This article was published on 30 October 2021. Some information may be out of date.

QHere’s the thing. How on earth do you know the difference between investing and gambling? For the life of me, I cannot tell the difference.

Bank deposits return almost nothing, so they are not much of an investment. You may as well hide your money in the rose garden. No taxes, no fees.

Take a risk for a better return, and you’re a gambler, surely. There’s plenty of choice — take a punt on art, classic cars, Bitcoin, number plates, rental property, alpacas, phone cards, gold or shares.

The bigger fool theory relies on you finding a bigger fool to pay you more than you did in the first place. Somebody is bound to lose money at some point, surely. So Mary, what is the difference between investing and gambling?

AGreat question, which really got me thinking.

One distinction is that in gambling you expect a negative return on average — or you should if you’re wise. The casino or lottery organiser or racecourse or whoever runs the show wants a profit. While the odds are in favour of an investor, they are against a gambler.

Also, if you lose a gamble you are left with nothing. That’s not usually true of an investment. Let’s separate your list into three groups:

  • Art and classic cars — and many other collectibles. Investors in these often say they know a lot about what they are doing. But they have to know more than other knowledgeable buyers and sellers, and even then nobody can predict changes in taste.

    Still, if the value of an artwork or car falls, the owner often gets huge pleasure from the item anyway. That might be an ample return for them.

  • Bitcoin, number plates, alpacas, phone cards and gold. These are probably the closest to gambles. As you say, you depend on somebody thinking they are worth more than what you paid for them.

    But some of these have some inherent value. With alpacas, you still have the animals. With gold you could make some jewellery. And a number plate might still give you a giggle. Bitcoin and phone cards? I’m struggling. But in any case, you can usually get some money when you sell these items — even if it’s less than you paid for them.

  • Rental property and shares. These usually have huge inherent value. Even if prices fall, with property you still have the house and rental income — or an insurance payout if there’s a disaster. With shares you own part of a business, which in most cases will generate profits and pay you dividends, giving you returns that can compound over time.

    True, shares sometimes become worthless, but if you invest in shares listed on a stock exchange, most don’t. And, importantly, it’s easy to diversify your share holdings — directly or by using a share fund. A well diversified share investment will almost never lose all its value.

    What’s more, an investor can diversify further, by holding some shares, some property, some bonds and some cash. That considerably reduces their risk of a loss — especially over a long period.

Therein lies another difference from gambling. Usually a gamble is over in a short time. With investments, you can keep holding them for years, and quite often things come right.

Having said that, if you trade shares frequently, that’s more like gambling. Some experts say that if you get excitement from your share investing, you are gambling.

You didn’t include in your list investments in foreign exchange, or in derivatives such as options and futures. These are often zero sum games: for every dollar one trader gains another trader loses a dollar. Arguably this is gambling — and not something I would recommend.

But most investing, if done wisely, improves the investor’s wealth more than bank deposits or rose gardens. There’s risk, but it can be modified.

QI’ve been following your last few columns about working past 70.

This caused me to speculate about the offsetting direct and indirect tax contributions to NZ Superannuation by those working past 65.

My question is: Has the per annum taxation contribution by over 65s (as an offset to the cost of NZ Superannuation) been quantified for the following items?

  • Income tax. In-work people over 65 pay additional tax over and above that paid on universal superannuation.
  • RWT on retirement savings (both onshore and offshore).
  • Income tax on rentals, fund investments, dividends and bonds.
  • Family trusts. How many over 65s have family trusts which contribute tax?
  • Health insurance. Hip or knee joint operations contribute about $30,000 an operation — a saving for the health budget.

It is possible that these summed financial offsets across the retired persons demographic may be insignificant, but I thought I would ask the question to see if it had any quantifiable merit.

Please discard this letter if my speculation has no merit or exceeds 200 words.

AYou did exceed 200 words — and thanks for noting that — until I edited your letter. But your point is an interesting one.

I’m sure nobody has added all this up. Much of the data wouldn’t be available by age. Anyway, I’m not sure what a total would prove. Even if government income from those over 65 exceeds the cost of NZ Super, people in that age group use many other government services, particularly health care.

As a group, over 65s must take out more than they put in.

An argument can actually be made for not paying NZ Super to 65-plusers still working full-time — although I don’t think that would be fair. Your point that they pay income tax would be part of a counter argument.

QI am one of these statistics, still working at 71 and a half. And I have six grand and six great grandchildren. I don’t have to work.

