Q&As

  • We compare term deposits with bonds…
  • …And with an income fund
  • …And with high-dividend shares
  • Questions for over-65s if they gain access to KiwiSaver

QThere has been a lot of discussion in your column about bank deposits as an investment but no mention of listed bonds. These can yield in excess of 4 per cent, and can be sold at any time.

Having the ability to sell all or part of the investment eliminates the need to have staggered term deposits. Bonds are issued by major banks, some large companies and local bodies, and are listed on the NZX debt market.

Compared with this, bank deposits yield around 3.5 per cent, they cannot be broken until maturity and have to be renegotiated to get the best rate.

The downside of bonds is that you need an account with a stock broker and there is commission payable on purchase and sale. This does mean that you don’t want to be changing things too frequently.

Bonds are a valid alternative to bank deposits and should be considered as part of any investment strategy.

ALet’s compare Boris Bond and Tammy Term Deposit. They’re similar in many ways. You invest a fixed amount, receive interest payments, and get your money back at the end.

But their five-year journeys to maturity are quite different. Tammy strolls along a road that slopes gently upwards and ends slightly higher up the hill, because of the interest she has earned. She has the same owner all the way.

Boris, meanwhile, has to negotiate some rougher countryside. His track rises at times and drops at times. But — unless he falls and breaks his leg — he will finish the walk higher up than Tammy, thanks to his higher interest rate. His owner may change several times during the journey.

What’s all this about? You could call it desperation to get an interesting picture to go with this column! But the point is that, while bonds can be sold at any time, their value goes up and down. It depends on what’s happened to interest rates in the meantime.

Let’s say you buy a newly issued five-year bond at $5000 at 4 per cent. Two years later you want to sell it, but since then:

  • Interest rates have risen, so your bond is unattractive. Nobody will want to pay full price for it. However, they will buy it for, say, $4,500.
  • Interest rates have fallen. Everyone will want your bond, so you will get, say, $5,500 for it. Yay!

In other words, planning to sell a bond before maturity is a bit risky. However, most New Zealanders hold bonds to maturity, and at that point you’ll get your full $5000 back plus interest — unless Boris breaks that leg, a.k.a. the issuer defaults.

The likelihood of default ranges from almost none on government bonds to low on bonds issued by big banks and major companies to somewhat higher on smaller or troubled companies. And guess which issuers pay higher interest? The riskier ones of course. Otherwise nobody would buy their bonds.

It’s the same old story. If you want a higher return you must take more risk. I’m not saying your suggestion is a bad one. Many people are willing to take a bit more risk to get a bit more interest.

You can gauge how much more risk from a bond’s credit rating, which is included in the bond list on www.interest.co.nz. Any A rating is good, with AAA best. BBB minus or higher is considered “investment grade”. I wouldn’t go below that rating. For more on credit ratings, do a search on www.maryholm.com.

Your other point is that you have to deal with a stock broker. But that shouldn’t be hard. Several operate online as well as through offices.

QThe articles in your last column intrigued me. Bank term deposits are what you suggest, am I wrong?

On reaching 65 I transferred my KiwiSaver to an income fund run by the same provider.

This income fund pays out 1.6 cents per unit held four times per year. Recent unit value was $1.63. Six years ago it was $1.066.

Ten years ago my wife and I started with $74,000 and now it’s worth $117,000. That’s after tax and fees and all those payouts. Cash available in 48 hours, no fees.

The reason our fund has grown is we have other income and have not needed extra withdrawals. The fund has averaged between 6 and 7 per cent over the last ten years.

Why would anyone use term deposits?

ABecause they are less volatile. Compared with Boris Bond and Tammy Term Deposit, Ivan Income Fund faces a tougher five-year hike, with quite possibly some serious ups and downs.

Over single years there’s a pretty good chance he’ll end up lower than he started. And it’s possible that could happen over five years. Most likely, though, Ivan will finish higher up the hill than Boris or Tammy. And there’s no chance he won’t get to the end.

The fund you’re invested in — you gave me the name — is rated by the provider at a risk level of 3 on a scale of 1 to 7.

Its product disclosure statement tells us that about 5 per cent of its investments are in cash and equivalents — at the same risk level as bank term deposits. Everything else is somewhat higher risk — with about 40 per cent in international bonds, 25 per cent in Australasian shares, 15 per cent in NZ bonds and 15 per cent in listed property.

If it were a KiwiSaver fund, it would be a middle-risk balanced fund.

