This article was published on 22 October 2016. Some information may be out of date.


  • Should we be getting out of property and shares?
  • Leasehold property not always a bad idea, but…
  • KiwiSaver tax credit numbers not quite right

QEvery week some expert seems to warn us of impending disaster for the housing market, sharemarket or economy. Just today we are being warned that our KiwiSaver balances will suffer in an imminent crash.

So, what to do? Switch to conservative investments within KiwiSaver? Move out of the property or share markets and take the profits? Hang in there and hope they are wrong?

I get that markets go down and up, and if that gives you nightmares, you should be in nice safe cash deposits in the bank.

My question is: if you don’t mind roller coaster rides, are you just better off to stay in the market, stop worrying, and it will all work out? It does usually all work out, doesn’t it?

AAlways. So far, anyway. And it’s hard to imagine a scenario in which it wouldn’t work out.

But — and this is important — you should invest in property or shares only if you don’t expect to spend that money for at least ten years. The same applies to funds that invest largely in shares or property, such as higher-risk KiwiSaver funds.

Even if a market crashes, it almost always recovers within ten years. And the vast majority of the time, you will get a higher return over a decade than if you had chosen a lower-risk investment. On the rare occasions this doesn’t apply, the superior returns should happen within a few more years.

What if you’re investing in a middle-risk fund, such as a KiwiSaver balanced fund, that includes perhaps half shares and/or property? Typically that will recover from a crash within around three or four years, if not sooner.

If you expect to spend the money within just a few years, it shouldn’t be in property or shares in the first place — unless you love risk. There’s too big a chance its value will fall over a short period.

Okay, so we’ll assume you’re talking about long-term money. Why not heed the warnings that both shares and property — especially Auckland property — may be riding for a fall, and get out now? And then, when the market has dropped, get back in again? This is called market timing, and it seems like an obvious road to riches.

The trouble is that nobody — and that includes experts whose full-time job is to watch the markets — gets it right often enough. They sell too early, and the market continues to rise. Or they sell too late, after a crash. Or they buy when they think we’re in a trough, but then the market drops further. Or they delay buying and miss a rally.

Often there’s no good explanation for short-term movements in property or shares. They simply can’t be predicted.

“Successful market timing requires two correct decisions: when to get out and when to get back in,” says financial analyst Rick Ferri in Forbes magazine. “Guessing right once is a 50/50 proposition. Guessing right twice drops the odds to only 25 percent…. This is what makes market timing so difficult.”

That means, of course, that quite a few fund managers, analysts and economists make the right call once, and perhaps a quarter get it right twice. The doesn’t mean you should switch to them. Financial history is full of stories of regretful investors who moved to a fund manager who seemed to have worked out market timing.

Last year a US financial market research firm published data on American share funds. Over 30 years, investor returns in share funds averaged 3.8 per cent, while the S&P500 — an index of the biggest US shares — grew a much faster 11.1 per cent.

If you had invested in an S&P 500 index fund, whose managers simply buy the shares in the index and don’t try to time markets, your return would have been a bit lower than the index because of fees. But it would still be much better than in the average active share fund, whose managers would have been trying to time markets.

There are similar figures for shorter periods. Over 20 years the funds averaged 5.2 per cent, while the S&P averaged 9.9 per cent; over 10 years it was 5.3 per cent versus 7.7 per cent, and so on.

Looking at the extremes, of all the monthly returns over 30 years, the worst “underperformance” by the share funds — the biggest gap between their returns and the S&P500 — was in October 2008. In that month, in the depths of the global financial crisis, shares funds fell a horrible 24.2 per cent that month, while the S&P fell a somewhat milder 16.8 per cent.

On the other hand, in a boom market, share funds rose only 3.7 per cent in March 2000, while the S&P rose 9.8 per cent.

“The underperformance results from bad investor decisions at critical points, the first in the face of severe market declines and the second when the equity market surged,” said Dalbar.

If the professionals can’t get it right, what chance have you or I got?

You’re quite right, it’s best to just stay put. People pay good money for the ups and downs of a roller coaster ride. In investing, you don’t have to pay anything extra for the thrills!

If you’re drip feeding money into KiwiSaver or another investment, celebrate the fact that when the market falls, you are buying in at low prices. In the long run, continuing to invest through thick and thin is a winning strategy.

