NZ Herald 18 February 2023

AA question for you: Have you compared your returns with what you could have made in low-fee funds? Many people are proud of their share performance when, in fact, the market has performed even better.

You might, of course, be an exception. You were lucky with the lithium shares, which you acknowledge. But who knows which industries will star in future? It’s not about industries with good prospects. While they are not hard to spot, investing in them probably won’t make you rich. Getting rich is about finding industries whose future performance is not yet reflected in their share price. That’s much harder to predict, especially for amateurs who compete with people working full-time on finding these gems.

Most of the time, in most markets, the majority of shares perform below average while a few perform way above average. Will you pick the right ones next time around?

It’s true that funds charge fees. But the recent correspondents chose low-fee funds, which makes a big difference over the long term.

And funds have a clear advantage — diversification. When one share in the fund performs badly, that is often offset by another performing well. This reduces your risk without reducing your average return — something that never happens in other investment situations. That’s why diversification is sometimes called the only free lunch in investing.

There’s nothing wrong with investing in individual shares, as long as you diversify widely. It was an absorbing hobby for my father, and for you, too, it seems. Many enjoy it, and most do pretty well — even if on average not quite as well as in a low-fee fund.

AYour situation is in some ways like that of the woman in her 30s in my January 28 column, who thought she could no longer afford the mortgage on her newly built home now that rates have risen. And my suggestion to you is the same: don’t give up and sell.

While I have often said you don’t have to own your home to have a comfortable retirement, that works only if you have large savings to cover your accommodation costs through retirement. And that doesn’t sound like you.

A growing number of retired New Zealanders rent their homes.

In 1986, 87 per cent of people in their sixties owned their homes mortgage-free, says Te Ara Ahunga Ora, the Retirement Commission. By 2018, 80 per cent of those in their early sixties were homeowners, but one in five were still paying mortgages, and 20 per cent were renting. By 2048, the proportion renting is expected to double to 40 per cent.

Some of the tenants will be non-homeowners by choice, but many will simply not be able to afford a home. And clearly that’s not a good situation in retirement.

If I were you, I would do whatever it takes to keep your home. If that means continuing to work for a few years, accept it.

How much longer will you have to work? Nobody knows, but we can be certain that property prices — including apartment prices — will rise again at some point. And history would suggest it won’t be all that many years from now.

Keep in mind, too, that the prices of small houses down south will also be lower than they were a year or two ago.

In the meantime, you can be boosting your equity by paying extra off your mortgage to the extent you can do that without penalty. Beyond that, boost your KiwiSaver. Look closely at what spending you could cut. It all adds up.

AIt seems ridiculous that you couldn’t set up laddering easily. I wonder if you gave them more information than they needed.

What we’re talking about is dividing your savings into, say, three lots. Then you set up term deposits so you have one third of your money maturing this year, one third next year, and one third the year after. When each deposit matures, you renew it for three years.

Laddering has two advantages:

• You get access to some of your money every year, whilst receiving the usually higher interest for tying up your money for longer.
• Your reduce interest rate risk. If you had kept all your money in one lot, you might have renewed the deposit for three years right before interest rates rose — so you’d be stuck for a long time with what has become a low rate. True, you could also have renewed right before interest fell, and you would be really happy. But it’s risky. With laddering you get bad luck one year and good luck the next, And most people are willing to sacrifice the chance of winning big to get rid of the chance of losing big.

To set up laddering, after you have divided your money you need to put one third in a one-year term deposit, another third in a two-year deposit, and the last third in a three-year deposit.

If you had asked just for that, rather than perhaps explaining why you were doing it, surely the bank would have obliged. If not, their service is appalling.

But even if you did tell them you were setting up laddering, they should have understood that. You’re entitled to be indignant!

By the way, your timing on withdrawing from the managed fund probably wasn’t too terrible, as most funds have recovered a fair bit of what they lost last year. But you’re perhaps a bit lucky with that.

Anyone, at any age, who feels they couldn’t cope with seeing their balance fall much in a managed fund shouldn’t be in there in the first place. It’s a real pity if they don’t realise their nervousness until the fund has lost ground, so they lose money when they bail out.

Low-risk cash funds are a good investment for those who don’t want wobbles — as, indeed, are bank term deposits now that their rates have risen.