NZ Herald 20 April 2019

AYou’re certainly not the first one to ask this. But it’s an important question, so I’m happy to answer it again.

What you plan would certainly beat doing the opposite — moving out of a fund that holds lots of shares into one that holds fewer shares after the market has fallen — which is what many people do. It’s better to buy when something is cheap.

But what if you miss out on some great gains in the meantime? And would you have the nerve to switch right after a big fall? How would you know the market wasn’t going to plunge further? Big falls and rises tend to happen over a period. Nobody can be sure when prices will hit rock bottom.

People who try to time markets often end up regretting it. It’s far better to move your money when it suits you — perhaps because you’ve realized that you have lots of years to go before retirement and your savings will almost certainly grow faster in a growth fund despite the ups and downs.

If you’re worried about moving all your money at what turns out, in retrospect, to be a bad time, you could move a third now, a third in three months and a third in six months. Once you’ve set up a plan like that, stick to it, regardless of what the market is up to.

I’m not sure if you’re in KiwiSaver, but even if you are, you are allowed to have your savings spread across more than one fund with the same provider.

AThanks for a great tip. There are too many money arguments in too many marriages.

AYou’re quite right — although I’m afraid your letter might have left some readers confused.

We’re talking about two different sets of rules here:

• To receive the maximum $521 KiwiSaver government contribution (formerly called the tax credit), you have to contribute at least $1042 a year. Some non-employees, such as students, reach this total by putting in $20 a week.
• If you want to apply for a KiwiSaver HomeStart grant — money from the government to help you buy a first home — you have to contribute at least a certain amount each year, for at least three years.

That amount has varied over the life of KiwiSaver. For details see the HomeStart grant eligibility checklist. Since 2013 the minimum contribution has been 3 per cent of your income or benefit or, for non-earners, 3 per cent of the adult minimum wage, based on a 40-hour week.

As it happens, until April 1 this year, contributing $20 a week has been enough for non-earners to satisfy both sets of rules. But now you need to raise your contributions to at least $21.24 a week to maintain eligibility for the HomeStart grant.

This is likely to be a continuing issue as the minimum wage rises further in future years. If I were you, I would suggest your sons increase their contributions to $25 or $30 a week so they don’t have to worry about it again for a few years. Even students can surely afford to save a few more dollars a week.

Lucky guys to have Mum looking out for them!

AMore lucky kids!

Yes, back in the early days of KiwiSaver I did encourage people to sign up their children while the $1000 kick-start was offered to everyone.

That’s gone, sadly. But children’s savings are still quite likely to grow more than in a savings account, especially if they are in a middle or higher-risk fund where average returns are somewhat higher.

Low or no fees will help though. As I said last week, Juno charges no fees for under 18s in KiwiSaver, and Craigs, NZ Funds and Simplicity give children a break on fees. Aon cuts children’s fees slightly.

Perhaps you could suggest that your daughter moves the children’s accounts to one of those providers.

AThat’s good to hear. Mind you, if the children have been in funds that hold quite a few shares, they will have benefitted from a strong period for share markets. In slower markets the results might not have been quite so good.

Being in a no-fee fund will help the kids to stay ahead of the game.

ANo I don’t. The video, which can be seen here, compares what happens over 25 years to Kaea, who buys a house at the start, and Lucy, who rents throughout. Lucy’s rent costs less than Kaea’s mortgage, insurance, rates and maintenance, and she invests the difference in shares.

After 25 years, Kaea’s investment is worth about $2.77 million while Lucy’s is about $1.99 million.

But there’s one important difference in the calculations. Kaea starts out with a deposit of about $184,000, while Lucy starts out with nothing. If we even up the comparison by giving Lucy that same lump sum to start with, and she adds it to her other share investments, she would end up with $3.77 million — way ahead of Kaea.

A OneRoof spokesman acknowledges the different starting points. “She starts off with a zero sum, and he starts off with a deposit. That’s what most people are dealing with. I think the video stands by itself.”

I disagree. And there are other less important worries too.

The calculations assume that Kaea has a 20 per cent deposit and a 25-year mortgage at 5 per cent, and that the value of his house rises 7.7 per cent a year. Meanwhile, Lucy earns 9.5 per cent on her shares. There are also assumptions about Kaea’s expenses and how fast they rise, and Lucy’s rent and how fast it rises.

None of those assumptions is clearly wrong. But what if mortgage interest rates go back up to 10 per cent — much closer to historical averages? Or house prices don’t rise so fast, given they have risen unusually fast in recent years and are slowing now? Or — on the other side of the ledger — Lucy’s shares grow by less than 9.5 per cent.

The comparison also ignores the risk of investing in a single house. What if it’s found to be leaky, a gang moves in next door, or a major employer in the area closes down?

Lucy doesn’t face a similar single-investment risk, as she can easily invest in a share fund that owns many shares.

The fact is that you can do well financially following either Lucy or Kaea’s example. There’s no sure way to predict which will be better.

There are of course non-financial advantages to home ownership, especially if you have children and want the security of a home base. But there are also advantages to renting, such as no worries about maintenance.

OneRoof, which is owned by Herald publisher NZME, has lots of useful info about property. But I don’t think that particular video is its best feature.