QYes, we should all reduce our spending, as you suggested last week, and put the savings to good use.

I realise your target audience is the individual and their economics, but what about all the people who derive their living from those coffees and bought lunches that people give up? If we stop that, some others will lose out.

It’s a juggling act to try and be responsible both to yourself and the wider community. Money that is traveling around the economy is doing work for everyone.

AAnother reader made a similar point, adding, “If a substantial number of people decide to moderate their expenses, it could lead to job losses and potentially a reduction in tax revenue for the government. This, in turn, could impact public services and various government initiatives that benefit all of us.”

But what both of you are overlooking is the people who will benefit if many more workers use their office coffee machine and bring their lunch from home, and save the unspent money.

Firstly, there could be more demand from workers for decent coffee machines at work, creating jobs for those who make and sell the machines and the coffee!

Okay, that’s not many people. But what about the suppliers and sellers of the food that workers would bring from home — everyone from farmers to other food producers to transporters to supermarket workers. That would offset the reduction in food purchases by cafes that provide bought lunches.

There would also be more work at banks and KiwiSaver providers and other companies that run investments, processing the extra savings. And — importantly — much of that money would ultimately be invested in businesses, helping them to grow and employ more people.

What’s more, when the savers finally spend their savings — which might be in one year or 50 years — that will create many jobs because their savings will be much bigger.

It’s true that cafe profits would also either be spent or saved, to be spent later.

But the point is that money travels around whatever you do with it — unless you put it under the mattress. it’s too easy to look only at the first effects of a change.

The conclusion has to be: sorry, but avoiding harm to the economy is not a valid excuse for spending on unnecessary stuff, rather than saving!

QI would be interested in your take on the attached article about Index funds.

I am no expert, but after reading about them in one of your books I thought they would be a way to save on KiwiSaver fund fees. However, our financial adviser suggested caution and sent me this article, so now I am a bit confused.

I’m presently in an actively managed fund made up of 34 per cent conservative and 66 per cent growth.

AOver the years since I started investing in index funds — soon after they were invented in the 1970s — I’ve read several articles like the one you sent.

They all say shares are currently over-valued and are therefore likely to bring in disappointing returns in the near future. And sometimes that does happen. Sometimes.

But even if your writer is right about over-valuation, there’s no guarantee the market will correct itself soon. Maybe values will stay higher than they “should” for several more years, or longer.

You might decide to avoid a fund holding only shares in the meantime, then get sick of missing out on some excellent returns, and get into the market just when it’s about to finally fall.

This is called timing markets. Or trying to time markets. Sometimes it works for a while, but nobody ever gets it right in the long run.

Think about it. If the person who wrote the article really can predict market rises and falls, they could not only time markets but use fancy financial instruments to win bigger in both upturns and downturns. Why aren’t they extraordinarily rich — and way too busy deciding which luxury yacht to take out today to bother writing articles?

I’ve long since learnt to put long-term savings into index funds and just leave it there — regardless of the markets. It works pretty well over the decades.

Your fund choice suggests you are a bit nervous to put all your savings in shares. Having a third in conservative investments will water down the effect of market downturns, although it will also water down gains. But that might work best for you.

Still, there’s no reason your 66 per cent of “riskier” money can’t be in a low-fee KiwiSaver index fund — as long as you don’t plan to spend it for a decade or more, and will stick with it through thick and thin.

Your adviser might say the managers of your active fund will cope better with volatility than an index fund would, but research keeps showing that most managers don’t. And the few who do well this year usually don’t next year — while charging higher fees for the pleasure.

Could it be that your adviser receives commission or similar for putting you in an active fund? Do ask.

QMary, I think you should stop encouraging people into overpriced equity ETFs (dominated by US), based on their age.

The US market has gone up 11 per cent a year since the GFC versus, say, a 9 per cent long-term historical average. The NASDAQ is worse. S&P 500 now trades on a 4.2 per cent current earnings yield and a Shiller PE of 32.

For me that justifies putting my money in other areas, because in the long term it’s the price you pay relative to earnings rather than the asset class which dictates returns. I fear a reversion to the mean in the US will see a generation give up on equities the way the boomers did in NZ after the 1987 bubble, which has many similarities to the US today.

Speculation always ends in ruin. Holding in a serious decline is good advice but much easier said than done.

AYour conclusion is similar to that of the article writer discussed above. And my response is the same: Don’t try to time markets.

