This article was published on 2 February 2008. Some information may be out of date.


  • Does the share price slump disprove standard investment advice? And should advisers make economic forecasts?
  • KiwiSaver member is doing superbly despite the slump — as are all other members.
  • A reader objects to the idea that KiwiSaver is a gift from the government.

QStill advising buy and hold?

The share market goes down about 20 per cent in 12 days with no specific changes to the underlying attributes of each individual entity. Buy and hold investors lose two to three years worth of returns, not to mention adjustments for inflation. What sort of an investment is that?

Efficient market theory is proved bunkum. Time to come clean I think.

The thing that really gets my goat is that most financial advisers advise only on portfolio diversification, not the macroeconomic environment. And those that may mention macroeconomics typically use mainstream economists that pay scant attention to the real issues of money supply, over-the-counter derivative abuse, or the real (not CPI adjusted) inflation rates.

Ask a financial adviser where we are in the economic cycle, and they’ll usually say, “it’s impossible to say”. This is just not good enough. If someone is going to profit from being a middle person in the investment game, they should take forecasting seriously, and back their judgements. So far I’ve seen very little evidence of this.

AThank goodness for that. Given how hard it is for even the full-time economists to forecast — and many admit they are often wrong — I would hate to see financial advisers getting in on the act.

There are scores of factors that go into economic performance — including weather and natural disasters that nobody can possibly predict accurately.

In my view, the role of a good adviser is not to forecast but to put their clients in a position in which they will do better than they otherwise would have, regardless of what happens. And a key part of that, when it comes to investing in shares, should be “buy and hold — for ten years or more.”.

You’re quite right that a market slump can wipe out several years’ gains in just a few days. But that doesn’t panic those with a long-term perspective. Almost always, over ten years or more, the market will fully recover from a slump — usually by miles.

In fact, for people who are steadily putting money into share investments — as are many people in KiwiSaver, for example — a slump can be good news. For the next little while, at least, they will get great bargains with their new savings.

On the idea of the efficient market, do you really think the brilliant minds that came up with the theory didn’t consider what happens when the share market slumps?

For the benefit of others, the efficient market hypothesis states that shares are generally priced according to all the public information about companies, including their future prospects.

If an analyst finds out that a company’s prospects are better than other people realise, his or her financial institution will buy those shares or suggest that key clients buy them. This demand pushes up the price, so that it quickly refects the new information. The reverse happens if an analyst thinks prospects look bad, leading to reduced demand and a drop in the share price.

While those who are first to get new information can profit from it, most people — especially amateur share investors — don’t find out until the news has already been absorbed into the share price, so they can’t gain from the knowledge.

In an efficient market, then, it doesn’t matter much which shares you buy — as long as you buy a wide range, preferably up to 50 different companies. Some will do well; others badly. There’s no telling which are which at purchase time.

That’s the beauty of the theory. Unlike in other endeavours, most people are not rewarded for putting time into share selection. They would do just as well choosing randomly. It’s a great justification for simply buying any diversified share portfolio, or units in a share fund, and not bothering about it again for years. That’s been my practice for decades now — using share funds — and it’s worked just fine.

Opinions vary on how efficient the New Zealand market is. Many claim it’s not very efficient for smaller companies, because they have too few shares for most analysts to bother to research them. Still, an investor would have to put in lots of time to be the first to learn that a small company’s shares are underpriced.

Your point, I think, is that when a share market suddenly slumps, the lower prices don’t reflect new information about the companies. There’s no denying that. Similarly, the higher prices in a market boom may not reflect corporate changes. Emotions can lead to inefficient behaviour for a while.

As I said, though, buy-and-holders don’t mind slumps too much, with their ten years or more in hand. They don’t lose, as you claim. They just hang about, knowing sanity will be restored.

By the way, you sound confident that you can make economic forecasts. All I can say is, “Good luck”.

QIt’s been interesting reading all the criticism about KiwiSaver in the news lately. I’m amazed at how far people will go to find a reason not to help themselves out financially.

