say. But Morgan has other fish to fry. “Sorry Mary,” he says in an email, “away overseas motorcycling and I have retired from the investment advice business.”

However, Gaynor has some important points to make, looking first at the six-month returns for balanced funds provided by Morningstar. They range from 2.26 per cent to 8.36 per cent, with an average of 5.59 per cent — not bad for just half a year.

“I don’t know why he had a return of only 0.7 per cent,” asks Gaynor. “It is far, far too low. What fee was he charged? Was he charged a large entry fee — which I suspect he was — and, if so, this has had a huge impact on his returns?

“The other point is did he go into a PIE, which he should have done? If not, how was the money invested?”

Gaynor’s firm Milford Asset Management “reduced its exposure to long bonds at the end of 2012, either selling out or moving to short duration bonds,” he says. “This individual obviously invested in long-dated bonds as advised by his AFA (authorized financial adviser).”

It might be time to review your choice of adviser. Or, if you really would prefer to go the rental property route, you could still sell your investments and do that. It sounds as if you have enough to buy several houses mortgage-free, which gives you a buffer. If rents go down, you can always sell one or two houses and spend the proceeds.

There are two main potential downsides. One is problems with tenants. But hiring a property manager should help with that. The other is the possibility of a big property price slump. But that might not matter until your estate sells the houses. And in the meantime there’s a lot to be said for doing what you want in retirement.

QIf there was a law change to introduce capital gains tax on rental properties, how would that affect properties that have been owned for several years before the new law?

I’m assuming the house value at the time of the law change is the starting point. If so, would that mean we’d all need to get our rentals revalued?

ANot necessarily. The Labour Party, which has said it will tax capital gains if it wins the next election, confirms that the valuation date would be the date the tax is introduced.

That will be a relief for long-term owners of both rental property and shares. Given that the tax will be on the difference between the starting price and the sale price, the higher the starting point the better.

How will the value be set? As Labour spokesperson for finance David Parker points out, for publicly traded shares that’s easy, as they are priced daily. But what about property and shares in private companies?

People will be able to use the latest government valuation if they wish, says Parker. But that won’t satisfy those who think their asset’s value has risen since then.

“If there’s been a recent arms-length purchase, I expect that would be the best evidence you would have” of value, says Parker.

If not, you can get a private valuation. “But I doubt if the government would pay for that,” he adds.

Sounds as if it will be boom time for valuers — unless, of course, properties or private shares are in a downturn, in which case everyone will be quite happy to stick with government valuation.

It’s funny how we want our government valuation to be low when they’re setting rates, but high when we’re selling the property — and, if a capital gains tax is introduced, high when that tax starts.

QI was a little miffed at your attitude towards amateur investors last week. Even professional investors can get it wrong sometimes.

In reply to the HSBC investor, you said “for every success story like yours, there’s someone who also thought he or she was buying wisely but whose two shares are now worth little or nothing. But they’re not going to write and tell us about it.”

Well I will. For three and a half years now, since I retired, I have been managing my own portfolio, which is worth in excess of $700,000. It is spread over 5 different bonds and 21 different shares. Most are doing well thank you, but I have made two big mistakes.

I bought 200,000 Allied Farmers Ltd for $4,455 which, after consolidation, is now worth only $36. My second mistake was Rakon, where I bought 10,000 for $5,400 and they are now worth only $2,500. Neither of these pay a dividend!

Apart from those two, I am doing okay and probably saving myself in excess of $10,000 in fees per year that it would cost if I was with a professional investor. My next investment will be $10,000 of Z Energy shortly.

As you well know, shares do fluctuate. At the moment I am down slightly with ASB Capitol, Mighty River and Skellerup, but my F&P Healthcare is showing me a healthy $20,000 increase, which more than compensates.

AYou sound like the classic retiree who enjoys investing in shares and does it well, with good broad diversification.

Why am I not also praising the performance of your portfolio? Well, to put it bluntly, you would have been extraordinarily unlucky not to have done well in the last three and a half years. In that time, the New Zealand share market has risen more than 40 per cent.

The worry is that in these situations investors can get over-confident. As I said last week, it’s almost impossible for amateurs — oops, sorry, “non-professionals” — to successfully pick which shares are the best buys. But when a market is growing strongly, they often think they can. And some — not you — are dangerously undiversified, thinking, “Why own 20 shares when I can pick three of the best.”

It’s important to always compare the performance of your portfolio with the market as a whole. And if you beat the market, remember that in any period half the people will do better than average. But will they keep doing better than average? Probably not.

Remember, too, that markets don’t always rise that healthily. You’ve had a great run, but there will also be downturns.

As for your two mistakes, I think you’re being a bit cheeky. You know perfectly well — she says in her best school marm voice — that I was referring to people who own only two shares, not 21!

And by the way, in response to your opening paragraph, I did say, “Even professionals often pick shares poorly.” In the paper version of the column, as opposed to online, that sentence was even blown up as a big quote!

QSome can work to 75, others struggle at 6O. Today, people can remain employed past 65 to the extent they choose and are able. Yet if they do, NZ Super is taxed at a high rate. I think this is fair. It limits the super claims of those who do not need it.

Likewise, if we raised the age of retirement, some people who lack the health to work or work in physically demanding jobs might need access to sickness benefits in lieu of super.

Thus, both the current system and any higher retirement age that might be introduced incorporate some flexibility.

As we have no statistics on the number of people who fall into either category, we can only estimate the savings to be effected by raising the retirement age, we cannot reliably calculate them.

I expect New Zealand will raise the retirement age. It’s only a small fiscal gain, but I’ll take it. Just don’t overrate it; it is small change in the context of the total aged budget.

AYou’re quite right. Gradually raising the NZ Super age to 67 “reduces future expected costs to some extent, but not by nearly enough to get us all the way to a sustainable long-term fiscal path,” says Treasury in its recent report “Affording Our Future”.

Still, if we raised the age to 70 — which might become feasible given that people keep living longer — that would make a bigger difference.

The report also acknowledges your point about different people’s circumstances. “Working past 65 would be difficult for some people, especially those in physically demanding jobs who are unable to find other work or who have insufficient savings to tide them over the extra years before they are eligible for NZ Super.

“These people are more likely to be on lower incomes, and Māori and Pasifika are over-represented. These people would be eligible for income-tested working-age welfare benefits, but the rate of those benefits is currently lower than NZ Super, and the rates are not expected to converge.”

However, the report adds, “these issues already exist under our current NZ Super system. People die before and after any age of eligibility, and lower-income people are more likely to die earlier than those on higher incomes.

“Raising the age of eligibility would reflect that lives are getting longer across all groups in New Zealand, so that the distribution of outcomes would be broadly maintained rather than made worse.”

You can read more in the report at tinyurl.com/affordingfuture.

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.