I only ever suggest ETFs (exchange traded funds) or other index funds for people with:

  • Money they can tie up for ten or more years.
  • The ability to cope with downturns.

Let’s just say that my long-term savings are staying put.

QBeen a reader of you for many years. Wrote to you about 15 years ago asking for advice about my work’s pension scheme. To cut the story short, took your advice and proved to be correct, many thanks.

Fast forward to present day, both retired now and taken plenty of your advice over the years, which has helped us get to where are today — doing okay in retirement.

Seen a few questions recently about giving money to family. We have decided to give our five grandkids a bonus Xmas present of $10,000 each.

As no cheques these days, how can we give them the money — without it being cash? Maybe do the same in five years’ time as well, hoping we are still in good health.

AIf the grandchildren are old enough to have bank accounts, you could get the account numbers from their parents and transfer the money. If they are younger, you’ll probably have to use a parent’s account and ask them to run the money for the young one.

But the bigger question, really, is what you would like them do with the money. If it was $100 it wouldn’t matter. But $10,000 is a lot, especially to a child.

Would you be happy to watch it blown on a huge party or trip, or clothes and entertainment and booze or perhaps other drugs? Even if that’s okay with you, will their parents go along with it?

If you would prefer to see the gift saved for higher education or travel or a first home, you could deposit the money into a savings account set up for that purpose. After that, it would probably be a matter of trust that they don’t withdraw it later for the “wrong” reason.

Another possibility is to make the money available to each child as they turn, say, 18.

Lovely to hear my advice has worked over the years. Thanks!

QMy mother died at 92 and dad lived till 98. They both left us small amounts. But by then, all the kids were in their late sixties and seventies. We don’t need the money at that age!

From that, I made two decisions. Firstly I resolved to give my kids money as emergencies came up. They will all get their inheritance eventually.

And second, I am gifting $10,000 to my grandchildren as they turn 20. As they range in ages from 29 to 10, this is not as hard as it may seem.

The biggest spinoff is seeing them put that money to good use. One has paid off his student loan, another reached the magic amount to put down a deposit on a first home, and another set off on his OE with back up funds. The others have put it in their KiwiSaver accounts. I have made arrangements for the youngest ones, should I die before they reach 20.

Being able to see your savings put to good use is so rewarding. And what’s the point of dying rich? Give to the family now!

AFair enough. And the previous correspondent might take some comfort from the way your grandchildren have used their gifts.

Thanks for all the letters on this topic. I think that’s enough now.

QYour readers may like to know about our situation when recently withdrawing our ASB KiwiSaver balance for our retirement.

I had been topping up my account by $100 per month for the past couple of years as a form of savings. The balance of course had dropped, but it had also partly recovered recently. However, my monthly contribution was virtually being eaten up by fees.

The decision was made on July 4 to withdraw the full amount and reinvest with ASB at 5.9 per cent for one year. I have confirmation the application was received on this date. The value of my account was $159,330.

However, it took until July 11 before the account was actually closed and the funds were transferred to my ASB bank account. The final amount was $158,368 — a drop of almost $1,000 in the space of a week!

ASB of course blame everybody else. But my point is that between 4th and 11th July I completely lost control of my KiwiSaver.

Surely, when the application is received the funds should be locked in, as my decision was based on the balance on that date. The paperwork should be done afterwards. Your thoughts please.

AWould you still be writing if the markets had moved the other way, and you had gained $1,000?

Still, it’s fair enough to wonder why the move took so long, so I asked ASB.

“Once a customer notifies us they would like to withdraw some or all of their KiwiSaver, we begin the process of selling the units,” says a spokesperson. “Until these units are sold, the value of the member’s investment will continue to change based on movements in unit prices, which have the potential to be either favourable or unfavourable.”

She adds that the withdrawal form “highlights that withdrawal value will be based upon the unit price at the date the request is processed.

“It is also worth noting that when a customer views their KiwiSaver balance online, this is based on the unit price received one business day prior.

“We aim to process all requests as quickly as possible. As communicated on our withdrawal form, and in line with most KiwiSaver providers, processing of partial retirement withdrawals usually takes between five and seven working days, and full retirement withdrawals between 15 and 17 working days” — because the provider may need to make a final claim for all the government contributions you have coming.

It seems that your one-week processing time for a full withdrawal was actually unusually fast.

One message from all this is that when you are within about three years of withdrawing, it’s a good idea to move your money — perhaps in a few steps — into a low-risk fund, in which unit values will change very little. It sounds as if you were in a higher-risk fund.

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Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former 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.