NZ Herald 31 August 2024

ASorry Grumpy, but I just rediscovered your email, which you sent in mid-May. I wonder if you’re still feeling the same way, given that since then the S&P/NZX50 index has risen more than 6 per cent — not bad over three and a half months. If that pace continues — a big “if” — it would be an annual rate of about 20 per cent!

Nevertheless, it’s true that the index of our biggest companies — which includes reinvested dividends — hasn’t performed well over the last few years, as our graph shows. In fact, by my calculations the growth over the period you measured is less than 1 per cent. Which brings me to my main response to your letter: It’s risky to invest in shares or a share fund for less than ten years.

Market downturns over short periods are common. Occasionally a market will fall even over a decade, but that’s rare. If we look at the past decade, from August 2014, the index has more than doubled (up 139 per cent). And in the decade before that, it came close to doubling (up 91 per cent).

Whenever the value of an investment roughly doubles, we can use the handy Rule of 72 to work out the annual return. In this case, the investment has doubled over 10 years. So you divide 10 into 72, and get an approximate return of 7 per cent a year.

If another investment doubled over 6 years, divide 6 into 72 and the annual return is about 12 per cent. If it doubled over 8 years, the return is about 9 per cent a year.

You can also use the rule to find out how many years it will take for an investment to double. If you know the annual return will be about 6 per cent, it will double in about 12 years. We should note, though, that it’s almost always impossible to predict an annual return except when investing in long-term deposits or bonds.

Two more things about the Rule of 72. Firstly, it works only for one-off investments, not for investments like KiwiSaver that are drip-fed over time. Secondly, it’s pretty accurate for returns around 6 to 10 per cent. By the time you get to less than 4 per cent or more than 14 per cent, it’s pretty approximate.

On your point about investing in New Zealand shares versus international shares, in some periods one market has done better, in other periods it’s the other one. But I do agree that it’s wiser to spread your money around the world, to get as much diversification as possible. The easy way to do this is to use a New Zealand-based fund that invests in the shares in a global share index. There are several KiwiSaver and other funds that invest that way.

I also agree that for some people, the fluctuations of the share market are too uncomfortable. Still, I urge people who have money they don’t plan to spend for more than ten years to invest at least some of it in a low-fee share fund. It’s highly likely it will do better over the whole period than money in a lower-risk fund or bank deposits.

Your point about rising interest rates is, of course, no longer relevant. But in any case, it’s not a good idea to flick in and out of shares, depending on interest rates or any other market factors. Just put your money in and leave it there.

AWe seem to have a bit of a “Help the kids financially” theme lately. Great! And I really like your idea. The easiest way to find low-fee funds — in and out of KiwiSaver — is to use the Smart Investor tool on sorted.org.nz. Given that you want high-risk funds, click on Aggressive Funds, and sort by “Fees (lowest first)”.

Then have a look at the first five or ten funds. Some aggressive funds are specialised, such as InvestNow’s US 500 Fund, or Kernel’s Global Infrastructure Fund. I would go for one with a broader range of investments, such as a global share fund. If you click on a fund name and scroll down to Key Facts, you’ll get an idea of its range of investments.

Some other comments:

• The parents or guardians are the ones who will have to open the children’s accounts. It should be pretty straightforward.
• Aggressive funds are a really good choice, because they are likely to bring in higher average returns over the long term. But there will be big ups and downs. Warn the parents, and the children as they get older and hopefully take an interest, and encourage them to stick with the funds through thick and thin.
• Perhaps use KiwiSaver as a way to teach the young ones about investing, and advise them on reducing their risk when they get within about ten years of using the money to buy a first home.
• Don’t overlook the possibility of other grandchildren coming along — or in some cases step grandkids. I suggest you do the same for all of them.

AThanks for the warning — although the children of previous relationships by no means always behave badly in these situations.

I’m running your letter partly to balance last week’s letter from the adult child of a man in a new relationship. There are always at least two sides to these sad stories.

AThanks, but let’s not make assumptions here. I haven’t received any protests from landlords, who are usually not shy about complaining if they think I’ve been unfair to them. So let’s conclude that most landlords agree with what I said — that the Healthy Homes legislation benefits both tenants and landlords.

AYou’re right, I should have made that clearer last week. If you go overseas for less than 26 weeks, your NZ Super payments simply continue. If you will be overseas for longer — or if you are moving overseas — you may still be able to receive payments, but you must apply at least six weeks before you leave New Zealand.

The amounts you receive, if away for more than 26 weeks, vary depending on circumstances. Te Ara Ahunga Ora, the Retirement Commission, has written a helpful guide to this.

ASorry, but no. You can continue to get the government contribution when you’re overseas under just two circumstances:

• You’re a government employee working outside New Zealand
• You’re working overseas as a volunteer, “for token payment, or for a charitable organisation named in the Student Loan Act regulations, and the work meets one or more of the requirements set out in the Student Loan Scheme Act 2011”, says Inland Revenue’s website.

Working for a locally-based company doesn’t cut the mustard. That means, as explained last week, that when you start withdrawing from KiwiSaver after you turn 65, you will need to sign a statutory declaration, and you’ll lose the government contributions made while you were away.

Another comment in your letter caught my eye, though — that your New Zealand-based employer stopped its KiwiSaver contributions when you were overseas working for them. I asked Inland Revenue if that was okay.

“We can’t answer the question because we don’t know the employer’s circumstances,” says a spokesperson.

“Generally, the KiwiSaver Act only applies to an employer if the employer is a New Zealand resident or carries on business from a fixed establishment in New Zealand (unless the employer chooses to apply the Act). While the correspondent says that the employer is NZ-based it is not uncommon for an employment agreement to actually be signed with the parent company, which may not be within the scope of the KiwiSaver Act.”

So maybe your employer wasn’t obliged to contribute. But it still sounds a bit mean to me.