NZ Herald 11 March 2023

AOh 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:

• Lower-risk defensive and conservative KiwiSaver funds — except the ultra-low-risk cash funds — tend to hold lots of bonds. Usually bond values don’t fluctuate all that much.
• Middle-risk balanced funds tend to hold roughly half bonds and half shares.
• Higher-risk growth and aggressive funds usually hold lots of shares, but most also have some bonds except the riskiest funds. Share values fluctuate more than bonds — although on average you get more growth over the long term.

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 last 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 it 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.

AYou’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 benefitting 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.

Over all, 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:

• I said above that longer term deposit rates are usually higher. At the moment, there’s a tendency for two, three, four and five-year rates to be about the same — a sign that the markets expect interest rates to fall. But that’s unlikely to last.
• Condescension is not helpful.

AThat 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.

“We encourage all customers to familiarise themselves with our tips to bank safely, available on our website: www.anz.co.nz/banking-with-anz/banking-safely/”

I expect other banks have similar services. If you can’t find info on your bank’s website, ask them.

AYou’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.

Over all, 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.