NZ Herald 17 June 2023

AIf anything, it’s better to be rash when the markets are down.

Last year was really unusual in that the value of shares and bonds both fell. And with many managed funds — not just the higher-risk ones — holding both, the value of their units took a hit. That means the units were cheap.

When strawberries are cheap we buy more. What about managed fund units? Investing more during a downturn — sometimes called contrarian investing — is certainly better than stopping deposits or, worse still, withdrawing money, which is unfortunately a common reaction to falling prices.

Still, investing more is not ideal. The market might fall further. You would be timing the market, and that doesn’t usually work out well in the long run.

The best strategy is to steadily invest into a fund, the same amount each week or month regardless of market movements. You buy more units when they are cheap. This happens automatically for employees in KiwiSaver — and others who have set up regular payments into their fund — and it’s great.

Your situation is different though, as you have a lump sum to invest.

It wouldn’t be silly to put the lot into a fund now. An economist friend of mine argues that’s best. While nobody ever knows where the markets will go from here, share prices rise more often than they fall. The chances are you will make more in a managed fund than in a bank account.

But there are a couple of counter arguments:

• These days, with term deposit rates unusually high by recent standards, keeping some in the bank for a while can work pretty well.
• Human nature comes into this. Lots of research shows that most people hate making an investment loss more than they love making a gain. They are willing to forego the chance of investing a whole lump sum at what turns out to be a great time to avoid the chance of investing it at what turns out to be a terrible time.

Because of that, I think it’s better to drip feed your investing to some extent. You might, for example, invest one third now, another third in a month and the last third in two months. Don’t string it out for too long.

Not only does this prevent terrible timing with the whole lot, but it also boosts confidence. Too many people sit on the sidelines, as you have been doing, unsure when to make their big move. If you make the moves smaller, it’s easier to get on with it.

Once the money is in there, please don’t watch it closely. Over the years there will be more ups and downs. If you’ve chosen a good, low-fee fund, it will probably perform well.

A few further points:

• All of this assumes you don’t plan to spend the money for at least three years if you’re in a balanced fund (roughly half shares and bonds) or ten years if it’s a growth fund holding largely shares. If you will spend it within the next three years or so, put it in a cash fund or term deposits.
• Back at the start, I said managed fund units “were” cheap at the end of last year. Since then, pretty much every managed fund had a positive return in the first quarter of this year, although it’s been a bit patchy since then. Anyway, most funds haven’t fully recovered to their high points a while back, so I would get in now.
• My comment about perhaps buying more when prices are cheap doesn’t apply to individual shares or bonds. They might be cheap on their way down to zero because the company has hit trouble. But a typical fund holds a wide variety of investments, and the majority will recover from a downturn.

AOh dear. Usually when I suggest gradually investing a lump sum I make the same points as above, but perhaps you read over it too quickly.

The fact is that, as my economist friend says, share prices rise more than they fall. So more often than not people who take my advice on this could come back to me as you have.

But I would rather you missed out on some gains than copped a short-term loss on all your money, because the markets fell right after you invested, which can be really discouraging.

In any case, you received the gains on at least the portion of your money that you invested right away. And I recommend spreading the deposits out over just a few months, so it won’t make much difference in the long run.

AWith small steps.

You could put your money into your KiwiSaver accounts, but you might prefer to keep access open to it, in case you want to spend some or all of it before you are 65 — perhaps on a house upgrade, travel or who knows what?

In that case, I would suggest you use a non-KiwiSaver managed fund, perhaps offered by your KiwiSaver provider.

Start by reading today’s first Q&A. If you want to move more slowly, divide your money into perhaps five lots of $40,000 and invest one lot each month for five months.

You could also start out in a, say, balanced fund, with about half in shares and half in bonds. That won’t give you the highest long-term returns, but it will be less volatile. Then gradually move to a growth fund as you get braver.

Don’t watch your balance closely. It will — not might but will — go down sometimes. Ignore that. Over ten years or more, you will almost certainly end up with more than in term deposits.

Two more comments:

• Please see the first bullet point at the end of today’s first Q&A. It also applies to you.
• Today’s Reader’s Story (see below) might give you confidence.

ACongratulations on the house purchase!

I’m glad the government makes everyone leave $1,000 in their KiwiSaver account when making a first home withdrawal. I think it helps people focus on “What next?”, just as you are doing.

I would switch to a growth fund now. As I’ve said above, it’s impossible to tell when it’s a good time to take on more investment risk until after the fact. But you haven’t got a lot of money at stake at this stage anyway, and over the long haul you are almost certain to do better in a higher-risk fund.

If your balance drops in the short term, just as I said to the couple above, ignore it.

AIf you get a reverse mortgage, it will reduce the proceeds you or your estate receive when you sell the house — which presumably means your son will inherit less.

On the other hand, it’s likely he and his family could make better use of the money now than then. So does it make sense to take out one of these loans?

Recently I listed two reverse mortgage “rules”:

• Use up your savings before getting a loan.
• Borrow only as much as you need, with the ability to add more later.

Keeping the loan total as low as possible for as long as possible reduces the effects of compounding interest.

If you have savings that you are using for living costs, I suggest you give some of that money to your son. Then, when your savings run out apply for a reverse mortgage for your own spending. If you’re closer to 80 years old than 70 at that point, all the better. It’s the same story — there is less time for the interest to compound.

You might want to read the other Q&As on this topic, over the last few weeks, to fully understand all the ramifications.

A Reader’s Story

Since mid April, to mark the 25^th anniversary of this column, we have run some readers’ stories of how the column has helped them over the years. Here’s the last one.

ABefore the 2020 Covid share market plunge, I worried that many people, like you, who invested in KiwiSaver or other managed funds, might have got the false idea that markets grow forever. Since the global financial crisis, around 2007 to 2009, there had been downward blips but nothing to really worry about.

And sure enough, when the big 2020 drop happened, many panicked. It’s great to hear from people like you that my harping on about not bailing out worked!

It’s also good to know you’ve learnt to love market dips — or at least to cope well with them. Good on you.