NZ Herald 16 September 2023

ASorry to hear about what you’ve gone through. It’s hard enough coping with such a loss without having money issues as well — although it sounds as though you managed well.

I fully agree with your suggestion that everyone should have easy access to, say, $15,000 to cover funeral costs — or any other unexpected costs.

But, while it seems the insurance company took unreasonably long to pay you, I don’t think that’s a good reason not to take out life insurance. Usually the money is needed for not just funeral costs but living costs, sometimes for many years.

The test of whether a person — and their partner if they have one — should have life insurance is to picture how well their dependants would cope if suddenly they weren’t there.

If one partner is working for money and the other looking after family, don’t neglect to insure that second person as well. Without them, the earning partner might have to pay someone for child minding, house cleaning and other work.

Note, though, that couples often continue life insurance for longer than necessary. If the others in your family could cope without you financially — perhaps because you have considerable savings — you don’t need life insurance any more.

And note that, if you die, your KiwiSaver money is available soon after. So if you have considerable savings, they can substitute for at least some life insurance.

AAt first glance it seems you have plenty of money. But your relative’s care costs nearly $100,000 a year — and that cost will inevitably rise with inflation. So you’re right, it would be good to earn a reasonable return on the money.

If it were me, I would put, say, $10,000 in an easily accessible bank savings account for unforeseen spending. That plus the pension should give her plenty to come and go on. Then invest $360,000 in bank term deposits, with $30,000 maturing each quarter over the next three years, to more than cover her care costs. A bank could help you set this up.

The rest could be invested in a conservative or balanced low-fee KiwiSaver fund, which will probably charge lower fees than a non-KiwiSaver fund and operates in the same way after you are 65.

The balance will fall sometimes, especially in a balanced fund, but it should grow bigger over the long term than in term deposits — where interest rates are likely to fall over the next few years. Don’t bail out when the balance falls!

Each year, move another $120,000 — or more if the care costs rise — into term deposits.

Upside Downside Excerpt

The Reserve Bank of New Zealand is updating an online booklet I wrote for them several years ago, called “Upside, Downside — a Guide to Risk for Savers and Investors.” Over five weeks, I’m including excerpts in this column.

The updated booklet is being launched on the Reserve Bank website, rbnz.govt.nz, through September.

Risky behaviour: Expecting past performance to continue

In most facets of life, you expect whoever or whatever did well in the past — the star athlete, the fastest car, the bestselling author — to continue to perform well.

But with investments, it’s often not the case. And that’s true whether you’re comparing shares vs property vs bonds vs emus, or whether you’re comparing one share with another, or one property with another, and so on.

Note that we’re not talking here about long-term trends. While our graph shows that shares and property are more volatile than bonds, over the long haul they have performed better. We expect that to continue.

Investors who switch from shares to property or vice versa, or from one share or share fund to another, because the new one performed well recently, are frequently disappointed with the future performance.

Let’s say that, in 2006, you had $10,000 and a choice of the following assets to invest in: cash, New Zealand bonds, overseas bonds, commercial property, New Zealand shares and overseas shares. If you had great foresight and, at the start of each year, you moved your money into the asset that was going to perform best that year, you would have $59,600 by the end of 2016.

But, of course, you don’t have such foresight. So, instead, you move your money into the asset that performed best in the previous year. By the end of 2016, you would have just $28,500.

High performers often don’t stay high performers. If anything, there’s sometimes a tendency for last year’s investment winner to do worse than average this year, and last year’s loser to do well this year.

When you think about it, this is not surprising. The top performer last year might have been at the peak of a cycle and so it falls this year. And the worst performer may have been in a trough, with values unusually low and about to start rising.

Perhaps, then, it would pay to do the opposite, and transfer to last year’s loser. There are two problems with this, though:

• The expense and hassle of trading. In New Zealand, this includes the possibility of having to pay tax on your capital gains if you trade frequently.
• Psychologically, many people would find it difficult to move from recently successful investments to recently unsuccessful ones.

As long as you have selected your long-term investments wisely, you’re better off sticking with them than trying to chase winners.

Property

Property prices go through fast-growth and slow-or- no-growth periods, and occasional declines. And despite some people’s claims that property cycles are easy to predict, there’s wide variability in how long and strong they are. If house prices rose fast last year, they may continue to do that this year, or they may not — as we’ve seen recently.

Shares and share funds

Research shows that people who chase high returns often lose out. In one study, for example, return chasers in share funds earned 5.96 percent a year between 2000 and 2020 compared with 8.29 percent in a sharemarket index.

Why the big difference? The researcher found some people consistently moved their money into funds that had performed well in the previous period, quitting funds that were often just about to do well. They ignored the fact that particularly big gains are often followed by losses.

With some shares or share funds, the ups and downs can largely be put down to riskiness. The price of shares in an electric ferry company, for example, will zoom up if the company looks likely to strike a deal with a local government transport authority. Then, if that deal is unfulfilled, the price will plunge.

Share fund managers that invest in lots of high-risk shares, or perhaps shares in a particular industry, will sometimes have a run of luck, boosting their unit prices. Other times, though, the value of many of their holdings will drop fast, and so will the fund.

This explains why, when comparing different share funds, you often find the ones that do best some years are also among the ones that do worst in other years. They are the risky funds.

Even the shares in much lower-risk companies don’t always perform the way you might expect.

Let’s say a company in a stable industry announces that it has a huge new contract, and it expects its future sales to double. Its share price is likely to leap. Then, in the following years, sales are, indeed, twice as big. Does the share price continue to grow fast?

Probably not. When the contract was first announced, analysts realised the company would be stronger in the future. Wanting to get in while the price was still low, they bought lots of shares immediately, pushing up the price straight away. Once the price reaches its new higher level — which would reflect all the expected future growth — it’s unlikely to continue to grow particularly fast unless it performs even better than expected. And if its performance is okay but not as good as expected, its price is likely to fall.

So even the prices of shares in a low-risk company that is doing pretty well won’t necessarily follow a steady path.

KiwiSaver

Some people tend to move their KiwiSaver money from one provider to another, switching to whichever provider has turned in a good performance recently. This is a hassle, and you probably won’t benefit from doing it.

If your KiwiSaver fund consistently performs worse than most other similar funds, that suggests poor management. But reserve judgement over short periods. Many funds that perform badly for a year or two later perform well.

Note the words “similar funds” in the previous paragraph. Whenever you compare the performance of KiwiSaver funds, make sure you are looking at funds with similar risk. For example, compare several conservative funds, or several high-risk funds. Also, make sure all results are presented after fees and taxes, which can make a big difference. It’s good to use the Smart Investor tool on www.sorted.org.nz for fund comparisons.

If you do want to switch provider, all you have to do is contact the provider you want to move to. They will contact your current provider and arrange to move your money, and also tell Inland Revenue that you have switched.

Take care, also, before switching within your provider’s range of funds. Let’s say the share markets have performed badly recently. You may be tempted to move to a lower-risk fund — perhaps just before shares are about to recover, bringing in great returns.

You should shift your risk level for one of two reasons only:

• You realise you can’t cope with the volatility of a higher-risk fund and you can’t sleep from worrying about it.
• You are getting nearer to the time you will spend the money.

In both cases, make the switch regardless of what is happening in the markets at the time. And don’t move back again later. That’s losers’ behaviour!