NZ Herald 5 June 2021

AFor readers wondering what on earth you are talking about, everyone who invests in shares — whether directly or via a share fund or a higher-risk KiwiSaver or other fund that holds lots of shares — has two choices around trading:

• Buy and hold. You leave your money where it is, regardless of what the markets are doing. This should be ten-year-plus money, and you can be pretty confident the markets will have time to recover from any downturns by the time you want to spend.
• Get in and out of the markets, hoping to avoid the downturns and be in for the upturns. This might mean cashing up or moving your money to a lower-risk fund, and returning when things look better.

I always choose buying and holding. It’s easier, and research shows that in the long run it works best.

However, people are always coming up with ways to try to predict market ups and downs, so they can win by timing their entries and exits. Our correspondent has found a system he likes, and sent me an article about it by Brett Arends on Marketwatch.com. Some excerpts:

“Money manager Meb Faber worked out years ago that pretty much every stock market crash or bear market in history has been signaled in advance.

“If you just cashed out when the market index first fell below its 200-day moving average, you avoided nearly all the carnage. (OK, in the sudden 1987 one-day crash you got all of a single day’s notice.)

“Even if you didn’t end up making more money in the long term than a buy-and-hold investor, he found, you made pretty much the same amount … and with far less ‘volatility’ (and sleepless nights).”

Arends continued, “Last year this trigger got you out of the S&P 500 (the main US share index) on March 2, just before the main implosion. The market rose above the 200-day moving average again, triggering it was time to get back in, on June 1.”

I looked back at those dates. The strategy meant you skipped nearly three quarters of the Covid plunge. You sold when the index had fallen to 3,090, missed the bigger drop to 2,237, and came back in at 3,056.

That’s tidy. But it doesn’t actually gain you anything — especially after you take any trading costs into account, as well as the bother of watching the 200-day chart. It would have been much more impressive if you had re-entered the market near its trough.

And what about the 1987 exception — one of the biggest share crashes?

The thing is that Arends, and our correspondent, seem to think the alternative to timing the markets is tossing and turning through downturns. But buying and holding doesn’t have to mean sleepless nights. It can mean ignoring the markets, and reading novels instead.

Sure, you can’t escape the talk during a big downturn. But I just look up from my book and say, “Here we go again. I’ll just sit tight and it will come right.” And it always does.

AOh dear. I may be partly to blame, because I don’t always mention the first-year situation when urging people to join KiwiSaver and receive the government contributions. I can’t always go into all the bells and whistles. But I’m sorry if I’ve misled you.

The basic rule is that once you’ve been in KiwiSaver a year or more, as long as you contribute $1,042 or more each KiwiSaver year — from July 1 to June 30 — the government will contribute its maximum $521. If you contribute less, the government puts in 50 cents for every dollar you put in.

However, in your first year in the scheme, the government’s maximum is proportionate to how much of the KiwiSaver year you have belonged.

If you join on January 1, halfway through the July-to-June year, the maximum will be about $260 in your first year. In your case, you joined right near the end of the KiwiSaver year, so your government contribution was tiny.

That applies only in your first year, though. From now on, you are eligible for the full $521. So do make the most of it.

After your first year, it doesn’t matter when you contribute, as long as it’s there by June 30. But I recommend setting up an automatic transfer to feed in $20 a week or $87 a month. It’s easier to budget, and you avoid putting the lot in at what turns out to be a bad time in the markets. Your provider can help you set up regular payments.

This is not the first time I’ve heard of bank employees giving the wrong advice about this. Clean up your act, banks!

You could try complaining to your bank. But unless you have proof of what you were told, I don’t like your chances of getting money out of them.

Rather than fighting, look at what happened this way: The $1,100 you contributed was a good start, and you will have earned returns on that money. From now on things will be even better, as you will also get full government contributions as long as you keep contributing.

Good on you for joining, and all the best for the future.

Reminder to others: Check that you will have contributed at least $1,042 to KiwiSaver between 1 July 2020 and 30 June 2021. If not, you can deposit extra money before the end of this month to get the government’s maximum input.

AIt seems you didn’t see last week’s column — and many columns before that — making the point that it’s best to take little notice of past returns, because they are often not repeated.

Switching providers is okay and should be easy. But chasing past returns is a mug’s game. I strongly recommend you switch to funds with low fees and stay there.

ASorry, but there’s no good news for you or others planning to become renter-landlords — as they are sometimes called.

For a while it felt as if I was on a wild goose chase on this topic. There are several government departments involved. But finally I got some helpful answers from the Ministry of Housing and Urban Development (HUD) and the Ministry of Business, Innovation and Employment (MBIE).

I asked first whether people in your situation could use KiwiSaver first home help and the First Home Loan and Grant.

Said MBIE, one of the rules about withdrawing KiwiSaver funds to buy a first home “is that members cannot use the KiwiSaver withdrawal to purchase an investment property, which is why members are required to live in the property for at least six months.”

Meanwhile, from HUD, “The First Home Grant and First Home Loans are designed to support people into their first home. The eligibility criteria are clear that the First Home Grant and First Home Loan are not for people looking to invest in an investment property, including an investment property that the owner intends to live in at some point in the future.”

Okay, I said, but why is it too hard to include renter-landlords who have never owned a home?

“We understand that people have a range of different plans to get into home ownership,” says a HUD spokesperson. “Extending the First Home Grant and First Home Loans to investors, even where the buyer intends to live in the home sometime in the future, would be inconsistent with the purpose and intended use of these products.

“Assisting people to purchase a first property that they intend to initially rent out could make it more difficult for first home buyers who want to purchase a home to live in from the outset.”

Not sure if that’s fair. Arguably you deserve help as much as others.

However, the spokesperson added, “It would also be difficult to define and administer this type of exemption. For example, it would need to be determined how long a purchaser could rent out the property and what would happen if the person never moved into the property.”

Sorry, but that is a fair point. This could become an administrative nightmare, with people cheating the system right, left and everywhere else.

The HUD spokesperson says there are no plans to extend the grants and loans to people in your situation. He adds, though, “The Ministry is monitoring trends in home purchases in New Zealand by investors and first home buyers. The Government’s aim is to give all New Zealanders a better chance at purchasing their own home.”

On KiwiSaver withdrawals, MBIE says, “While there are no immediate plans to change the KiwiSaver first-home withdrawal rules, the Government is always considering how KiwiSaver could be improved.”

Rays of hope. But don’t expect good news soon.

I suggest that if you buy your friend’s property, move into it, despite the inconveniences. Or buy another place more suitable to move into.