Q&As
The burden of money
QI am wondering if you are doing a current update on investing, considering gold’s rise etc etc.
I just inherited $450,000. Oh the burden of money, that I have avoided and been free from all my life!
I am going on 70, live a VERY happy, simple, content life. Never owned a home. Never wanted to. I have no investments, shares, etc and save on the pension.
There are companies coming on board with the government security deposit. Maybe I should spread $100,000 amongst them, eg Xceda paying 6% for six months.
PS I have had blood cancer, a pacemaker and defibrillator over the last 11 years, so I did all my travel in my youth. I am renting on the tip of a peninsula for very cheap rent. If that ever changed I would buy a motorhome.
AI’m sure many readers would happily relieve you of your burden! But — especially given your health issues — I reckon you should hold on to the money. You never know when it might smooth your path.
So … where to invest it? Not gold — or not much, anyway. Its price has risen a lot in recent years, but it can also fall fast. And in the meantime, you earn no interest on it.
By the “government security deposit” I think you’re referring to the Depositor Compensation Scheme, coming into effect on July 1. Under the scheme, if a bank or other deposit taker fails, depositors will get their money back, up to a maximum of $100,000 per person.
In the past I’ve suggested readers stick with bank term deposits rather than going to finance companies, which usually pay higher interest but are riskier. However, the new scheme will change that. So yes, you might want to invest in finance company or bank term deposits of up to $100,00 after July 1. For more on the Depositor Compensation Scheme, see here.
I suggest you “ladder” your deposits, so that one matures every one or two months. That way you have access to some of the money quickly if you need it.
You could also put money you don’t expect to spend within a few years into a medium-risk low-fee KiwiSaver fund, which over the years will probably give you a higher after-tax return. But I sense that you would like to keep things simple, and in your circumstances that seems fine.
Use a lawyer?
QI read with interest last week’s letter from the “rueful investors”. I am a retired English solicitor, and before moving to NZ, I specialised in the “misselling” of financial products.
I insisted that my team obtained financial advice qualifications in addition to legal qualifications, as I did, to better understand the clients’ problems.
Both the NZ and UK codes for financial advisers require an understanding by the client of the risks of the recommended investment and suitability for the client. In your correspondents’ case the investments obviously were not suitable.
The loss they have suffered should be measured, not against the sum invested, but against what they would have done if properly advised. They should not rule out consulting a local lawyer or a good financial adviser to help them with the actions you recommend. It’s a difficult field.
And yes, you’re right. They should get away from this crook as quickly as possible.
AWe’ve heard only one side of the story. But yes, maybe the couple should receive compensation for returns they could have received in a suitable lower-risk investment.
Before they speak to a lawyer, though, I strongly recommend they follow my suggestion last week — use the free financial disputes resolution system. They can find the adviser firm’s resolution scheme on the Financial Service Providers Register.
They don’t need a lawyer for this. The scheme will listen to both sides and can award money, which the adviser is obliged to pay. If the couple are unhappy with the outcome, they can then go to a lawyer.
Note, though, that many lawyers — unlike your team — are not particularly financial savvy, whereas the disputes resolution schemes specialise in that area.
I should add that I represent consumers on the board of one of the schemes, Financial Services Complaints Ltd. I’m biased, but I reckon they offer a great service.
A lightning reminder
QReading your Q&A last week entitled “Sell — and file a complaint” was a lightning reminder of my own awful experience at the hands of a mortgage broker and registered financial adviser team.
Worth adding for readers, who may not be fully aware of the motivation of pairs like these, is that both make considerable commissions despite the clients’ losses.
In my case, despite some compensation through the legal system, it ultimately cost me all my retirement savings, and I’m back to work at 70, while they launch new entities with names designed to fool people into trust. I’m saddened to hear that trusting people keep being fooled.
Absolutely, your advice for security over shorter timeframes has proven to be laddered deposits, for which I’m eternally grateful.
AGosh, that’s a tough story. We should note, though, that many financial advisers don’t earn commissions on the money you invest with them. Instead they charge you a fee, and give back to you any commissions they happen to make. For a list of these advisers, see the Financial Adviser List on the MoneyHub website.
Tax advice might help
QTo the person who borrowed money to buy shares, I hope they also seek tax advice on the deductibility of the interest paid on the loan. This may help towards a little relief from losses in value.
AGood point, although I would think their financial adviser — even if he or she gave poor advice — should already have told them about this.
Spend savings first
QRe: Last week’s letter “Holiday from Rates”, my wife (62, working part-time, income $24,000 a year, KiwiSaver $180,000) and I (67, retired, income NZ Super plus $140,000 in KiwiSaver) have been wondering about rates postponement.
But are we too young to take advantage of this “mini reverse-mortgage”? You’ve previously suggested avoiding a reverse mortgage if possible until aged mid-seventies or eighties.
