NZ Herald 18 September 2021

ALucky grandson! This is a great idea, which he might not appreciate at 8, but probably will at 18, and from then on.

In any situation, it works well to contribute the same amount on a regular basis to say, a share fund or higher-risk KiwiSaver fund, regardless of what the markets are doing.

It means that your yearly $1,000 — or whatever the amount is — buys more units in the fund when the markets are down. So you end up buying more cheap units and fewer expensive units. That’s got to be good!

And over the long run, this sort of investment grows impressively. At $1,000 a year, if the return averages 5 per cent after fees and tax — a typical share fund return — it will total nearly $35,000 after 20 years. With luck, at 6 per cent it will total $39,000.

Next question: what to invest in for a little grandchild? A low-fee KiwiSaver fund that invests largely in shares — called an aggressive fund — should work well. There will be lots of ups and downs, but stick with the fund through thick and thin.

Why KiwiSaver? The fees tend to be lower than in other similar funds, and the regulators watch KiwiSaver fairly closely.

The downside is that the money can be spent only on a first home or in retirement, except in cases of hardship. If your grandson doesn’t ever buy a home — and this could well become more common — it will be a long time before he uses the money.

Still, let’s say you stop contributing after 20 years and the $35,000 sits in a KiwiSaver fund earning 5 per cent after fees and tax for another 45 years. By then it will total more than $330,000 — plus the growth on other contributions your grandson would hopefully make. Sure, inflation would cut a big hole in the value of that money, but it’s not to be sneezed at.

It’s very powerful to save even quite small amounts over long periods.

What if you would like your grandson to have access to the money for, perhaps, university or travel or setting up a business? I suggest a similar fund, but outside KiwiSaver. Most KiwiSaver providers also run these. However, the fees may be a bit higher, which can make a big difference over a long period.

P.S. If you can’t afford $1,000 a year, make it $100 a year. Then divide all the numbers above by 10. So the boy would have $3,500 after 20 years, and $33,000 at retirement. That’s still pretty nice.

AI would rather see you keep saving for a modest home, or for your retirement. There are two reasons for this:

• I’m not convinced that your son would be better off having gone to a private school. I know I’m inviting protests by saying that. And occasionally you hear that “the old school tie” opens some doors. But not many in this country.

  So many New Zealanders who are major contributors in every field went to state schools. And many proudly proclaim, “I went to Outinthesticks District High.”

  In any case, some interesting research suggests that the encouragement and help a child receives at home is more important to their educational success than which school they went to. And it sounds as if you would give your boy plenty of support.

• Giving priority to your needs is not selfish. On a plane you are told that in an emergency you should put on your own oxygen mask before helping a child. Similarly, getting yourself financially set up will make it easier to support your boy, financially and in other ways, in the years to come.

You may yet be able to buy a home. There are many modest houses and townhouses being built now, and I wouldn’t be surprised if prices fall, or at least stabilize while incomes grow, in the next few years.

There’s all sorts of help available for people on lower incomes wanting to buy a home. This includes $5,000 grants, or $10,000 on a new home; a loan with just a 5 per cent deposit; and KiwiSaver withdrawal. See the Kāinga Ora website.

And if you don’t ever get into your own place, it’s really important that you save a large sum to cover your rent in retirement. I’m sure your son would rather not be worrying about your financial situation in your old age.

Footnote: Before the letters come flooding in, in some circumstances a particular child may be better off in a private school, which may offer advantages for that child. But I don’t think that applies to most kids.

ALast week’s correspondent said, “It is almost impossible for me to get a loan now for a four-bedroom house, so for the next 12 months or so I am envisioning having to rent, which I am happy to do.”

So I assume you are suggesting she buys what she can afford now, and the family stays there for some years.

If, instead, you mean buying a cheaper place and then moving in a year or so, I doubt if that would work well. The process of buying and selling two properties isn’t cheap, to say nothing of the hassle.

But if your idea is to buy cheaply and stay put, that has merit. As you say, life in lower-priced areas can be as good or better than elsewhere.

A couple of points about some assumptions about house prices that you — and many others — are making:

• You say, “If she waits for long the market will beat her every time.” Not quite. While house prices usually rise, they have fallen three times since 2000 — in 2000, 2008 and 2010. It will happen again, we just don’t know when.
• You say, “The money retains current value relative to the market”. But prices can move very differently in different areas.

In June 2019 I wrote in this column: “Recently Auckland house prices dropped 4.4 per cent over a year, while in the rest of the country they rose 6.7 per cent. Even within Auckland, Mt Albert prices fell more than 30 per cent, while they rose about the same amount in Takapuna.”

That prompted an angry response from a Mt Albert reader, who said many recent apartment sales had dragged down the suburb’s average. Fair enough. But the fact remains that price stories can vary widely across a city and across the country.

AGood point. It’s all spelt out in the document I referred to last week, which is titled “Reform of the Residential Tenancies Act, Implementation — Frequently Asked Questions.” You can find it here.

The relevant section starts at page 13. It includes, “The tenant must return the property to a condition that is similar to the state it was in before the change was made… unless the landlord agrees that they would like the change to remain.

“Parties should discuss remediation when a change is requested to avoid issues arising at the conclusion of the tenancy.

“What happens if the tenant doesn’t meet the conditions set by the landlord for changes to the property? If a dispute arises, a landlord could seek remedy at the Tenancy Tribunal. As well as the cost of remediation, the tenant may be liable for an additional penalty of up to $1,500 if they fail to reverse a minor change that the landlord didn’t agree to keep.”

AFor the benefit of other readers, a private equity fund invests in companies that are not listed on a stock exchange. They are often fairly new companies, that might do brilliantly or might crash and burn.

So yes, there are higher potential returns and higher risks. And I have a sneaky feeling that many investors focus a bit too much on one side of that equation!

I agree with your 5 per cent limit — unless the investor could easily cope with losing the lot.

And I like your suggestion to people who want a bit of private equity action: check out the investments of some growth funds.