This article was published on 28 March 2020. Some information may be out of date.

QFor everyone who is feeling despondent about the unnerving fall in share markets at present, consider this anecdote.

A friend told me the other day that they were pleased that their “spare” capital was invested in a holiday home rather than shares at present.

It’s a very understandable feeling, however the reality is that right at this moment, the holiday home would probably be virtually unsalable, and if you were forced to sell who knows what price you might have to accept — 10, 20, 30 per cent less than a month ago? But you feel comfortable because you know that the “real” value of your holiday home hasn’t changed at all.

Try to feel the same way about your shares. Nothing that has happened has changed the real value of Apple, Unilever, Fisher & Paykel Healthcare, or most of the thousands of other companies that you are likely to be invested in.

The market price of any asset at any point in time is irrelevant unless you actually plan to sell. All that matters is its inherent long-term value.

AWise words — which also apply to investors in KiwiSaver and other funds that hold shares.

I’ve often thought that the price you would get for your house would vary widely if you held an auction every day. On one day two or three keen buyers might push the price way up. The next day you might be lucky to get any bids.

Shares are sold daily, in a public arena, so we all see the volatility. Not so with property, but it must still be there.

And the price fluctuations are often wilder in a holiday home area. In an economic downturn, several financially struggling owners may put their “baches” on the market at a time when there’s lots of uncertainty and hardly anyone is keen to buy. Prices can plunge.

But your main point is that the inherent value of most houses and shares doesn’t change in a downturn.

Sure, the values of some companies, such as airlines, may not fully recover. That can also happen to some properties if, for example, they are under threat from sea level rise. But after Covid-19 is well under control, most properties will be fine, and most companies will still be producing goods and services that people want, and their share prices will reflect that.

The key is to set yourself up so you’re never forced to sell an asset. That’s when people take big losses.

Please note: being forced to sell does not mean selling because you hate to see your KiwiSaver or portfolio balance dropping. Stay put!

QWe are both retired and our only income is NZ Super. We have in excess of $500,000 in bank deposits (all the same bank) which is earmarked for home renovations, new cars, travel and living expenses. We cannot afford to lose this money.

My questions are:

  • How strong are the banks and is there any likelihood that they will restrict access or take our money in event that the economy really tanks?
  • How does the Govt guarantee on deposits work?
  • Should we be taking our money out and putting it in gold?

AOn your last question, absolutely not! Gold prices can be really volatile. And in any case, the banking system is not about to get into trouble.

“New Zealand’s financial system is sound, with strong capital and liquidity buffers,” says a spokesperson from the Reserve Bank, which regulates the banks.

“The Reserve Bank has been in constant communication with the country’s retail banks and the New Zealand Bankers’ Association, and we are confident that they are well placed to respond to the impacts of coronavirus.

“We are continuing to monitor developments, and we’re ready to act to ensure markets, financial institutions, and the financial system operate in a stable and efficient manner.”

In recent years, the big banks have made huge profits. They are not vulnerable businesses. So it’s extremely unlikely you could lose any of your bank deposits.

But of course nobody can be 100 per cent certain about these things. And, despite what you think, New Zealand doesn’t have a government guarantee on deposits.

We did back in the global financial crisis in 2008–2011. And the government announced last year that it will introduce insurance for deposits of $50,000 or less, and perhaps $100,000 on joint accounts. But it hasn’t happened yet.

So how’s progress on that? “Design work on the deposit insurance scheme is well under way, but it will take some time until it is ready to be implemented,” says a spokesperson for Finance Minister Grant Robertson.

“In the meantime, depositors should have confidence in the ability of the financial system to withstand the stress posed by COVID-19.”

Right now, New Zealand banks operate under “open bank resolution” or OBR.

Under this system, if a bank failed, a portion of depositors’ funds in all types of accounts could be frozen, and you may get only some of that money back later. But the bank would open next morning — hence the “open bank” name — and customers would be able to access the rest of their money.

There would be a “de minimus” amount in on-call transactional accounts that wouldn’t be affected, so people could carry on their day-to-day banking.

Says the Reserve Bank spokesperson, “Open Bank Resolution is a long-standing Reserve Bank policy aimed at allowing a distressed bank to be kept open for business, while placing the cost of a bank failure primarily on the bank’s shareholders and creditors, rather than the taxpayer.”

Another worried correspondent wrote, “There seems to be a growing expectation by banks that they can use the savings of their depositors to offset a reduction in returns to shareholders or to recover their financial position in the downturn.” There’s absolutely no way that could happen.

The bank’s owners, shareholders and subordinated creditors would lose all their money before depositors lost a cent. That’s a big buffer.

