NZ Herald 21 March 2020

ASigh. I was hoping to move the column away from COVID-19 and wobbly share market issues for a change. Then I checked my inbox. Not a chance! The confusion, cries for reassurance and “brilliant” timing ideas keep coming.

Please note, everyone, that I can’t predict the future. Last week I said, “share prices could rise from here”, and then look what happened! In my defence, elsewhere I suggested a reader be prepared to see share prices fall further.

Meantime, you’re more interested in the housing market. And maybe I should say, “Don’t buy”, to be on the safe side. But I reckon you should go ahead.

Your job security has got to be as good as anyone’s. And surely, if you do become ill, you’ll still be paid. It would be outrageous for health workers not to be.

Presumably your husband is also earning an income, but hopefully you’d cope if that dried up for a while. And your parents might help you through a short-term cash shortage. Perhaps check that with them now.

There’s another issue here though: what will happen to house prices? Normally, the Reserve Bank’s big cut in the official cash rate last Monday would reduce mortgage rates and therefore boost house prices. But these are strange times.

Economists’ house price forecasts are mixed — so what’s new? But it seems they all expect prices to at least flatten, if not fall. And the very fact that I’ve had several people asking about this suggests some would-be buyers will delay purchasing, softening the market. So perhaps you should wait for lower prices.

On the other hand, in these circumstances I wouldn’t be surprised if some sellers will accept a fairly low offer from you. Keep looking, but bargain hard.

AI don’t think we should start predicting lots of mortgagee sales. It wouldn’t be a good look for the banks in this environment.

If people who are struggling to make mortgage payments discuss this with their lenders — rather than just not paying — the lenders will often accept smaller payments for a while. They might extend the term of the loan or make it interest-only for a while, or even suspend payments for a period.

Still, especially if your job security isn’t great, it’s wise to think about how you would manage mortgage payments with no job. There’s improved government support, but maybe not enough if you’ve taken on a big home loan.

Do you have rainy day money — ideally three months’ income perhaps invested in one-month term deposits? Or would your extended family help out with an emergency loan? Or are there expenses — eating out, entertainment, booze, clothes — you could heavily cut back for a while? Travel might be an easy one to curb!

If you’re answering “yes” to these questions, plowing ahead seems fair enough. If not, perhaps sit tight for a while — at least until you have a better feel for your job tenure.

And while you’re waiting on the sidelines, how about building up that rainy day fund — or buying a cheaper house to allow for it?

AThere’s an important difference between drip feeding money into an investment and drip feeding it out again to spend it.

All of this applies only to investments whose values rise and fall, such as shares, property and, to a lesser extent, bonds, as well as balanced, growth and aggressive KiwiSaver and other funds.

Let’s say you’re investing $100 a month into one of these volatile investments:

• When the markets are down, units might be worth $4, so you buy 25 units.
• When the markets are up, units might be worth $10, so you buy 10 units.

The average market price is $7 — halfway between $4 and $10. But you’ve bought more in the down markets, so the average price for you is only $5.71 ($200 divided by 35 units) in this oversimplified example. Great!

But what if you were selling instead of buying? You’ll be disposing of more when the prices are below average. Not so great.

You’re quite right that over 20 or 30 years a higher-risk fund will grow more. But drip-feeding out of it could more than offset that advantage.

Sometimes you have no choice. See the next Q&A. But it’s better to move your money into a low-risk defensive fund several years in advance of spending it. Good thinking on the campervan.

By all means, though, keep the ten-year-plus money in riskier investments, as explained last week.

AFollowing on from what I’ve just said, if you plan to spend your KiwiSaver money within a few years, it’s best to be in a low-risk defensive or perhaps slightly riskier conservative fund. Then your balance won’t drop lots right before you buy.

What about people planning to buy soon but caught in higher-risk funds? Oops! You haven’t been reading this column over the years! But what do you do now?

The above Q&A advises against drip feeding out of a higher-risk fund. But it could be even worse to move all your money to low risk in one hit — at what might turn out to be the bottom of the downturn.

I suggest you reduce your risk in three or four steps, maybe a month apart if you plan to buy a home soon, but three months apart if you’ve got a year or two to play with.

ARelax. You’re okay. That “stay put” advice applies to most people of all ages — at least for the next couple of months, although there might be some wise moves to make after that.

This is a good opportunity to check:

• Whether your KiwiSaver or other fund is the right risk level — low-risk if you plan to spend the money soon, but higher risk for later spending. See last week’s column for more detail.
• Whether you can tolerate the volatility of your fund.

You seem pretty good on the first count. Your conservative fund money can finance the early years of your retirement, and the balanced fund money can be for spending later — right on into your nineties perhaps.

But if you’re a horrified possum (sorry, but I couldn’t resist!), perhaps you just can’t cope with volatility.

The trouble is that we haven’t seen significant market falls for years, and people aren’t used to it. The markets will rise again. They always do, usually within a year although it can take longer. So I urge you to ignore what’s happening.

But if you must do something, consider gradually moving your conservative fund money into your provider’s lowest-risk defensive KiwiSaver fund, which will hold mainly cash and pretty much never lose value — and if so, only a tiny bit.

If your provider doesn’t have such a fund, move to a provider that does. The KiwiSaver Fund Finder on sorted.org.nz lists defensive funds — sometimes called cash funds.

With your other money, in the balanced fund, try to be brave and leave it where it is. It will recover in time, and grow more than in a lower-risk fund.

Nor would I rush into the other company’s fund. Its future returns won’t necessarily be any higher than where you are, and it might charge higher fees, which eat into returns.

For info on fund fees, see the Smart Investor tool on sorted.org.nz. Click Compare KiwiSaver and Managed Funds (which are non-KiwiSaver funds), choose from those two types, and then click the risk level. Then — importantly — scroll down and sort by “Fees (lowest first)”.

Just to put things in perspective, your $15,000 loss is about 6 per cent. Over the last few years you will have gained considerably more than that.

AThank goodness for the news media and then the internet, which mean the privileged no longer get the news first.

The cabbie saying reminds me of the story of President John Kennedy’s father Joseph, who decided to get out of shares just before the 1929 Crash because a shoeshine boy was giving him stock buying tips. If even the shoeshine is buying, he thought, the market is overly exuberant.