We’re like last week’s correspondent — asset rich (Auckland house $2 million, no mortgage), cash poor, and with our rates at $5,600 a year could take advantage of the extra $100 a week. Remaining in our home for another 10–15 years would be our dream, along with good health of course.
Does the approximately 2.5% difference in interest rates (between the Auckland Council’s 6.4%, and a reverse mortgage rate at 8.9%) mean I should jump now into a little bit of debt?
AYes, if you had no savings. With a $2 million house — which will almost certainly grow in value over the years — the rates debt would remain a small portion of the house value.
However, you have considerable KiwiSaver savings. Would you be better off withdrawing $100 a week from that money? Compare:
- The 6.4% you’ll pay on the postponed rates total.
- The return you’ll miss on the money you withdraw from KiwiSaver.
If the KiwiSaver return is higher than 6.4%, you’re better off keeping your money in KiwiSaver and using rates postponement. But 6.45% after fees and tax is a fairly high hurdle year after year.
There’s also psychology. Most people would prefer to spend their savings than run up debt — albeit a small amount — in their retirement.
So I suggest you set up an automatic weekly $100 withdrawal from KiwiSaver, and skip rates postponement in the meantime. If the Council interest rate drops considerably, you might reconsider.
When to sell gradually
Q100% of your articles to date I have read with agreement. But in your last article, regarding dollar cost averaging (DCA) when selling, I couldn’t see a balanced rationale.
While DCA works well for buying because you accumulate more shares when prices are lower, the claim that selling gradually is inherently bad is an oversimplification.
When selling gradually might be logical:
- Market timing uncertainty — if you sell in one go you risk selling at a low price. If prices rise afterward, you miss out. Selling in increments smooths out price fluctuations.
- Tax — selling over time might help manage tax liabilities, especially if it keeps you in a lower tax bracket or spreads capital gains over multiple years (applicable for share traders).
- Liquidity needs — if you don’t need all the cash at once, you can hold onto some shares in case prices rise.
- Mitigating emotional biases — selling gradually can reduce the impact of making a large financial decision all at once.
When selling in one go might be better:
- Urgent need for cash.
- Conviction in market decline — if you strongly believe the price will fall further, selling everything at once may be preferable.
- Low liquidity and high transaction costs — if selling in small chunks increases fees or slippage (for large trades in illiquid markets), one-time selling could be more efficient.
Verdict: I think DCA for selling isn’t “bad” — it depends on the situation.
AWhat a comprehensive list — and much of it makes sense for some people in some situations.
However, last week’s question was about just one issue: whether dollar cost averaging works when you’re selling. I replied that it doesn’t, because you sell more when the price is low and fewer when it’s high. That’s all!
There are often other factors to take into account when selling. Perhaps I should have gone into all that, but I can’t cover every point in every Q&A, with far too many other good questions waiting to be answered! Anyway, now you’ve done it for me.
The psychology of investment decisions comes into several of your comments. Before I wrote that Q&A last week, I discussed it by email with a financial expert, including this:
Him: “There is also the emotional risk. You have decided to sell and if you defer all or part and the asset goes down you beat yourself up, as the risk of it going down was why you were selling.”
Me: “To counter your comment, there’s also the risk that you sell it all at the lowest price. I don’t think you should muck around, but I think selling some now and some soon reduces that risk. Perhaps I will put both points of view in the column.”
Him: “It is a question of which is worse. A, with the benefit of hindsight learning that you could have got more, or B, realising that you will get less than you thought. Most people have more regret around B, so my starting point is: Do it when you have made the decision — unless you want to time the market, and that is mostly a mugs game.”
Maybe I should have listened to my “both points of view” idea!
Usually units
QMy understanding is that KiwiSaver doesn’t operate like a unit trust, and therefore dollar cost averaging does not apply. There is no unit price, just an open ended fund. Is this not correct?
AYes (or should I say no?) it’s not correct. The vast majority of KiwiSaver funds operate like unit trusts, with unit prices. And while at least one scheme is not unitised, and in a few schemes people can invest in individual shares, dollar cost averaging also works in those situations.
Mathematical muddle
QIn your reply last week regarding dollar cost averaging, you’re mixing and comparing two different averages.
$15 is the average sale price (over two transactions). Then you use this average sale price as if it were the average price per unit purchased, which is actually $13.33 ($200/15) per unit purchased, not $15.
The calculation, 15 times 15 units, should be 15 units purchased times $13.3333 per unit (where $13.3333 = $200/15 — the average sale price per unit). Alternatively, you can do a weighted average calculation. Let’s not complicate the issue.
AI think you already did!
As a mathematician friend puts it, “The issue here is the term ‘your average price’. The average price you paid to buy units is $13.33 as the reader has said. But the average of the prices you paid is $15 as you said. Because you pay on average $13.33 but get something that is worth $15, on average, you win!”
It’s just like when you’re buying tomatoes. It’s good to buy more when they are cheap and fewer when they’re not.
That’s what dollar cost averaging does. And it’s a great way to encourage people to keep investing when the markets dip.
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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.