Looking forward, “The Government and the Reserve Bank will continue to monitor the situation, and stand ready to introduce further measures to support the economy and financial system,” says Robertson’s spokesperson. “This will include actively monitoring financial institutions and providing advice to the Minister, as required, on any government response.”

Where does this leave you? Calm I hope. But if it gives you peace of mind, it wouldn’t hurt to split large term deposits among several banks. For one thing, it makes it easier to keep up with who is paying what interest.

QAm I correct in saying that if a bank — in my case BNZ — goes under, we could lose our savings — over $50,000, which I believe is the maximum amount the Government will cover.

I am most concerned that our life savings are in the bank for our retirement (we are now retired), and we might lose it as businesses and ultimately the banks fail with the virus threat.

Money under the mattress doesn’t really seem a good idea.

I would love to hear from you as my wife and I are worrying about this hopefully unnecessarily. It would put our minds at ease.

ARelax. You will have seen the previous letter. But you raise a couple of other points.

Firstly, could business failures lead to bank failures? Theoretically yes. But the government — which is in a strong position financially — is giving businesses all sorts of support.

As part of that, the banks are expected to cut some slack for both businesses and individuals. Says the Reserve Bank spokesperson, “We encourage those who are financially affected by COVID-19, particularly small to medium sized businesses, to contact their bank to discuss their situation.”

The banks are in a strong position to help out. I just can’t imagine enough businesses going down the gurgler to put any bank in jeopardy.

Secondly, you’re right that the mattress is not a good savings bank. Fire, flood, hungry rats or burglary loom larger as dangers than a bank collapse.

QI’m in a KiwiSaver growth fund and I want to switch to conservative for a month just to take pressure off my funds being mainly invested in shares.

Tell me please, do I lose a whole lot of units by doing so? And when I switch back in a month or so will I just pick up from where I left off?

AMost KiwiSaver providers don’t charge members for switching from one fund to another, which sounds good, but at times like these I wish they would, to discourage thinking like yours!

Let’s say that at the start of this year you had $100,000 in your growth fund, and your balance is now $75,000. You move the $75,000 into a low-risk fund, where it sits, earning low returns, until you move it back again. Here are two scenarios:

  • In a best case scenario, the markets fall further. If you had stayed in the growth fund your money would now be worth, say, $65,000. You’ve avoided that $10,000 loss.

    After a month you switch your $75,000-plus-a-bit back to the growth fund, just in time for a recovery. You’re better off by $10,000. Yay!

    But would you settle for that? You’d probably think, “The markets may drop further, so I’ll wait another month.”

    You’re right. The markets keep falling and you keep avoiding losses. And then, miracle of miracles, you finally decide to shift your money back to the growth fund at the very bottom of the share market downturn. So you gain from all the growth after that.

  • Okay, now let’s look at a worst case scenario. The markets rise from now on. As I write this, the world and NZ market indexes have been rising this week, and maybe that will continue. Who knows?

    It’s quite possible that, a month from now, your growth fund balance would have been, say, $85,000 if you’d left it alone. But you have only $75,000-ish to move back in. You’ve lost $10,000.

“Ah,” you say, “but I would wait. The markets will surely fall more. Everyone says we’re going into recession.”

Share markets don’t work that way. The professional investors — who run KiwiSaver funds and the like — already know short-term economic prospects are gloomy. So prices have already dropped. And it’s quite possible they’ve dropped too far.

We won’t know when we’ve reached the bottom of the trough until maybe six months or a year later. Then we might look back and say March turned out to be the low point. Meanwhile, you’re waiting in your low-risk fund, and missing out on some healthy gains.

Nobody, even the professionals, gets market timing right. I’ve seen many studies, over the years, comparing the average investor who moves their money around with the one who buys and holds. The latter always wins.

Sure, a few “movers” will outdo everyone else for a while, but that’s just luck. They get over-confident and try it again — and lose.

Go for a walk, read a book, watch a movie — do anything but watch your KiwiSaver balance.

A Note to Other Correspondents

I’ve never before received as many letters as now, and my heart goes out to all the worried people. Here are some basic messages that more or less answer many of your letters:

  • Many of you may find my article Getting a KiwiSaver WOF helpful — including retired people and those not in KiwiSaver. A lot of the advice also applies to other managed funds.
  • There’s no way anyone in a KiwiSaver fund will lose anything like all their money.
  • Markets always recover — often in less than a year, but sometimes it’s two or three years. It is never decades. Most people should stay put and be patient.
  • If your fund balance has dropped a long way, that means you’re in a higher-risk fund that will have gained lots in recent years. In 2019 alone, the New Zealand share market rose more than 30 per cent. Take the bad with the good!

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 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.