NZ Herald 6 April 2024

AWhere does investing stop and gambling start? It’s hard to say, but I reckon keeping money you plan to spend shortly in a high-risk fund borders on gambling.

You haven’t got my recommendation quite right. If you are in a growth or aggressive fund, I suggest you move to a medium-risk fund about ten years before you plan to spend the money. And then move to a low-risk fund — preferably a cash fund — when your withdrawal is about three years away.

This is based on the fact that it’s “safe” to be in a share-heavy investment over ten years or more because the likelihood of its losing value over that time is really low. Similarly, a medium-risk fund is “safe” over three years or more.

You’re right that if you stay in a high-risk fund throughout, you’ve got a pretty good chance of having more money to withdraw. But there’s also a fair chance the markets will fall at the wrong time and you’ll end up with less.

And it could be a lot less. If your investment was worth $20,000 many years ago, a return of minus 10 per cent would cost you $2,000. But if your investment has grown to $100,000 by now, such a return would cost you $10,000.

By the same token, of course, a 10 per cent gain is more powerful in the late years of an investment. But that’s where the gambling comes in. If you’re up for the risk, go for it! But I think most people are not.

Having said that, it depends on what you’re saving for. If it’s a holiday, you might stay in a high-risk fund throughout. Then, if you do well, go to on a luxury overseas tour. If you do badly, it’s time to jump in the car and see New Zealand.

One more point: In response to your “Furthermore” comment, you’re right that moving all the money in one go is risky. That’s why I suggest you move it in, say, four lots, a month or two apart — so it’s not all transferred at what turns out to be a bad time.

And if the markets have just plunged, you can always put off the move for a while. There’s room for flexibility in these fund shifts, but often not in the final withdrawal.

AYes, it would be wise to move that money into a cash fund, as explained above.

It’s good that you also have money in higher-risk funds, which could be moved to lower risk later on, to fund your later retirement — or left where it is if you don’t need it.

ANever judge a fund by its return over a single year. The quarterly Morningstar KiwiSaver Report for last December tells us the Milford Balanced Fund didn’t do as well as its peers in 2023 — coming second to last out of 34 balanced funds.

But over the last five years the fund’s average return of 8.3 per cent placed it first out of 21 balanced funds. And over ten years, its average return of 8.6 per cent also placed it first, out of 16 funds.

But could the fund’s recent returns mean it has lost its sparkle? Maybe. Or perhaps this will be just a glitch. The fund holds about 20 per cent cash, compared to about 9 per cent in the average balanced fund, according to Smart Investor on sorted.org.nz. And it holds about 41 per cent in shares, compared to the average 48 per cent. So it’s not surprising it underperformed when the share markets have done so well.

I wouldn’t leave Milford because of what’s happened over a year. But you might consider moving to a lower-fee balanced fund. Smart Investor tells us your fund charges the second highest fees of all balanced funds.

As Morningstar says at the start of its report: “Please note:

• “Past performance is not a guide to future performance. This year’s best performers can easily be next year’s worst.
• “Understanding your risk profile, and the mix of growth and income assets is critical.
• “Fees are the one constant that will always eat away at your returns. Take a close look at the cost of your KiwiSaver Scheme.”

To read the report, see here

AThere are a few important points to note here:

• Your returns are after tax. Published term deposit rates are before tax. That makes a big difference.
• You’re looking at one relatively short period — and with unusually high recent term deposit rates. When comparing returns, you should look at ten years or more. See the Q&A above.
• You can access money in a managed fund within a few days, whereas it can be tied up for years in a term deposit. This may or may not matter to you.

Also, I question your assertion of getting at least double 1.8 per cent in term deposits. Back in 2021, those rates were less than 1 per cent — before tax. See graph.

A suggestion: Put $100 in term deposits, for a comparison. Come back to me in ten years if that money gets higher returns than your balanced fund over that period. I would be astonished.

AWhen then Herald business editor Rod Oram — who died recently, sadly — asked me to write this column in 1998, he wanted a “column with attitude”.

And that’s what I produce. I love the diversions which, I think, keep the column interesting. If I stuck to just repeating “pay off debt” and “take more risk if you want higher returns”, would you keep reading? Would I keep writing?

Politics and personal finance are often intertwined. Admittedly we don’t usually get into the handling of Covid, but it was the correspondent who brought up the topic, not me. Anyway, we won’t be pursuing it further!

A second reader felt the same way as you, but read on.

AThanks. And another correspondent added to his email, “As regards how well we did in our Covid response compared to UK and other countries, I agree with you entirely. We did well.”

ALast week I said we’ve had enough correspondence on mortgage interest deductibility. But your letter ranges across other issues, and makes some interesting points.

On several of them, I bet there are readers who would argue with you. But I’ll stick to your final point. I don’t think mortgage interest on homes should be deductible. Homeowners are not in business earning a taxable income, against which costs should be subtracted.

Already New Zealanders with homes are — for the most part — better off than others. I would rather see taxpayer dollars going into helping people get into their own home. While your tenants are apparently happy renting, many are not.