This article was published on 2 July 2016. Some information may be out of date.

Q&As

  • A reader challenges my 2008 advice on term deposits
  • Another wants to buy — not sell — UK shares right now
  • Family should consider inner Auckland townhouse
  • My motive is uncovered!
  • Some lucky reading at McDonalds
  • Corrections

QNobody knows when a “Black Swan” will come, as come it has.

In my opinion, there is only sub-optimal financial advice. For example, in 2008, what to do? Herald advice column says, “split your money into five term deposits, so each year one rolls over and you can take advantage of the interest rate field.”

Which I did instead of fixing the entire amount for five years at 8.5 per cent, and then another five years. The result was having, as each term deposit matured annually, lower and lower interest income.

Alternatively, if the advice had been to put the entire amount (less living expenses) into the New Zealand share tracking index (or US mutual funds), I would have more than doubled my money.

Certainly with the five-year annual rollovers I was still ahead of inflation. And it was better advice than some others on offer. But, again there is no perfect advice and, with respect, nobody knows anything for certain, as the Brexit referendum — which has “confounded all the experts” — shows.

AIndeed nobody can foresee a Black Swan — by definition. It’s a rare and unpredictable event. The expression dates back to a Latin poet, who thought black swans didn’t exist. Clearly Juvenal never visited Australia.

But turning to your main point, when I asked, you said you’re pretty sure the “sub-optimal advice” was from me. And that’s probably right. It’s the sort of suggestion I have made — and would make again — to people expecting to spend their money within a few years.

Bank term deposits work well in this situation. You receive steady income and you’re almost certain to get your money back at the end. And phasing the maturities has two advantages:

  • You gain access to some of the principal every year.
  • You avoid rolling over all the money when interest rates happen to be low.

Of course it also means you miss out on investing the lot at high rates — which is what you’re lamenting. What’s more, if you continue with my suggested strategy, you might again be sorry in a few years time. But you might be glad.

Given that interest rates always fluctuate, over time you will sometimes be annoyed and sometimes happy. It will probably average out at 50:50.

And here’s the crunch. As I would have explained back in 2008, research shows that most investors are content to give up on the chance of having really good luck in exchange for avoiding really bad luck.

What about the other option you mention, putting the money in New Zealand or US shares?

Again, in hindsight that would have been great. But we’re talking about money you plan to spend shortly. Putting that into shares is foolhardy. While it might double, it also might halve over a short period — right when you want to spend it.

I quite agree that nobody can predict financial markets. If that’s what you expect from any financial expert, dream on.

I operate in the real world — making suggestions on how to cope with the unknowable. Is that sub-optimal? Only when compared with the impossible.

QWhile the British economy is down a bit (after the surprise of Brexit), I’d like to buy some British shares. But I probably don’t have enough spare money to interest a stockbroker in doing it for me.

So how I can buy British shares (of about $10,000), please?

ARule Number One: shares are a long-term investment. It’s not clever to buy and sell in reaction to breaking news and market ups and downs.

Rule Number Two: if you must break the first rule, do what you’re proposing — buy when things look bad and sell when things look good.

That, of course, is the opposite to what most people want to do. It’s sometimes called contrarian investing. On average, you probably won’t do as well as people who buy and hold. But it sometimes works brilliantly. And if you’re planning to keep the shares for the long term — even if their value plunges in the meantime — that will improve your chances.

The next question is which shares to buy? It’s much less risky to buy a wide range of shares than to pick one or two, which may soar or crash. And with just $10,000 the only way to get a range of shares is to buy into a share fund.

So I asked authorized financial adviser and Herald columnist Brent Sheather if he knows a suitable UK share fund that charges low fees.

“Yes this is an easy one,” he says. “There is a UK closed end fund listed on the NZ Stock Exchange called City of London, which owns a very diversified portfolio of UK stocks that might suit this correspondent. The fund has low fees, at around 0.42 per cent per year, and at 1350 million pounds, it is a big fund.

“Any NZ broker would be able to buy this for a client, and because it is listed on the NZX the client can hold it directly without requiring expensive custodial arrangements or a platform.”

Sounds suitable. Just don’t forget to stick with it through what might be tumultuous times ahead.

QThe couple in last week’s column with a fourth child on the way, whose lives are in central Auckland, seem to be deciding between renting in central Auckland or buying some way from the city.

