Stay put

QLike lots of others, I’m very pleased to see my investment funds soaring after the Covid downturn years. But feeling a little uneasy that it may not be sustained, and that some almighty crash is imminent.

I’m wondering if some of the gains should be siphoned off to safer investments such as term deposits etc?

I am 67 years old and have three years’ worth of spending in term deposits as per your recommendation. The rest of our funds are in conservative, balanced and growth funds.

AGo for a walk on the beach, read a novel, have lunch with friends who are not interested in financial stuff — do anything but read and talk about where the markets might go. And leave your investments alone!

That assumes that you’ve set things up the way I recommend, with money you don’t expect to spend for ten years or more in the growth fund and three-year-plus money in the balanced fund. If not, you might want to move money — ideally in three or four monthly steps — to make that happen.

But beyond that, ignore market movements. There might indeed be an “almighty crash” coming for all we know, but even if that happens, there’s a very high probability the markets will have recovered by the time you spend the money, and you’ll have considerably more than if you had reduced your risk.

I feel like a broken record saying this, but it is foolish to try to time markets. Research shows people who move in and out of share funds do worse than those who stay put.

For example, US research firm Dalbar found that over the 30 years ending December 2023:

  • The average share fund investor earned 8 per cent a year.
  • The S&P500 market index average return was 10.15 per cent.

A $100,000 investment at the start of 1994 would have grown to just over $1 million for the average investor, but $1.8 million in the index — a huge difference.

The difference will be partly because of fees, but also because people moved their money in and out of the funds — no doubt trying to guess, like you, when it was a good time to switch.

Other research has shown the investors who move their money most often do worst. Stick with your plan. As hugely successful investor Warren Buffett puts it, “Our favourite holding period is forever.”

By the way, while term deposit interest rates still look attractive, every expert is expecting rates to fall some time in the next year or two, now that inflation is easing.

Quite contrary

QI haven’t seen anyone comment on this and would like to get your opinion. I invest in US companies through Hatch.

I try to keep around 30 to 40 per cent of my share portfolio in cash. In times of uncertainty, like trouble in the Middle East, the cash reserve can go as high as 75 per cent. This places me in a better position to buy more shares during a stock market downturn. This cash also earns a reasonable rate in interest.

AAt least you’re planning to buy in a downturn. As explained above, people who sell at those times — or transfer to a lower-risk fund — nearly always do worse over the long term than those who stay put. But what about “contrarians” like you?

Some contrarians say they can beat the market, but it’s tricky to keep getting your timing right. And the big concern is that, for long periods, you are earning lower returns in cash than the average return in shares. Sure interest rates are high now, but as I said above, that’s not likely to last.

You might want to try an experiment. Put half your money in a wide range of shares and leave it there. After ten years, I would be surprised if it doesn’t do better than the half you are “playing” with. Let me know!

It’s a cliché in financial advice circles, but you might not have heard it: It’s time in the market, not timing the market, that counts.

Giving teens control

QI read the letter about teaching children how to handle money last week.

My parents were doing this roughly sixty-five years ago. The first lesson involved a cousin of mine. They were looking after him for the summer. He was 15 and spent his time reading comics.

They decided on a road trip. During the early stages he continued to be lost in his comics, so, having agreed on a plan that included doing what he decided to do, they announced that they had spent more than they had planned. They had a credit card from a petrol company for buying petrol, but he had their remaining cash to cover food and accommodation.

He suddenly became obsessed with the cost of their meals and rooms. This included his finding a very cheap room which had a skylight but no windows. Now in his eighties he still talks about the trip.

The second lesson involved me. Normally, I did not get an allowance or pocket money. Having had success with my cousin, my parents came up with a scheme for me.

My father was consulting for companies in the United States that wanted to sell products in Europe. So as a family, we spent several months travelling around Europe. The deal was that I would get US$1 a week. I was responsible for converting this into the local currency. If we travelled between countries, I then had to covert what, if any, I had left into the new currency. To this day. I can remember the exchange rates that you could get for changing US dollars into the major currencies of Europe.

The other part of the deal was that, if we disagreed, say, on whether to take one road or another and I was willing to bet my allowance on being right, we went where I said we should go. If I was wrong, I didn’t get my allowance the next week. Both valuable lessons taught sixty-five years ago.

ASome creative ideas. I hope your cousin didn’t buy only food that a 15-year-old boy likes!

While your single US dollar sounds a bit silly these days, it would have bought roughly what NZ$20 would buy today.

