NZ Herald 25 March 2023

AFirst of all, good on you for looking into shares. While many New Zealanders own shares indirectly through their holdings in KiwiSaver or other managed funds, a much smaller number own them directly.

If you do it right, investing in shares should give you higher returns over the long term than other options such as bonds or bank term deposits, and comparable returns with property. And share investing — especially if you just buy and hold — takes much less effort than investing in a rental property.

However, I’m glad you’ve written before buying your shares, because I have a couple of concerns about your plans:

• Lack of diversification. You’re looking at four shares in the same industry. That beats investing in only one company. But still, specialising in any single industry heavily exposes you to problems that might beset that industry. What if there’s a revolution in how power is generated, and those companies don’t adapt well to the change, while new companies take over?

  Stranger things have happened. Nobody foresaw the Covid pandemic and how it would affect airline and airport shares, among others.

  It’s much less risky to buy shares in a wide range of industries.

• It seems you think that you — or I — can judge whether shares are a good buy.

Certainly the shares you are considering are unlikely to become worthless. You’re close to correct about the government involvement. Genesis Energy, Mercury and Meridian Energy operate under a mixed ownership model, with the government holding majority stakes,but Contact and Trustpower are private sector companies. Still, it’s hard to picture share prices in any of those companies dropping to zero.

But that doesn’t mean they are good investments. You want more than just not losing all your money. You want strong returns in the form of dividends and gains in the share price so you can sell at a profit.

What a lot of share investors don’t realise is that a company might be run well and have a bright future, but if you know that, so will other share investors — unless you are an insider trader, and that’s illegal.

When everyone knows a company — let’s call it Bright Co. — is looking good, many of the professional share investors who run KiwiSaver and so on will have increased their holdings in Bright Co. before you and I could. And when lots of people want to buy something, that pushes up its price.

Similarly, when bad news breaks about Dull Co, the professionals will sell fast, lowering its share price.

In other words, share prices reflect the knowledge we have about companies. So you’re just as likely to make gains, from a low base, in Dull Co as you are, from a high base, in Bright Co. Any share might be the best buy. That’s why there are stories about monkeys or other animals “picking” shares and doing better than many people.

What to do? Don’t try to pick shares. Instead I suggest you invest in an exchange traded fund, or ETF, that holds shares in many companies.

The only ETFs traded on the NZ stock exchange are offered by Smartshares, which is owned by the stock exchange. If I were you, I would invest some money in Smartshares’ NZ Top 50 ETF, which holds shares in our biggest 50 listed companies, and the Total World ETF, which basically invests in the world’s biggest listed companies.

Once you’ve made the purchases, stick with them through thick and thin.

Note that these investments won’t necessarily perform better than the electricity generator companies. But there’s a good chance they will. And you will be superbly diversified, so when some companies do badly that will often be offset by others doing well. You might miss out on unusually big gains, but you will also miss out on unusually big losses. It’s a tradeoff that most people are happy with.

AIf your provider gave you that advice based only on your age, I’m disappointed.

The Financial Markets Authority and others have been urging KiwiSaver providers to give investors more help with their fund selection as they approach retirement and at other times of change. But providers should point out that you need to take into account your other investments and your circumstances.

I suggest you work out how much of your savings, in and out of KiwiSaver, you expect to spend and when. Then hold the money you plan to withdraw within about three years in a low-risk fund, such as a cash fund, and the three-to-ten-year money in a middle-risk fund or a bond fund.

The longer-term money can stay in a growth fund as long as you can cope with the ups and downs.

It seems you probably won’t spend any of your savings for four years or more. But you might want to move the short-term money from balanced to moderate in the meantime, as a transition step, and then later put it into a cash fund.

On waiting for the markets to rise, I wouldn’t bother. They might not rise much for some time. And when they do, how will you know whether to wait a bit longer in the hope of even further rises? Trying to time markets doesn’t work well.

But I do I like the idea of making your move in three instalments, to avoid moving the lot at what turns out — when you look back on it — to be a bad time.

AThanks for a good example of laddering over the shorter term.

These days, banks are tending to pay the same or even lower interest for 5-year term deposits than one- or two-year deposits, which is unusual. More on this next week. But the banks are still doing the normal thing with terms of one year or less — they pay more if you are willing to tie up your money for longer.

So what your customer has done should work well. She’ll get considerably higher rates than if she had invested for just one month, and yet she will gain access to some of her money every month.

It’s interesting to learn that banks might prefer laddering over facing unhappy customers wanting to break their TD terms. Perhaps you could point that out to your bosses. Then, hopefully they would encourage you to help more customers set up laddering.

AThere’s no reason not to use more than one bank. It will help you keep track of what interest rates the different banks are offering.

It’s worth noting, too, that lately a few banks around the world have collapsed or been saved from collapse. The Reserve Bank is assuring us that New Zealand’s banks are not looking wobbly. Still, some people hold considerable money in bank term deposits over many years. And who knows what the future holds?

After the new bank deposit insurance scheme takes effect, some time next year, deposits totalling up to $100,000 per person will be covered . So it wouldn’t hurt, from now on, to limit your investments in each bank to that level.

AThat’s not quite what I mean by laddering, whether it’s term deposits or mortgages.

To ladder a mortgage the usual way, you would start with what you have — say one third of the debt with a one-year term, one third with a two-year term, and the rest with a three-year term. But when the one-year loan ends you would renew it as a three-year loan, and the same with the two-year loan. You would continue with just three-year loans from then on. See table.

That gives you one loan maturing every year, in an even flow — unlike what you are doing, which gives you anything from one to three loans maturing each year. If interest rates have risen a lot in year six or year twelve — years in which all your loans will mature — you’ll be hit hard by the new higher rates.

Still, your way is better than not breaking up your loan at all. Under both your system and mine, you spread out the impact of rising interest rates. Of course you also delay gaining the full benefits of falling rates. But it’s a bit like the situation in today’s first Q&A. Most people feel fine about that sort of tradeoff.

Another plus from laddering a mortgage: with part of the loan maturing each year, you have plenty of opportunities to pay extra off in a lump sum without penalty.

Oh and by the way, good on you for driving some hard bargains with your bank.