NZ Herald 26 November 2022

AYou’re in a pretty strong position financially, with that rental property. My vote is for going to university full-time.

If, instead, you keep working and skip the nursing idea, you’re not following your dream. That’s not okay. And if you do the degree part-time, it will be a hard slog. I did my MBA that way, and there wasn’t much time for fun.

What’s more, it sounds as if you don’t have the qualifications to earn high pay in an onshore job in the meantime.

Of course heading off to uni full-time won’t be a picnic either. You will presumably need to take a part-time job, while also eating — literally — into your savings. But you’ll get the qualification much faster, and then you can earn better money and forge ahead with reducing the mortgage and rebuilding your savings — in and out of KiwiSaver.

Highly motivated older students often perform well at uni, and enjoy it. And if you find it doesn’t work as you had hoped, you can always switch to part-time study to finish the degree.

Go well with your studies. The country needs you qualified!

ALucky boy! In these days of high interest and wobbly share markets, it’s quite possible he will earn more in a new term deposit than in a KiwiSaver account over the next year or two. But it might be the opposite.

Over the next ten years or so, he’s almost certain to get a higher return in a high-risk, low-fee KiwiSaver fund. So that’s where I would put it — assuming you think a first home deposit would be a good way for him to use the money.

If you want to keep the option for him to spend it on, say, university fees or starting a business, you could put it in a similar non-KiwiSaver fund, which he can access at any time.

On topping up every year, there’s no real need to do that, as he won’t receive the government’s KiwiSaver contribution until he is 18. But it wouldn’t hurt to do it anyway.

AGiven that cash funds hold term deposits and similar investments, you would think the returns on the two options would be similar. So how come the big difference you’ve spotted?

You’re looking backwards at cash fund returns, and forwards at term deposit returns.

The “headline” cash fund returns in the Smart Investor tool on sorted.org.nz are average annual returns over the last five years ending March 31. But term deposit returns are what the bank will pay you in future.

The unusually fast rise in interest rates recently explains the big difference you found. Rates will head downwards again at some point, and when that happens cash fund returns — looking backwards — will look better than forward-looking term deposits.

A more valid comparison would look at what’s ahead for both types of investment. But unfortunately we can’t predict future fund performance.

Note too that tax will be deducted from a term deposit return, but the cash fund returns in Smart Investor are after tax. They are also after fees — but that’s not relevant here, as there are no fees on term deposits.

So which is likely to do better in the future, after tax? One market observer says cash funds tend to perform a bit worse than bank term deposits. But the big advantages of cash funds are:

• You can withdraw money whenever you want to.
• You don’t have to bother reviewing the situation every time a term deposits matures.

Do those issues matter to you?

One other point: If you go with a cash fund, I would choose it on the basis largely of low fees, rather than recent returns. The top performer can easily do poorly next time around, but fees rarely change.

For the benefit of others, to find a KiwiSaver cash fund go to the Smart Investor tool on sorted.org.nz, click on KiwiSaver and then Defensive Funds, and sort by Growth Assets (lowest first).

Look for funds with “cash” in their name, and then check they don’t also invest in bonds, by clicking on Details under the Mix heading. If a fund includes bonds, your balance can fall sometimes when interest rates rise — as has been seen recently. If it holds cash only, your balance should never fall — which is what you want with money you plan to spend soon.

AAs I recommended last week, money you expect to spend within a few years is best invested in a cash fund or term deposits.

The higher-risk funds you’ve invested in are best for ten-year-plus money, because you don’t want to be caught doing what you are doing now — withdrawing when units in the fund have lost value, and thus making those losses real.

But it’s no use crying over dropped balances. What should you do now?

I suggest you move the $39,000 into a cash fund or term deposits. While your account might, indeed, recover soon, it might fall further. Too risky.

Review the situation in a year. If the markets have recovered and your higher-risk balances have risen, get things set up properly! Move the next three years of spending money into a cash fund, and the three to ten year money into a bond fund.

However, if your balances are still down, you don’t want to be moving more than necessary. So move just one year’s money into cash. Keep reviewing things each year, as described last week. Eventually you will have the “proper” set-up.