This article was published on 18 May 2019. Some information may be out of date.

QI have listened to many of your on air interviews and read several of your articles over the years. While I agree with your views on most things, I was disappointed and surprised to read that you believed in spending your children’s inheritance.

I don’t agree that children will squander an inheritance. On the contrary my experience, over several family generations, is that heirs take the responsibility to look after and grow an inheritance very seriously, enjoying the benefits of some additional money while aiming to grow it for another generation.

AThe reasons I encourage retired people to “SKI”, or spend the kids’ inheritance, have nothing to do with whether the children will squander the money.

I agree that many families handle inheritances well — although there are also cases of the opposite.

My concern is that many people deprive themselves during their retirement so they can leave money to children who don’t need it as much as their parents did.

In any case, most retired people these days own their own homes, and commonly leave these to their children. Houses are worth more, relative to incomes, than they used to be. And given that families are smaller than a generation or two ago — so the home often goes to just one, two or three children — each child gets a pretty generous chunk of money. Usually they don’t need to inherit their parents’ investments as well.

True, occasionally the parents have used a reverse mortgage, which eats into the value of the house to be inherited. But usually there’s still a fair bit left over for the estate.

Another point was made at a recent conference at the Retirement Policy and Research Centre at the University of Auckland. Life expectancies are growing fast, and these days it’s common for people to live well into their eighties and nineties. That means that by the time the children inherit, they are often in their fifties, sixties or even seventies, and don’t need more money at that stage.

The trend is for parents to help their children much earlier on — perhaps to cover university expenses or assist with a first home deposit. That probably works better for both generations. The young ones get the money when they most need it, and the older ones have the pleasure of seeing their money at work.

In many families it’s a good idea for parents and adult children to discuss all this openly. “You get the money now, rather than later.” And, by the way, if the children are not happy to see their parents spending on a few luxuries in retirement, that might signal that the kids don’t deserve to inherit! It’s not a right.

P.S. There’s another issue here, too. Inheritances must contribute to the widening gap between the rich and the poor in New Zealand.

QDo any KiwiSaver funds invest in the NZX50 Index only? The management costs would be very low and the return would beat 99 per cent of current funds.

I just cannot see how investing in the NZX50 index could be anything but very low risk.

A really interesting analysis would be to tabulate:

  • The years that the NZX50 has had a negative return (I suspect 3 or 4 years out of the last 40).
  • The return of the NZX50 over the last say 20 years.

AThere are a couple of worrying statements in your letter.

You’re right that the management costs of any index or passive fund — which simply invests in all the shares in a market index such as the S&P/NZX50 — are low. The managers don’t have to pick investments, and they don’t trade often. Reflecting that, their fees are low.

But when you say index fund returns beat almost all other funds, that’s only over the long term.

If you look at a month or a year, index fund returns are always mediocre. They are, after all, investing in all the big shares in the market — for the S&P/NZX50 it’s basically the biggest 50 companies. So they perform pretty much like the market as a whole.

Managers of the other type of share funds, actively managed ones, choose the shares they think will beat the index. And in any given month or year, about half the active funds beat the index and half don’t.

Over longer periods, though, you don’t get the same ones always outperforming. Most have some good years and some bad. By the time you look at a decade, usually only a few active funds will do better than index funds, especially after fees.

So why don’t we all invest in those ones? International research shows the ones that did well in one decade tend to do way worse than average in the next decade.

Maybe their brilliant stock pickers and strategists were hired away by other fund managers, or they retired rich. Or maybe they did well because they tend to take more risks, which sometimes works but sometimes doesn’t. Or maybe they were just lucky the first time around. Financial history is full of tales of superstar fund managers who later failed miserably.

Because very few active funds keep performing well over really long periods — and KiwiSaver is a long-term investment — many financial experts say it’s best to stick with slow and steady index funds. With their lower fees, in the long run they are your best bet for the highest after-fee returns.

Let’s not get carried away, though. Your second comment that worried me is that investing in an NZX50 index fund would be very low risk.

The NZX has crunched the numbers you asked for, to the extent it can. There are two top 50 indexes, the capital index, which looks only at changes in share prices, and the gross index, which also includes reinvested dividends. We’ll use the gross index, as any index fund would reinvest the dividends it receives.