There are properties within their budget (I own one in a block of 18) that would house them, are within walking distance to Grammar and the CBD, are across the road from a nice park which the dwellings look over, and are also warm, dry and north facing. Two of these townhouses sold in the last month.

Maybe they, like many people who feel they cannot afford a dwelling, need to review their expectations and then they will be able to get on the property ladder.

AGood suggestion. New Zealanders, especially those with fairly big families, tend to think only in terms of having a sizable backyard.

But if there’s a park over the road, hey, you don’t need to mow it. And it makes it easy for the kids to meet other neighbourhood children. Millions of people have grown up happily in London or New York apartments with parks down the street.

Mind you, I think the couple are just as concerned about the timing of a home purchase as about the location of it.

QIn a recent column, you are warning people from becoming overleveraged on their mortgages to buy extra goods or house extensions or renovations. House prices will come down eventually.

At the same time there are speakers and writers out there who are deliberately trying to talk the market down so they can move in and snap the mortgagee sales they have created. I am not criticising all commentators. There are many honest commentators out there warning people.

AOh no, my plot has been uncovered!

Seriously, though, those of us who have watched a few property booms and busts have cause for concern.

Probably the best scenario would be for house prices to just stay still for many years. Most heavily indebted property owners could cope with that, and houses would gradually become more affordable for first home buyers as their incomes rose with inflation.

Now if we could just wave a wand and make that happen…

QI’d just like to say thank you.

Yesterday, while sitting in McDonalds — four kids in tow, and another MIA — trying to think of a way to pull $1,000 out of thin air for our 20 per cent deposit, as we’re trying to purchase our first home, and there it was … your article “Dodgy sales pitch makes the blood boil.”

That heading captured my attention, as we live in Kaikohe and those dodgy salesmen are everywhere in this town, preying on the “less fortunate” on days known by locals as “the broke days”, offering products that are ridiculously priced and so forth, but are delivered to your door with only one payment needed!

Unusual for me to be perusing this section of the paper, but it was better than watching and listening to my children squabble over the hardly touched combo that previously belonged to their 2-year-old sibling. As I read on I felt a tingle. You had just saved our day!

I went home and checked our KiwiSavers. We only put in the minimum and realised we were each between $70 and $100 away from the $1042. I used my shopping money to make voluntary contributions. Just checked KiwiSaver and there it is, the little purple segment from the government’s contribution smiling at me.

Thank you once again for your article. The simple way of explaining what it all means has allowed us to pursue our dream.

The quality and service standards of some real estate agents up here are… Put it this way, my partner’s a logger, I stay at home with kids but work part-time cleaning at nights. Last night after speaking to a real estate agent we sat at the table together and researched what it takes to become a real estate agent.

The more we researched the more we realised something. We’d like to become property brokers, ones that work in the interest of home buyers. My partner left for work at 5am this morning in the pouring rain, one eye opened and one eye closed! Filled with hopes and dreams! Thank you anyway.

AAnd thank you for a lovely encouraging letter.

You won’t have received the government’s tax credits yet. They don’t come until after July 1. But perhaps your provider has signaled that you’ve contributed enough to get the maximum credit.

I should note, too, that even if you hadn’t topped up your contributions, you would still have received 50 cents for every dollar you put in — up go $1042. But it’s great that you will now get as much as possible.

As for your dreams of becoming real estate agents who work in the buyers’ best interests, go for it. There’s nothing like seeing a gap in the market for getting an idea to start a business.

Meanwhile, for information about how you may be able to use KiwiSaver to buy your first home, see tinyurl.com/FirstHomeKiwiSaver.

CORRECTIONS

In last week’s column, I wrote about factors that could affect the annual KiwiSaver tax credit. Unfortunately there were a couple of errors.

Firstly, I said, “in the year in which you reach NZ Super age, your maximum credit is proportionate to how much of the July 1 to June 30 year you are under 65.” I should have added that this doesn’t apply if you joined KiwiSaver after your 60th birthday. Everyone gets at least five years of tax credits, so if you joined at, say, 63, you will receive tax credits until five years from your joining date, when you are 68.

Secondly, Inland Revenue gave me some incorrect information. Contrary to what was said, withdrawals from KiwiSaver funds during the year — for a first home, financial hardship or serious illness — do not affect a member’s entitlement to the tax credit.

Sorry.

Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd FSCL, a seminar presenter and a bestselling author on personal finance. 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.