Op shop conversion

QI gave my boys a monthly allowance. I think they were about 10 and 12 when we started. I got sick of being harassed to buy designer clothing because “everyone else has them”.

We worked out what we spent on clothes, pocket money, and other incidentals. They then got that monthly. It worked great for me. Clothes shopping was a breeze as they had to work out what they needed and could afford. Suddenly designer things weren’t purchased.

One son is still an avid op shop buyer. The other one used to get clothes from the school lost property so he could save money.

AI love the op shops and school lost property. As well as being thrifty, the boys were recycling.

Deposits versus PIE funds

QIs there any difference in risk between a bank term deposit account and a bank PIE term investment account? Are both to be protected under the NZ government guarantee?

We’ve read through terms and conditions for both and it seems like in bank PIE term investment accounts there is less obligation for the bank to return your money if something goes wrong at the bank.

We’re currently missing out on the tax savings by sticking with standard bank term deposits. Is this a dumb move?

AYou’re referring to what’s being called the Depositor Compensation Scheme, scheduled to finally take effect in the middle of next year.

Under the scheme, if a deposit taker — a bank, building society, credit union or finance company — fails, the government will repay you for money you lose, up to $100,000 per person. The scheme will be funded by all the deposit takers.

The details are not yet finalised, but the Reserve Bank (RB) says term deposits will be covered, or as they prefer to put it, they will be “protected deposits”.

The RB has also proposed that the scheme covers holdings in bank-sponsored PIE funds if they ”only invest in that bank’s New Zealand dollar deposits.” Because of their more complicated structure, compensation for those and other similar eligible products could be a bit slower, the RB says.

In the meantime, I think you can take comfort from the fact that New Zealand’s major banks seem to be strong.

Have a look at the Bank Dashboard on the RB’s website, It covers the different banks’ credit ratings and other measures of their financial strength, with brief explanations of what each one means.

If I were you, I would get into a PIE account in a strong bank now and make the most of the tax reduction.

Meanwhile, something caught my eye when I was reading the Reserve Bank info. Pretty much all KiwiSaver funds are PIEs. What if a bank set up a low-risk KiwiSaver fund that invested only in its NZ dollar deposits? Would it be included in the Depositor Compensation Scheme?

While KiwiSaver funds and non-KiwiSaver managed funds will not normally be protected, an RB spokesperson said that would have to be considered if such a product was ever proposed in the future.

That worries me a little. It could give bank-run KiwiSaver schemes an unfair marketing advantage over non-bank schemes.

Tax confusion

QI was reading the Sunday Herald last week and saw an article by Diana Clement on bitcoin. It said, “‘But just like shares or property investing, it’s taxable,’ says Paul Quickenden, chief commercial officer at EasyCrypto.”

Now I am confused. I always understood New Zealand does not have a capital gains tax, and unless you are a day-trader in shares, you don’t pay tax on what you buy and hold. And you don’t pay tax on a house’s capital gain after the Brightline is passed.

So which is true? How did another Herald journalist get this so wrong?

ADiana didn’t get it wrong. While it’s correct that New Zealand doesn’t have a capital gains tax, as such, there are some circumstances in which a gain is taxed as income — just like a salary.

Apart from the brightline rules on property investment, a gain on property, shares or other investments is taxed if you bought with the intention of selling.

It’s pretty obvious that’s what you’re doing if you trade frequently, or are in the business of trading. But what about long-term holders?

When I first came back to New Zealand, in the 1980s, I couldn’t believe the law was built around something as fuzzy as intentions. “Why else would someone buy a rental property or shares?”, I asked. The answer is, apparently, that some people say they bought for the rent or dividends, with no plans to ever sell.

Given that it can take many years for some mortgaged rentals to bring in more cash than their expenses, and that some shares pay little or no dividends, you have to say, “Pull the other one!”

My next question was, “How can you prove you intended to hold forever, and how can IRD prove you didn’t?” The answer, sort of, is that you can document your intentions. But why wouldn’t you lie?

It seems the law is often ignored, with people simply not paying taxes on longer-term gains — although I’m sure they are sometimes challenged. And I imagine some people worry that one day they might be caught.

The vagueness of the law was behind the introduction of the brightline test on property investing, so at least those holding rentals for a short period paid tax. The weakening of the brightline test this year will push more investors back into the uncertain zone. Can it be proved they bought with the plan to sell?

All of this uncertainty is another strong reason for bringing in a straightforward capital gains tax, so everyone knows where they stand.

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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.