QI read your articles weekly and see diversification within a portfolio of shares mentioned often.

I can understand and see the point of diversification and it makes a lot of sense to me. Where I become unsure is where does an index fund fit in this definition?

Let’s say I want a portfolio of New Zealand shares (ignoring the fact that I have already limited the diversification of the portfolio by investing only in New Zealand). If I buy (say) the Smartshares NZ Top 50 ETF (exchange traded fund) and only this ETF, does this holding constitute a portfolio of New Zealand shares and is it considered diversified?

Am unclear what the status of such a holding would be. Can you clarify this point for me.

ALet’s start by explaining share diversification.

  • If you own shares in just one company, a typical range of returns on that investment might be from minus 40 per cent to 60 per cent. The average of those two returns is 10 per cent.
  • If you own shares in two companies, the range of returns might be from minus 30 per cent to 50 per cent. The range is smaller because, if one share falls or rises a lot, chances are that the other one won’t move as dramatically, watering things down. Perhaps it’s in a different industry that is less affected by a changed environment. But the average return is still 10 per cent.
  • If you own shares in 50 companies, the range might be from minus 10 per cent to 30 per cent. With many shares, there’s a lot more watering down going on. But the average return is unchanged, at 10 per cent.

In other words, if you diversify — by owning lots of shares — you’re much less likely to get really good returns or really bad returns. And most people are happy with that trade-off. We hate big losses.

Now let’s introduce index funds — or any other share funds actually. They invest money from many people in a whole lot of different shares. Some funds might hold only about 30 companies, while other big international funds hold thousands. They are all pretty well diversified, but some are better than others.

A fund like the Smartshares NZ50 index fund invests in the biggest New Zealand shares — so it covers a pretty wide range of industries. But it doesn’t include smaller companies, which are more likely to either grow fast or go belly up. They are higher risk, and on average bring in higher returns over time.

That fund also confines itself to one country, as you point out. One advantage of investing in New Zealand companies is that you get credit for tax the companies have already paid, through dividend imputation. But it’s also great to have the majority of your savings invested internationally. It’s the same story: when one country is doing badly, there’s a good chance other countries will be doing well, to water down losses.

The simplest way to invest internationally is through a New Zealand-run fund that buys shares around the world. You don’t get caught up in tax issues and so on. Smartshares has a Total World ETF, and other providers have similar funds. They give excellent diversification.

QI read the piece last week about the age-old question of saving versus paying down mortgage.

One area of possible clarification. You rightly note that paying down a 3.99 per cent mortgage is like earning a 3.99 per cent on an investment. What may be worth adding is that it is on an investment after tax and fees. So in reality paying down such a mortgage is like receiving a gross return of around 6.5 per cent (assuming fees of 1 per cent and 28 per cent PIR).

As you say this is risk-free — so paying off the mortgage is probably the best risk-adjusted return available.

It’s still likely that over the long term a good diversified portfolio of shares will provide a higher return — but it’ll be a bumpier ride!

AGood point. Whenever we think about any investment, we need to take fees and tax into account.

QI noted your advice last week re paying down lump sums on fixed interest mortgages and that a fee would likely be charged. A lot of people are unaware you can pay up to a 5 per cent lump sum every 12 months on a fixed term mortgage without penalty.

AAnother good point. The rules on this vary with the lender. But most lenders permit some extra repayments off a fixed mortgage without penalty. It’s worth asking.

QJust read your article about a reader with a lump sum deciding to pay down a mortgage versus doing something else with it, and the fees associated with breaking a fixed term. I did that, and it cost me a grand total of $10 to break the term, pay a lump sum, then refix at a new rate. So it’s worth a chat with the bank before being put off the idea completely.

My one-year term was due to end in July, but by April I got a little nervous with where rates were headed. I’m glad I did, because only a fortnight later they went up again. Fortunately I had been making more than the minimum repayments so the hit to the wallet is the same, just the proportion of interest to principal has changed (such is life).

Talked to the bank and asked if they could do anything — not only did I get to refix at a lower than advertised rate but was also told the fee to break the term is actually lower when mortgage rates are going up.

Just in case if readers are worried that the fee to break a term is going to be hellishly exorbitant. :)

AYou’re quite right that penalties for repaying a fixed mortgage early are much lower when interest rates are rising, as they are now.

The bank is happy if you pay back a loan on which they are getting, say, 2 per cent, so they can lend the money to somebody else at 5 per cent. Who wouldn’t be!

When interest rates are falling, though, a lender is much more reluctant to end a loan paying them a higher-than-current rate. That’s when the penalty can be huge.