With a wide range of investments, it’s virtually impossible that you would lose all your money even if some of its investments went belly up. But the value will fluctuate.

The “minimum recommended investment time frame” in the product disclosure statement is three years. That means it’s suitable for money you expect to spend in three-plus years — but not so good for current spending money, because you’ll sometimes be withdrawing units that have recently lost value.

“But hang on a minute”, you may be saying, “we’ve had a great run with the fund over the last ten years.” So has pretty much everyone in every fund like this. That’s because the markets have performed really well since the global financial crisis of 2008.

While nobody knows what the future holds, history tells us things won’t stay that good. Be prepared to see your balance sometimes fall.

That’s not to say I’m recommending you leave the fund. Just that I suggest you keep your spending money for the next few years somewhere less volatile.

QIf the guy with $155,000 in your last column bought shares in good safe dividend companies with imputation credits, he would enjoy a bit over $10,500 tax paid per year. Brokerage costs would be charged as an expense, and if he’s in a lower tax bracket there could well be a small tax credit.

A quick sale of some or all of the shares means the money is available within days.

I have enjoyed about $8,000 a year on $100,000 for some years now, and also have a paper profit of $10,000 should any proceeds be needed. Long may it last.

AIndeed. But the very fact that you say that suggests you realise it may not last.

Joining our three hikers we now have Sheryl Shares. She faces the toughest terrain of all, including the occasional deep valley and some steep climbs.

But she’s pretty much certain to get to the end after five years, and probably at a higher spot than any of the others. If the hike were for ten years, it’s highly likely she would come out well above the others.

It’s true that “good safe” companies that have paid high dividends for years are unlikely to go belly up. But they can hit hard times and reduce those payouts, sometimes to nil. And their value can certainly decline.

That’s why investing in shares or a share fund is best done only with money that you don’t expect to spend for at least ten years. If the market plunges, there’s time for your investment to recover before you’re spending it.

Like the previous correspondent, you haven’t yet seen what a serious downturn can do. But you probably will in the years to come.

By all means keep your long-term money where it is. But my suggestion for you and others remains: For ten years or more invest in shares or a share fund — such as a KiwiSaver growth or aggressive fund. For three-to-ten-year money use a KiwiSaver balanced fund or similar. And for the shorter-term use a cash fund or bank term deposits — preferably laddering the deposits as described in recent columns.

Footnote: I’m assuming you have, say, a dozen different shares. In just one or a few shares there’s too big a chance that if the value of one plunges, possibly to zero, that will badly affect your outcome.

QCould you advise re two questions:

  • The forthcoming entry of plus-65s to KiwiSaver. Is there any indication as to a time frame when invested money can be withdrawn? Those in the 70s-plus age group may not want to tie up money for five years. Statistically they are nearing the passing away age, and the knowledge of that narrow time frame may be a severe impediment to them investing.
  • Are there any stats as to the aggregate — across all providers — return from low-fee KiwiSaver funds say over the last five years compared to similar returns from private saving funds e.g. banks’ wealth management etc (which have higher fees) and investing in a large basket of shares?

AFirstly, the KiwiSaver changes listed in this column two weeks ago are just proposals. The bill has to get through Parliament.

But assuming it does — although perhaps with modifications — people over 65 who join KiwiSaver will be able to withdraw their money at any time.

Note, though, that you’re bumping off the 70-pluses rather early! A 70-year-old New Zealand man is expected, on average, to live to nearly 87, and a woman to 89. For an 80-year-old, life expectancy is higher, because the figures exclude those who died in their seventies. So a man at 80 can expect to live to 89 on average, and a woman to 90 years and six months.

On your second question, I haven’t seen stats on that. But given that providers nearly always charge lower fees on their KiwiSaver funds than similar non-KiwiSaver funds, over-65s will usually be better off in KiwiSaver. It’s not as if non-KiwiSaver funds make better investments. A provider is likely to make similar investments with both types of funds.

How does that compare with investing in a large basket of shares? Firstly, I reckon you need at least $100,000 to invest directly and get enough diversification. With a smaller amount, you would either be mucking around with tiny, uneconomic parcels of shares or not spreading your risk enough.

Secondly, you would want to monitor your shares, keeping track of dividends, takeovers and so on — something some people enjoy but many wouldn’t.

On the other hand, your costs would probably be lower, as long as you didn’t trade often. But in one of the lowest-fee KiwiSaver funds there might not be much difference.

Most over-65s who don’t currently invest directly in shares would probably be better off in a low-fee KiwiSaver fund.

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.