NZ Herald 21 September 2024

ALaddering a mortgage is, actually, playing it safer than putting your whole loan on one term. This applies regardless of whether interest rates are moving up or down. And, by the way, the same goes for term deposits.

The point is that nobody knows how fast and far interest rates will fall or rise. In the current market, you might pay 7 per cent on a one-year term or 6.5 per cent on a two-year term. Two years looks better. But a year from now the one-year rate might be well below 6 per cent, making two one-year terms a better deal in total. On the other hand, rates might not fall much, and you’ll wish you had taken the two-year deal.

When interest rates are rising, the choice might be one year at 5 per cent or two years at 5.5 per cent. If, a year from now, the one-year rate is 6.5 per cent you’ll be sorry you didn’t go for two years. But if it’s 5.7 per cent, you’ll be glad you stuck with one year.

What to do? Take a bet each way by splitting your loan — or, as you are proposing, take a three-way bet.

It’s true that by laddering, you remove the chance that all of your loan will look good a year from now. But you also remove the chance it will all look bad.

Psychological testing tells us that people dislike a loss more than they like a gain of equal size. So most people are willing to give up on the chance of getting the whole lot right in exchange for knowing they won’t get the whole lot wrong. It’s a type of diversification.

Another advantage: In your plan, you’ll have a third of the money maturing every six months. You never know when you might suddenly receive more money, perhaps from Lotto or a gift or inheritance, and you can use it soon to repay a lump sum without penalty. Or maybe you get a big pay rise and, when a mortgage term ends, you can increase your regular mortgage payments.

One more thing: I keep hearing of people getting lower mortgage rates by asking their bank if they can do better, and telling them of better deals available elsewhere. Be a bit pushy.

AThere’s no trans-Tasman grab. “I can reassure your readers that all Lotto NZ’s profits — whether from instore and online channels — are transferred to the New Zealand Lottery Grants Board for distribution to New Zealand community causes,” says CEO Jason Delamore. “None of our profits go offshore to Australia or anywhere else.”

AMost of the remaining 16 per cent — 12 per cent — does indeed go to the government, as taxes. The other 4 per cent goes to retailer commission and MyLotto transaction fees, says Lotto NZ.

And yes, buying a ticket is madness if you define it as an investment. But perhaps you could call it entertainment!

AOh dear. Last week I said, “Taking much notice of the performance of any volatile investment over less than a year is silly. (Sorry!) Returns are all over the place.”

Returns on shares are made up of dividends — your share of the company’s profits — and gains or losses in the share price. And I didn’t mean you shouldn’t take an interest in those numbers. Of course you should if you want to.

The worry is when people assume the returns over a year are likely to continue, and buy or sell shares on the strength of that — or, in the case of last week’s correspondent, choose to invest in several individual shares rather than a share fund.

As I said, investing directly in a handful of shares is not a bad idea. But there’s less diversification, which means more volatility. And it seemed that he thought he could pick shares that would beat the market over the long term. Nobody — not even the professionals — can do that consistently.

Generally, dividends are steadier than movements in a share price. And some investors — perhaps including you — tend to buy shares that usually pay high dividends and hold them for the long term, using the dividends as income.

By contrast, if you invest in a KiwiSaver or other managed fund, your dividends are reinvested, helping your balance grow. And many investors in individual shares also have their dividends reinvested.

Using dividends as income can work well, but you take two risks. One is that the dividend flow won’t continue because a company’s profits have fallen. The other is that when the shares are ultimately sold — which may be after you die, but still — the price may have fallen, or gained little. Companies that pay big dividends tend not to grow as fast as the ones that keep their profits to reinvest in growth.

Years ago, a friend and I were comparing the way we had invested some savings for our children. I was using an international index fund. He was using shares in a stable New Zealand company with a track record of paying higher dividends than the returns on my fund. Until it didn’t. Unexpectedly, things went wrong for the company, and his kids’ savings plunged. Mine, in a widely diversified fund, chugged on.

The very example you give, of Chorus, illustrates how volatile dividends can be. You give an impressive return since the dividend was zero in 2015. But that’s a classic example of cherry picking a period to make an investment look exceptional. Before that, in 2013, the dividends had been 25.5 cents a share. Investors moving from there to zero in 2014 and 2015 would have been far from happy.

I assume you invest in a range of companies, to reduce that risk. But in economic downturns, many companies may cut their dividends. That might be okay if you have other sources of income. But it’s something to be aware of.

Your choice of Chorus to write about is also a classic example of the benefit of hindsight. Looking back, anyone can name shares that have performed “far in excess of what many fund managers have managed”. The trick is to know which ones will outperform in future. As I said above, good luck with that.

Footnotes:

• Last week’s correspondent wrote to say his shares are diversified, in several industries and in three countries.

  He added, “FYI, putting my $10,000 into shares was part of a long-term investment strategy and not a ‘silly’ 1 year dalliance — far from it!” That’s good to know.

• I’m glad you usually agree with me!

AGood on you. I see nothing wrong with what you’re doing although, yes, I would include these plans in your wills, just in case you die before turning 65.

A couple of points to note:

• Nearly all KiwiSaver providers’ fees are percentages of your balance. These days, few also charge a fixed fee. So in most cases it wouldn’t cost any more if the grandchildren had their KiwiSaver money in a different fund.

  For example: If the fees are 1 per cent, and you have $10,000 in one fund and a grandchild has $1,000 in another fund, the total fees will be $100 plus $10, which is $110. If the $10,000 plus $1,000 was all in one fund, totalling $11,000, total fees would be the same $110.

• A few KiwiSaver providers waive all fees for under 18s, so you could take advantage of that — although I wouldn’t let that be the main reason for choosing a provider. They are Koura, NZ Funds, Quay Street, and Simplicity, according to a Retirement Commission survey. Also, PIE Funds waives fees for under 13s and charges a reduced membership fee for 13 to 17-year-olds. And MAS and Pathfinder waive or reduce some fees for under 18s.
• You and the kids probably haven’t missed much because you couldn’t use term deposits. Their returns have been higher than usual lately, but that is not expected to continue. Over the next decade, the money will probably grow more in a KiwiSaver growth fund.