The only trouble is the gross index goes back only to June 1991. Also, until 2003, it was a top 40 rather than top 50 index, but the NZX has adjusted for that. So here’s what the numbers tell us:

  • In the 28 years of data we have, the top 50 index has had negative returns six times — in 1994, 1998, 2000, 2007, 2008 and 2011. All but one were mild downturns of 8 per cent or less, but in the 2008 global financial crisis the index fell nearly 33 per cent.

That’s a fair bit worse than the three or four years out of 40 that you expected negative returns. Any investment that can occasionally lose one third of its value — or possibly more — is hardly low risk. Mind you, the same would apply to active KiwiSaver growth and aggressive funds as well. They all have higher average returns than lower-risk funds, but with some big ups and downs.

On the up side, in seven of the 28 years the index gained more than 20 per cent. The biggest gain — of nearly 48 per cent — was in 1993.

It’s also interesting to note that four of the six loss years were followed by years with healthy gains of 13 to 24 per cent. Markets often bounce back — sadly right after the people who panic have bailed out. But in the global financial crisis there were two consecutive down years before the 16 per cent recovery year. Sometimes you have to wait a while!

  • Over the last 20 years the gross index’s annual average return is 8.8 per cent. Over the whole period, a $100 investment in the index would have grown to $540.

By the way, the calculations are till the end of last year. This year has so far been pretty extraordinary, with the index gaining nearly 15 per cent in less than five months.

Conclusions from all this: the S&P/NZX50 has performed pretty well since 1991, despite one major downturn and some other dips. A typical stock market.

Okay, now to your first question.

I’m pretty sure the only KiwiSaver fund that invests only in the shares in the S&P/NZX50 index is the SuperLife NZ Top 50 Fund. Most providers want their KiwiSaver funds to hold overseas assets as well as New Zealand ones.

There are, however, other KiwiSaver funds that invest in other share indexes, often international ones. The Commission for Financial Capability, which regularly surveys providers, says the following report these funds are passive:

  • AMP: AMP Passive International Shares Fund, ASB Moderate Fund, ASB Balanced Fund, ASB Growth Fund
  • ASB: Conservative Fund, Moderate Fund, Balanced Fund, Growth Fund1
  • Booster: Asset Class Conservative Fund, Asset Class Growth fund, Asset Class Balanced
  • Simplicity: Conservative, Balanced and Growth Funds.
  • SuperLife: 33 of its 40 investment options are passively managed, as well as its Age Steps funds

Outside of KiwiSaver, Simplicity has its NZ Share Fund, which invests in all the top 50 shares except Sky City, because of its ESG — environmental, social and governance — investing policy. “It’s very cheap — $30 a year plus 0.10 per cent! No entry and exit fees. Minimum $5,000,” says a spokesperson. That is, indeed a low fee.

QMy KiwiSaver growth fund, an active fund, has consistently performed really well on an after-fee basis, yet does not have the lowest fee like you always suggest is all that matters.

The lowest fees are typically the big default bank funds, whose returns are all lower even after fees. I feel you do your readers a disservice by not clarifying that after-fee returns are more important and relevant to their future savings than merely fees alone.

AYour fund might continue to do unusually well, but it might not. See the previous Q&A.

On the importance of fees, I always say the first step anyone should take, when choosing a KiwiSaver or any other fund, is to decide what risk level is right for them — given their investment period and how well they cope with volatility. See “Find the right type of fund for you” on the KiwiSaver Fund Finder on Then look at who charges the low fees within that type.

You’ll find it’s not the bank default funds. The low-fee providers are Juno, Simplicity and SuperLife. Juno is an active manager with unusually low fees. Simplicity has passive funds only, and SuperLife is largely passive.

Still, you’re absolutely right that it’s not fees that matter, but after-fee returns. But as I explained above, over the long term, the low-fee funds tend to have the best after-fee returns.

QI have this idea stuck in my head that saving is more rewarding than earning. By saving I mean limiting consumption spending.

I reason that if you save a dollar, you save a full dollar. If you earn a dollar, it is reduced by taxation. With a nod to Mission Impossible, “Your task, should you choose to accept it” is to devise some sort of formula to prove or disprove this theory. It would take me hours, whereas you probably know it already. No pressure, but plenty of flattery.

AWe don’t need a formula. You’ve said it brilliantly yourself. Benjamin Franklin said, “A penny saved is a penny earned,” but he forgot about tax.

People sometimes put too much emphasis on income and too little on cutting spending.

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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.