NZ Herald 17 February 2018

AA “recipe for wealth” might be overstating it, but you’re far from crazy. And you’ve had some opportunities to cook up a feast in the last week or two.

At first glance it seems strange that most people — except you and a few others — don’t react the same way to cheap shares as we do to cheap apples.

But when we buy apples — or cars or movie tickets or most other purchases — we’re not hoping to sell them later at a profit. It’s simply “the cheaper the better” — provided of course that we’ve checked out the quality.

With shares, the obvious fear is that prices will keep falling. And in a market downturn, they might fall for a while, occasionally a year or more. Some share prices might drop to zero.

But the market as a whole always recovers, and grows over the long term. Companies keep selling goods and services. Most of them make a profit most of the time, and their share prices reflect that.

So if you buy a range of shares when prices are lower than they’ve been lately, sooner or later you should do better than most investors, who tend to buy in rising markets.

What’s more, you wouldn’t be crazy to put some of your retirement savings into shares when the market drops, provided that:

• You spread your purchases across different industries, and preferably different countries. The easy way to do this is through a KiwiSaver or other share fund.
• You don’t plan to spend the money for at least ten years or so. You don’t want to find that, when you go to spend, the market is in a dip and you haven’t got time to let it rise again.

AFirstly, for the benefit of others, equities basically mean shares. Some pedants say a few equities are not strictly speaking shares, but that’s splitting hairs.

You’re quite right that timing makes a big difference if you’re investing or withdrawing a large amount of money. But it’s just sheer luck.

The New Zealand, US and world share markets have all had a great run in the last nine years, since the global financial crisis ended. Not only have annual returns been almost always positive — and often high — but in recent times New Zealand monthly returns have always been positive. The market has risen eerily smoothly.

Anyone moving their KiwiSaver money into a higher-risk fund over that period will have been glad — until perhaps the last couple of weeks rattled them. But as you note, only those who made the switch very recently will have seen their balance fall below what they put into the fund.

One of the recent switcher is your son. But still, his move — with just a third of his money after all — is probably a good one. In fact, if he’s not planning to spend the money on a first home in the next eight or ten years, he might want to move the rest of his money as well. Ditto his brother. Over the long term, the money is likely to grow considerably faster than in a conservative fund.

The two of them could follow the lead of today’s first correspondent, and make their move now, to take advantage of somewhat lower prices — assuming they are still lower by the time this column is in the paper.

But a lower risk strategy is to move money gradually — especially if it’s a large amount. Your sons might, for example, move a third of their money now, a third in six months, and the rest a year from now.

On your question about re-evaluating options, the recent volatility will give everyone in KiwiSaver a chance to see how they react to down markets.

Keep in mind that unless you are in a growth or aggressive fund — with most or all of your money in shares and perhaps property — the effects of a share price fall are watered down.

If you’re in a balanced fund, with about half shares, and the market drops 10 per cent your fund will drop about 5 per cent. In a conservative fund, it might be 2 or 3 per cent. And defensive funds should be unaffected by a share market drop.

Still, if recent events have made you nervous, perhaps you should switch to a lower-risk fund. You’ll probably end up with less but have a smoother ride.

If you do that, though, please promise yourself you won’t switch back to a higher-risk fund when the market is growing. Frequent switchers tend to quit shares after they fall, and move back into shares after they rise. They almost always end up worse off than those who get into the right fund and stay put.

A KiwiSaver provider recently told me about a member of his scheme who complained because his return was minus 5 per cent for the year ending March 31 2017. It turned out that each month he had looked at fund returns, and moved to the fund that had performed best in the previous month. If he had stayed in his original fund, his return would have been 9.2 per cent.

AI suspect you’re the sort of person I’m talking about above — someone who worries when the share market wobbles.

As I said, in a balanced KiwiSaver fund, the wobbles will be watered down. And if you’re not expecting to spend the money for, say, five years, it will probably grow faster than in term deposits.

But if you’re really concerned, go with the term deposits. Life’s too short to worry about your savings.

I suggest, though, that you leave a bit in KiwiSaver, just to keep your options open. Once you’re past 65, if you quit you can’t rejoin.

AWithdrawals from any managed fund — whether it’s in KiwiSaver or not — are not taxed. It’s all your money, just like money in a savings account. And none of this affects NZ Super in any way.

Stick with your plan. As long as you’re putting enough in KiwiSaver to receive the maximum tax credit — and employer contributions if applicable — it’s good to put extra savings in an accessible account.

AIn the year you turn 65 — assuming you’ve been in KiwiSaver for at least five years — your maximum tax credit is proportionate to how much of the KiwiSaver year you are under 65.

The year runs from July 1 to June 30. So if you turn 65 at the end of January, your maximum tax credit is seven twelfths of $521. To get that you need to deposit seven twelfths of $1043, which is $609. You can make the deposit any time in the year, including after your birthday.

But the maths gets a bit trickier if your birthday is in the middle of a month. And it doesn’t matter anyway. Put the whole $1043 in. Once you’re 65 you can take it right back out again!

ATena koe e hoa. I’ve got a few questions for your friend. Does she or he ever ride in a car or a plane? Or swim at surf beaches? Or climb a ladder to fix something?

Using internet banking is not risk-free, but nor are many other good or convenient things in life. Just as you wear your seatbelt, swim between the flags, and make sure a ladder is placed on level ground, so you should make sure you have internet protection. It’s not something I’m expert at, but you’ll have savvy friends who can help you.

And don’t ever give your bank PIN or password to anyone — including someone who rings or emails you saying they’re from your bank. Banks don’t ask for that information.

Provided you do that, you will almost certainly be fine. How many people do you know who have lost money through internet banking? It’s pretty rare.