NZ Herald 20 August 2016

AI’ve got a couple of questions for you:

Let’s say you’re a skier standing at the top of a mountain. Do you head down the steep slope, knowing it will be thrilling but you might crash in a heap, or do you take the gentle, well groomed slope that will be less exciting but safer?

Or let’s say you’ve invited new friends around for dinner — people you would like to impress. Do you make a dessert soufflé you’ve never tried before, knowing it will be fabulous or embarrassing, or do you stick with the tried and true but boring apple crumble?

If you’re a risk taker, borrowing to invest in shares might be for you. But you must be prepared to face a bad outcome.

It might go something like this: You borrow $100,000 — perhaps by getting a revolving credit mortgage — and put it in an exchange traded fund that invests in New Zealand shares. All goes well until the market slumps. Your investment falls to $80,000, then $70,000.

You panic and bail out. With the proceeds, you pay back part of the loan. But you’re left owing $30,000, with nothing to show for it.

That’s the big difference with borrowing to invest, a.k.a. gearing. Without gearing, the worst that can happen is your investment becomes worthless. With gearing, add a debt. Ouch!

On the other hand, if the share market continues its recent growth, your $100,000 might double over a few years. You pay back the debt and you’re left with a tidy profit.

To do well out of gearing a share investment, you need to earn a return — including dividends and after fees and tax — that’s higher than the interest you pay on your borrowing. And given the risk, you would want it to be lots higher.

There’s no way to know in advance whether you’ll achieve that. But the following will help:

• Invest in a widely diversified fund.
• Keep fees low. Your choice of an exchange traded fund will help with that.
• Promise yourself that you’ll stick with the investment through market downturns.

Are you up for it? You have years to go before retirement, so there’s time to recover from an investment mistake. And you seem to be in a strong position financially. But would you hang in there if your $100,000 turned into $70,000?

If not, stick to drip feeding into a fund. It’s less risky because you’re not borrowing. And you buy in both high and low markets, which reduces your risk even further.

Footnote: There is no maximum investment in KiwiSaver. You could do your geared investing or drip feeding into your KiwiSaver fund if you wish — contributing directly to your provider — although the money is of course tied up.

AMore or less.

One reason I often discourage direct investment in shares — which is what you would probably do if you used a share broker — is that you need enough money to buy a wide range of shares.

But $200,000 could get you plenty of diversification. And with direct investment you avoid fund management fees.

On the other hand, there is more hassle with direct investing — including handling dividends, tax and so on. In KiwiSaver, all that is done for you.

The trick is to find a KiwiSaver fund that charges low fees. I suggest you use the KiwiSaver Fund Finder on www.sorted.org.nz, and consider switching to a low-fee provider.

Note that as you get within eight or ten years of when you expect to spend some of the money, it’s wise to transfer that amount it to a middle-risk balanced fund. And within a couple of years of spending, transfer it to a low-risk fund. That way you don’t suffer from a market downturn right at the time you want to spend.

By the way, I’m not sure what you mean by “growth shares”. Are you interested only in higher-risk shares? These have higher expected returns, but there’s also more chance that they will perform badly.

KiwiSaver growth funds generally invest in all sorts of shares and sometimes some property. And that’s probably best for you. The broader the diversification, the better.

AWell done, on several counts: joining KiwiSaver, saving a little in challenging circumstances, investing rather than spending your inheritance, and setting yourself a goal.

I don’t think you should worry about losing the KiwiSaver first home withdrawal. But first, you don’t seem to be correct about the $8000 cutoff for getting the accommodation supplement.

Assuming you are not a beneficiary, the cash value of your assets has to be less than $8100 for a single person, but the cutoff is $16,200 for sole parents like you and for couples. For more on this see tinyurl.com/ASupplement.

But those are the cutoffs for getting any accommodation supplement at all. If your assets total somewhere between $5400 and $16,200, the amount you receive decreases as your assets increase.

“You will only be eligible for the full rate of accommodation supplement if your cash assets remain under $5400, assuming all eligibility criteria are met,” says a Ministry of Social Development spokesman.

So your idea of putting your inheritance in your KiwiSaver account is good. It means the money won’t be counted as a cash asset (unless you were someone who could access their KiwiSaver money in retirement).

But can you be confident you’ll be able to withdraw your savings to buy a house?

It’s true that there have been too many changes to KiwiSaver — more than 20 in fact. Major changes have included: the axing of the $1000 kick-start and $40 annual fee subsidy; the halving of the tax credit; increasing tax on employer contributions; changes to minimum contribution levels; and changes to the first home rules.

While many of the changes have been bad news, the first home changes have largely been positive. The government has increased the house price caps for the HomeStart grant, and doubled the grant amount if you buy a new home. And you can now withdraw tax credits, which previously had to stay in your KiwiSaver account.

It’s important to note, too, that none of the changes to the scheme would make anyone wish they hadn’t joined or contributed to KiwiSaver up to that point. It’s the opposite actually — many people are glad they joined when the kick-start was there and the tax credits higher.

No government can make any guarantees of what a future government will do. Laws can be changed. But with so many people saving for a first home in KiwiSaver — and first home buying such a challenge these days — it’s inconceivable that any government would prevent KiwiSavers from withdrawing their savings to buy a home.

At worst, a government wanting to stop the practice would surely let people earmark their savings up to that point for first home withdrawal, or let them withdraw that money and deposit it elsewhere.

Sure, the government stopped the $1000 kick-start with no warning. But that was presumably to stop a huge rush of sign-ups by people who hadn’t bothered until then — unfortunately including you. There wouldn’t be a similar problem with stopping first-home withdrawals.

How can I be so confident? We live in a democracy. Governments don’t unfairly sabotage the plans of hundreds of thousands of would-be homebuyers, plus all the other voters who would be appalled at such a move.

Having said all that, you might want to park a small portion of your inheritance in a savings account in the short term. Why?

As a part-time worker, you may be earning less than $34,762 a year. If so, and you’re contributing the usual 3 per cent of your pay to KiwiSaver, your annual contributions will total less than $1042. That means you’re not receiving the maximum annual tax credit of $521.

If that’s the case, each June work out how much more you need to bring your total contributions above $1042, and deposit that into KiwiSaver from your savings account. You’ll get 50c for every dollar you put in — well worth getting.

I like your attitude. I bet you’ll make it into home ownership. Let me know.