I helped my sister (a school teacher) work out the numbers, and she found that with her 4 per cent, the government’s 4 per cent and the extra $1000 kick-start, she was going to have about $5000 after a year in KiwiSaver, of which she would have put in only $2,000.

Now, if the value of these funds had gone down 10 per cent she would be left with $4,500, a pitiful 125 per cent return on her original investment. Not to mention that the shares she is now buying through KiwiSaver are at a 10 per cent discount.

Keep pushing back on the doubters!

AThanks for your support. Yours was the only response to last week’s column, which suggests that nobody can really argue against KiwiSaver on the strength of recent performance.

I agree, though, that it’s funny how some people seem to search for a reason not to join. Perhaps they can’t be bothered deciding on a provider and fund. But, as you point out, KiwiSaver members are handsomely rewarded for their effort.

However, your numbers don’t look quite right.

The government’s tax credit matches a member’s contributions but with a maximum of $1043 a year. That means it would equal 4 per cent of your sister’s pay only if she earned $26,000 or less. But your sister is contributing $2,000, which means her pay is $50,000. So her tax credit will be the $1043 maximum.

In her first year, then, she’ll get $2043 — the tax credit plus kick-start — from the government.

From April 1, she’ll also get at least 1 per cent of her pay from her employer. And there’s nothing to stop the employer contributing more. So she might reach the $5000 total by adding employer contributions.

In any case, her total will be well over $4000 — which is still great given that she puts in only $2000.

Note that after the first year, she’ll no longer get the kick-start. But for most people that will be replaced by growing compulsory employer contributions, which rise yearly until they reach 4 per cent of pay in 2011.

QThere seems to be a belief in this country that the Government gives” things to citizens and that it’s a good idea to compel others to “give” things to them too.

Actually the only thing the Government can “give” to citizen Paul is something it has taken from citizen Peter, but this fact is cunningly disguised by the language which Governments (and you to some extent) use.

The term “KiwiSaver tax credits” (which you dislike) versus “cash gift from the Government” (which you prefer) is an interesting example. From where I sit it’s a “tax credit” all right, only it’s my tax that is being credited to somebody else’s account.

Even if you must say “cash gift” please don’t obscure the issue by adding “from the Government”. The money actually comes from you and me, the taxpayers. Whilst the Government glows in the vote gathering glory of “giving”, the only thing it really brings to the transaction is the authority to compel one taxpayer to transfer their money to another.

The opportunity cost should also be noted. The taxpayer contributions to KiwiSaver members’ accounts could have been left with them by way of a lower tax rate at source. Or they may be foregoing pay rises because the Government is compelling their employers to divert funds to their KiwiSaver accounts. Or they may be paying mortgage interest they could otherwise avoid by putting the money into their mortgages.

In all cases the Government is effectively saying, “You can’t be trusted to save your own money so we will force you to do it, and we’ll force others to subsidize you”.

I do support KiwiSaver, Mary, because the Government’s right, our history shows that people can’t be trusted to save. But I would like to see a little honesty about who’s picking up the tab and who’s doing the “giving”.

AI can’t argue with most of what you say. I’ve said much the same myself. It would get tedious if I made those points in every column, but perhaps it’s time they were repeated.

However, I don’t agree that New Zealanders can’t be trusted to save. It’s highly debatable whether the average New Zealander is a bad saver. In fact, reliable research suggests many of us are doing pretty well.

True, thousands of people will benefit from KiwiSaver’s encouragement to save, but thousands more are being paid handsomely to do what they would have done anyway.

Add to that a couple of your other points — that the money could be used for tax cuts or bigger pay rises — and it’s not clear that KiwiSaver is good policy.

But, as I say in my little red book, “KiwiSaver: How to make it work for you”: “Whether you like it or not, the government has directed a large chunk of taxpayer money towards KiwiSaver. You might as well claim your share of it.”

One more thing: As you say, KiwiSaver members could instead use the money to pay off their mortgages. But it’s hard to come up with a situation in which the person would be better off repaying their mortgage than being in KiwiSaver.

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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.