One more point: While it doesn’t cost anything to switch between high and low-risk KiwiSaver funds, it does in most other investments. If you’re moving in and out of direct shares or — perish the thought — properties, you’ll also be paying expenses, which should include taxes on your gains. It’s just another argument against trying to time markets.

QNew Zealand has got leasehold wrong.

It’s not bad, it just has been sold for the wrong reasons, resulting in the unfavourable reputation it has today.

The opportunities within the Auckland property market seem to have encouraged a single pointed perspective — if the property can’t provide you with an endless amount of increasing capital then it is not worthy of purchase. Yet property provides so many other solutions.

If your only objective is capital gain I wouldn’t be recommending you purchase leasehold. I’m not saying leasehold can’t make people capital gain, it’s just not the best instrument in my opinion.

But leasehold is proving to be a great solution for asset-rich cash-poor baby boomers facing retirement; business owners who can make more money in other ways; investors more focused on income rather than capital gain, and the list goes on.

So I’m not saying that leasehold is good or bad. I’m saying today’s experts are not looking at leasehold through the right lenses — their clients.

Lawyers, financial advisers, lenders, real estate agents and the media need to look at leasehold differently, and realise that it can be a great fit if matched correctly.

AYou’re right that there’s nothing inherently wrong with buying a house on land that you lease from someone. It’s much cheaper than other property, and could suit some people.

The biggest problems usually stem from the fact that a rent review takes place only every 20 years or so. And if the rent increase is based on how much the land value has risen, the rent might well be multiplied.

As I said last week, an Auckland woman in 2013 abandoned her property after lease payments zoomed from $8300 to more than $70,000 a year.

Much more frequent reviews, perhaps annually, would remove such shocks. Even so, when land values soar — as they have done recently in Auckland and now elsewhere — annual lease payment increases could still be steep.

I wouldn’t like to see a retiree taking on such an arrangement unless they could cope with that. It’s not wise to just say, “If the lease payments rise too fast, I’ll sell.” In those circumstances, there might be no buyers.

Landlords, too, need to know what they might be in for. In 2013 a landlord wrote to this column: “Currently I have a leaking apartment that requires $120,000 of repair work, plus because it is on leasehold land the ground rent increases have destroyed its value as an investment.”

As I also said last week, “This is a game for someone who can afford to lose at it — maybe someone who buys ten cheap leasehold properties and some turn out well because they were so cheap, making up for the disasters.”

There’s an irony here, though. If property prices plummet — which some people are predicting — owners of leasehold houses might do quite well. Their lease payments might even fall if they are reviewed frequently.

But anyone entering any major financial commitment should always think through how they would handle a worst case scenario. With most property buyers that would be a big mortgage interest rise. With buyers of leasehold property, it should also include a big lease increase.

QIn your reply last week to the lady who was asking about her KiwiSaver account you made a basic maths error, which you also made about three weeks ago when helping another lady who wanted to contribute for her daughter.

Eighty-three dollars a month will not come to $1043 a year, to get the maximum government contribution. In the previous case the fortnightly figure you gave also was not enough to make $1043.

I look forward to your Saturday column. It is my favourite part of Saturday’s Herald. Arohanui.

AArohanui to you too. It’s much easier to be caught in an error by someone who signs off that way, and makes such a kind comment about the column! (I usually edit out compliments, but decided not to this time.)

You’re quite right. Somewhere in the back of my mind I’ve blended $87 — the correct monthly amount — and $1043, and come up with $83. Very slack of me.

I wasn’t wrong with the other figure, though. It was weekly, not fortnightly, and I correctly said “You might want to set up an automatic contribution from your bank account of $20 a week.”

It’s true that $20 times 52 is only $1040, but that’s so close to $1042.86, the maximum credit before rounding, that it doesn’t matter.

Besides, $20 a week is easy to remember. And because there are 52 weeks and one day in each year — plus one more day in leap years — a weekly $20 contribution will bring your total to $1060 in some years.

The weird $1042.86 total is actually based on $20 a week. If you divide $20 by 7 to get a daily amount, and multiply that by 365 days, you get $1042.8571.

Thanks for pointing out the error. And apologies to anyone who has set up a monthly $83 contribution. You might want to change it to $87, to pick up $23.43 more tax credit each year. It all helps.

The $20-a-weekers might even want to change to $21. The difference in your tax credit in some years — a whole $1.43 — might buy you a third of a cup of coffee.

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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.