A couple of other comments:

  • It’s great that you had been making higher than minimum payments. That reduces total interest paid and, as you say, gives you a buffer against rising rates.
  • You’ve shown, once again, that talking to your mortgage lender can often get you a better deal. Well done.

QI’m 75. Surprise, surprise I’ve lived in “NEW ZEALAND” for 75 years.

Our socialist prime minister and her Maori caucus have an agenda to allow 16 per cent of the country to not only have co-governance but to force te reo onto the naming of all government departments,,all cities, council property, events etc.

Our democracy is being eroded, but there is hardly any media coverage as we are called racist.

Given up watching TV as all introductions are in te reo, which I don’t know or need to know. Glad I’ll be out of here before the kickback from the majority.

AYou’re reacting to a Q&A last week in which a reader angrily objected to the use of the words Aotearoa and kai in my column the week before.

And you’re far from the only one. In the nearly 25-year history of this column, I have never before received as many emails about a Q&A. The vast majority liked what I said, but let’s start with excerpts from the unhappy ones.

In reply to you, the use of Maori names for government bodies and so on might, in fact, strengthen our democracy. But anyway, you’ve now got a bit more media coverage for your point of view!

QFor those of us older folks trying still to speak French or Spanish if we can afford an offshore holiday, another language is a bridge too far!

And the last time I looked our country was still named NZ not Aotearoa, so if people want to change the name like the national flag, then it is Parliament’s job to do this not the minority in our society. Kind regards and tena koto.

AMost times someone uses more than a few common te reo words they promptly translate them. Nobody is calling on everyone to learn a whole new language.

But hey — well done for your signoff. It’s officially spelt tena koutou, but still, good on you!

QI have lived closely with Maoris at times in my life, and until 20 or so years ago, none of them used “Aotearoa”! (refers to only the North Island anyway).”

AI’ll let another correspondent reply to that, as follows.

QThe name Aotearoa has been around a lot longer than “New Zealand”, which was imposed by the newcomers soon after 1840. At the time of signing the treaty “New Zealanders” were the indigenous inhabitants of these islands, and the invaders called themselves “settlers”.

AAnd from another reader:

QI was taught at my convent school New Zealand had two names. This was in 1943, and I feel sorry for all of these people through ignorance who insist it is something new. I loved your reply, and I say shame shame shame on them. Thank you, Mary for having it printed.

AInteresting to hear what you were taught almost 80 years ago.

Three emailers said I shouldn’t have published last week’s angry letter. Here’s one…

QAre you not there to advise on financial matters? How dare YOU suggest that we try to learn from “our Maori culture”. We get just soooooooooo much rammed down our throats in every shape and form these days.

AAnd another…

QWhile I think it’s great that you’ve chosen to reply in te reo, I don’t think this person’s views deserved to be given a platform.

AI did hesitate — and sought advice — about publishing the letter. But we need to know what others think. Read on.

QInitially I wondered why you had given a person like that oxygen? Then I recalled the words of a very generous Maori Studies professor. When students complained about a student expressing racist views in a tutorial, she said that this should not be shut down but looked upon as an important “educative experience”.

She welcomed the opportunity to bring negative perceptions into the open so they could be challenged, and hopefully, changed. That way other people who may have unvoiced niggling doubts could be better informed.

The comment about “Kiwi” was ace! Kia kaha, kia manawa nui.

ASuch a wise professor.

QYou might be interested in the work done in the financial area to strengthen te reo Māori. Here’s an example.

AThanks for the reference, which is to a Maori Glossary of Financial Terms.

QI am 69 years old, and am loving the introduction of Te Reo into our language. I am hoping you get a similar response from a large number of people who think the same way.

AI did. Here are excerpts from some other letters:

  • “(Maori) culture is ours too, as we (I speak for myself as a Pakeha New Zealander) have adopted many of the wonderful expressions, attitudes (forgiveness and humility and pride — and more) from Maori culture.”
  • “The irony in your reader’s letter is that the English language is not from New Zealand, whereas te reo Māori (and kiwi) uniquely is.”
  • “I think, and hope, that the number of people who feel superior like that person will reduce as the years go by.”

QI sent a brief letter to the Herald editor stating that you deserve a block of Whittaker’s Miraka Kirīmi chocolate for your response to the criticism for using te reo in your column. Kia kaha, wahine toa.

AI’m still waiting for the chocolate!

Next week I need to get back to the financial knitting. But I do appreciate the outpouring of support. All the positive letters warmed my heart.

No paywalls or ads — just generous people like you. All Kiwis deserve accurate, unbiased financial guidance. So let’s keep it free. Can you help? Every bit makes a difference.

Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former 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.