I teach in early childhood education, 17 years with the same company, 10 years as an on-call casual reliever, with the option to accept or refuse daily jobs app style. I benefit experiencing a variety of locations, teaching styles, teams, to add to and gain knowledge from, while making a difference in the lives of the children, staff and parents, with the added bonus of keeping my brain active.

I am welcomed overwhelmingly by the staff and children, when I have not been to a centre for some time, and this is my drawcard to keep working.

The company has assured me that age is no barrier, if I can still “do the job”.

I never miss the opportunity to do other things, and I have had many overseas trips and travel within New Zealand. My employer has continually paid into my KiwiSaver from when I turned 65, and to top this, has paid me during level 4 lockdowns.

A little bit of give and take goes a long way.

ASounds like the perfect job for someone your age. Great to hear about such a good employer.

QAnother question re rental properties and retirement. My wife and I are both recently retired. We own our own home which is paid off plus two rental properties.

One is a new build, which our daughter and fiancé are renting. We have agreed to refund the rental paid by them in five years to assist them to purchase a place of their own. This has a mortgage of $1.3 million of which we are paying interest only. The rental is covering the interest payments.

The second rental is a new build purchased ten years ago. This has a mortgage of $140,000 remaining. It is managed by a property manager.

We also have managed funds of around $720,000 from which we are withdrawing 5 per cent per annum to live on as well as our super.

The tenants in the second rental have a fixed term coming to an end in a month.

Should I sell the second rental, pay off its mortgage, reduce the mortgage on the new rental to meet the bank’s lending rules and invest the remainder (about $440,000) in a balanced fund? Or continue to rent out the second rental?

ADo whichever appeals. There’s no way of telling whether Plan A or Plan B will make you better off, because we can’t predict house prices or fund returns. But either way, you will clearly be comfortably off.

See the next Q&A for some thoughts on investing the sales proceeds if you decide to sell.

QWe are about to sell a rental unit which we originally bought for a retirement investment. We think prices have just about plateaued and we will make a considerable profit — $310,000 — from our eight-year investment.

How to invest best in this financial climate? We are considering putting it in my low-risk conservative KiwiSaver account — I am over 65 but still working. This way it would be on call if we need any of it but earning better that the term deposit rates.

We do have smaller investments on term deposits with ASB and Heartland as well, which renew periodically, but as you know the interest is very low. We own our home with nothing owing on it. What do you think?

ABasically it’s a good idea to use your conservative KiwiSaver account. But I encourage you to put the money you don’t expect to spend for several years in higher-risk KiwiSaver funds with the same provider.

Ideally you would put money to spend in three to ten years in a middle-risk bond fund, and longer-term money in a higher-risk share fund. Every year or two, move some money to maintain those time horizons. That set-up gives your money time to recover from market fluctuations, and your average returns over time will almost certainly be higher.

You must, though, promise yourself you won’t panic and reduce the risk when the markets perform badly — which will happen sometimes. If you feel you can’t cope with that, perhaps just use a middle-risk fund for all three-year-plus money.

QYou point out that investing in real estate often does not work out in retirement.

As an old age pensioner, I must say that it can, if properly organized. It is a matter of treating the exercise as you would any other business, not as a charity or a hobby.

I spent 25 years assembling a portfolio of residential rentals, and now enjoy a six-figure income from them.

However, it is not just a matter of buying anything anywhere at any price and then waiting for gold bars to fall out of the sky. I have always bought for income, capital gain is largely irrelevant to me, and I have never sold an investment property.

The properties must be carefully bought at the right price and at the right time, be well maintained, and let out to selected tenants at full current market rates. This takes time, as does acquiring the necessary management knowledge and assembling a team of competent people to carry out the repair and upgrading work.

Despite the best efforts of the current Government I do not expect to sell any of my properties, as I am enjoying the well-deserved fruits of many years of planning, effort and stress.

AYou are the exception. I was writing about the much more common situation — someone with one or two rentals, bringing in less income than they would like in their retirement. But your income is clearly high enough, and you enjoy owning your properties, so go for it.

Another correspondent with several properties says he plans to buy more in retirement. He adds, “Some will say that I must have been lucky, but as the saying goes — the harder I work the luckier I am.”

No doubt you have both worked hard to get where you are. But, at the risk of riling the two of you, can I suggest that perhaps there has been an element of luck in it too?

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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.