NZ Herald 19 April 2008

AWhat a great story. But it’s absolutely not about how the stock market works. I suppose you could say it’s about how a single stock occasionally fails, but it sounds more like what sometimes happens with non-stock market investments.

The story is one of out and out swindle. And the managers of companies listed on the stock market could, of course, engage in that. But analysts and other experts keep an eye on the performance of listed companies, looking to see whether to buy or sell the shares. I think they might spot such monkey business before too long.

By contrast, many non-listed investments come under much less scrutiny. And to the extent they are researched at all, it is often by non-experts. A lot more wool can be pulled over eyes.

The other point about the stock market is that it makes it easy to invest in many shares, so that if one company does get up to monkey business you don’t lose the lot.

Everyone with any smarts spreads their share investing over many companies. Or, if they haven’t enough money to do that, they invest in a share fund that does the spreading for them.

Not only does diversification greatly reduce risk, but it removes the necessity to closely check out your investments.

The moral of your monkey story is: Don’t trust a fast talker, and know what’s going on. But if you invest in many shares you don’t need to bother with that — partly because the professionals are doing it anyway.

You can sit back, confident that as long as you have at least ten years to play with, most of the shares will do well.

AGood point, and your recollection about the 1970s is right. But rest assured, times have changed. Since then, banks have hedged their currency risk on the money they borrow overseas, says the Reserve Bank.

There are various ways of hedging, but the result is that changes in the value of the New Zealand dollar don’t affect how much they have to pay back.

Asked whether all banks hedge all their risk, a Reserve Bank spokesman replied, “We’re not sure whether they hedge all, but they certainly hedge the vast majority of their offshore borrowings.”

By the way, I would be careful about assuming that 60 US cents is the normal value for our dollar. History shows that currency ranges change over time. I wouldn’t make any move assuming the New Zealand dollar will fall far — any more than I would assume it will rise far.

AI wish I could say, “Go for it”. But it’s not clear that it’s a wise move.

You, like many other New Zealanders, have seen the value of your home soar. But think before you cash in on that gain.

It’s true that having a pleasant place to live into your old age doesn’t necessarily meaning owning a home. If you sold your house and put the proceeds into a fund that you drew on only for rent, it’s quite possible that you could live in as nice a home as your current one for the rest of your life.

But you would almost certainly need to eat into your capital as well as the interest. That may not be true in the current environment, in which house prices have risen much more than rents, but market forces will tend to change that. We can already see rents rising faster, and house prices stagnating.

And eating into your capital means that, if you live a long life, you could run out of funds.

There’s also the worry that a landlord may raise the rent lots or kick you out because he or she wants to sell the property or move into it. Because of this lack of security, most retired people prefer to own their homes.

In any case, we’re talking here of putting your entire house proceeds into the rent fund. But you want to spend some of the money on a better lifestyle.

If you do that, you will probably have to settle for less pleasing surroundings, or live in an area in which housing is cheaper. Would you be happy there? And could you cope with the insecurity of renting?

On the other hand, there are some clear advantages to renting. There’s less responsibility and maintenance, and you can move easily and quickly if you wish. But you need to weigh it all up.

On a more positive note, your business may grow, enabling you to have your cake and eat it — spending more on your lifestyle as well as maintaining your standard of housing, whether rental or owned.

Which leads to another point. If you should need to borrow to expand your business, it will be easier to do that with a house as security. All in all, it may be better to stay put for a few years and see how the business performs.

One more thing: I can’t resist saying that if you haven’t joined KiwiSaver, you’d be silly not to. As a non-employee you should contribute $87 a month or $1,043 a year, which will be matched by the government.

I realise that means you will have even less spending money. But by the time we add the $1,000 kick-start, the government will more than double your money, and you can get it all out five years after you join.

That will give a nice little boost to your lifestyle spending in your later sixties.

AYour thinking is off to the tune of at least $5,215.

You have two good options:

• Join KiwiSaver while you are still employed. Up until retirement, you will have to put in 4 per cent of your pay. But after that you can contribute whatever you want. The advantage of this option is that your employer will put in 1 per cent of your pay while you are working.
• Join after you have retired. At that stage you can contribute zero if you wish — as long as your provider will accept that, and many will. If you do that, then you’re right — all that is in it for you is the $1,000 kick-start.

But it would be much better to contribute $1,043 a year, as I’m recommending to the reader above. Over five years of government matching, you’ll get $5,215 in addition to the kick-start.