This article was published on 6 September 2008. Some information may be out of date.

Q&As

  • Family of five should go with several different KiwiSaver providers to compare them.
  • Last week’s look at the effects of gearing was deliberately simplified — and it probably didn’t make too much difference.
  • Two poetic reactions to last week’s poem.
  • Parliament move ends wait for woman not wanting to sign a work contract that treats KiwiSavers differently.

QI am in the process of signing up myself, my wife and our three young children into KiwiSaver.

My question is: would you recommend signing up with different providers (and potentially different fund strategies) to give us further diversification?

I feel nervous about placing our entire KiwiSaver savings with one provider, given the fairly erratic performance across the fund management industry.

My fund will be the largest as my wife receives only a small shareholder salary from our company (I am a self-employed IT consultant). Appreciate your thoughts.

ADiversification is pretty much always a good idea in investment. While each person can be in only one KiwiSaver scheme, with a family of five you have a good opportunity to spread your savings around several providers.

That’s not to say I expect any KiwiSaver accounts to hit the skids. As explained in earlier columns, KiwiSaver providers are not like finance companies. Your money is not invested in the provider’s business, but in assets bought at arm’s length by the provider. If a provider runs its business so badly that it folds, your investments should still be safe and you will be moved to a new provider.

However, as you say, different providers use different investment strategies and offer different investment options. They also differ in many other ways, such as quality of communication with investors, fee levels, flexibility of contributions, and so on.

If you want to find out how good a wine is, compare it with other wines. Similarly, to find the best provider for you, compare it with its competitors. This could work particularly well with your three children, who will presumably all receive the same contributions from you.

I suggest you put them with three different providers, but all in funds of much the same risk level. It will be interesting to see who’s account grows the fastest over, say, five or ten years. To keep things fair, though, you might have to top up the other children’s accounts at some point — and perhaps move them all to the best provider.

Moving should be easy. Your new provider will do all the paper work with your old provider and Inland Revenue.

QYour piece in last week’s NZ Herald about gearing and the effects of 20 per cent profit or 20 per cent loss, whilst interesting, was significantly understated.

You had not allowed for either the interest paid on the loans (likely to be considerable in the higher gearing) nor the costs of buying and selling. No financial advisor should be satisfied with the consequent error, which will magnify the highly geared losses considerably.

I wonder whether perhaps you didn’t want to frighten people too much!

AI wasn’t concerned about frightening people, but about confusing them. I wanted to simply show the effects of gearing — or borrowing to invest — which can be tricky enough to follow without adding further complications.

For those who missed last week’s column, it included a table that looked at light gearing, where you start with $10,000 and borrow $10,000 — perhaps to invest in shares, and heavy gearing, where you start with $10,000 and borrow $90,000 — perhaps to invest in a very cheap property.

If the investment grows by 20 per cent, light gearing enables your $10,000 to grow by 40 per cent and heavy gearing triples your money.

But if the investment falls by 20 per cent, light gearing leaves you with a loss of 40 per cent, and heavy gearing leaves you without your $10,000 and still owing another $10,000.

The table can be viewed at the bottom of the “Book: Get Rich Slow” page on www.maryholm.com [This page has been removed from the website]

You’re quite right that it shows an artificial situation, ignoring interest paid and buying and selling costs. But it also ignores some “pluses” — rental or dividend income and repayment of principal on the loan.

Including all of that in an example muddies the waters to the point that my message — how gearing ups the ante, making a good investment better but a bad one worse — can get lost.

In any case, adding back the missing items won’t necessarily paint a bleaker picture.

Let’s look first at adding interest expenses, rent and dividends. While it’s rare for current rents to cover interest payments on a recently bought property, in some markets rent exceeds interest. Similarly, for geared investment in shares, dividends sometimes more than cover interest.

Also, given that share and property prices rise much more often than they fall, it’s common for the gain on sale to easily make up for any cash shortfall during the investment. My 20 per cent loss scenario might be apt these days — and people are learning anew the downside of gearing — but over the long term it doesn’t happen all that often.

What about repayment of principal? If you have a principal and interest loan, as opposed to an interest-only loan, part of your loan repayments is building up the equity in your investment. It has nothing to do with gearing as such, but is a good by-product of it.

As for buying and selling costs, they certainly need to be taken into account — and they can be considerable for property. But they apply to all investments, geared or not. And trading costs can also easily be covered when things go well.

Just because many people overlooked the risks of gearing in the recent housing boom, let’s not get carried away in the other direction now. Gearing can still work well for those in a position to weather short-term financial storms.

QRe last Saturday’s poem on “Love, Drink and Debt”, trawling through the various websites I was unable to source the poem as printed in the Otago Witness, Issue 1171, 9 May 1874, Page 26, but I did find another poem by Alexander Brome along the same lines, as well as the information shown below.

THE MAD LOVER

I have been in love, and in debt, and in drink,
This many and many a year;
And those three are plagues enough, one would think,
For one poor mortal to bare.
’Twas drink made me fall in love,
And love made me run into debt,
And though I have struggled and struggled and strove,
I cannot get out of them yet.
There’s nothing but money can cure me,
And rid me of all my pain;
’Twill pay all my debts,
And remove all my lets,
And my mistress, that cannot endure me,
Will love me and love me again,—
Then I’ll fall to loving and drinking amain.

Alexander Brome (1620–1666) was an English poet, says Wikipedia. “He was by profession an attorney, and was the author of many drinking songs and of satirical verses in favour of the Royalists and in opposition to the Rump Parliament.

“In 1661, following the Restoration, he published Songs and other Poems, containing songs on various subjects, followed by a series of political songs; ballads, epistles, elegies and epitaphs; epigrams and translations. Izaak Walton wrote an introductory eclogue for this volume in praise of the writer, and his gaiety and wit won for him the title of the English Anacreon in Edward Phillips’s Theatrum Poetarum.

AOh dear. I don’t like the Mad Lover’s prospects much — given that “amain” means with all one’s might — nor his choice of mistress.

Brome sounds an interesting character. A pity he’s not around to write political verse about what’s happening in New Zealand these days. There’d be plenty of scope for satire.

QAlthough not an investor (parental attitudes and bad memories from Poseidon Mining), I frequently read your column and last week’s column made me think.

The poem you quote seemed familiar, and after some thought I came to the conclusion that it might be a parody of Longfellow’s “A Psalm of Life”. Suggest you might read it and see what you think, at http://www.potw.org/archive/potw232.html

AI don’t think the two poems are quite close enough for “Love, Drink and Debt” to be a parody, but I can see where you’re coming from.

Longfellow’s verse is certainly stirring, with all those exclamation marks. A sample verse:

Trust no Future, howe’er pleasant!
Let the dead Past bury its dead!
Act — act in the living Present!
Heart within, and God o’erhead!

Okay, all of you who feel we are straying too far from the column’s Money title — back to the financial stuff next week. But given the Herald rarely publishes poems, it’s been a lovely diversion.

UPDATE ON LAST WEEK’S Q&A ABOUT EMPLOYER CONTRIBUTIONS TO KIWISAVER

In case you didn’t catch the news this past week, the government has passed legislation making it “unlawful for employers to offer employees different salary packages on the basis of their KiwiSaver membership,” in the words of Labour Minister Trevor Mallard. If an employer does offer different packages, employees can take a personal grievance against them.

Employment agreements negotiated after September 2 “should take account of the changes,” said Mallard. However, the amendments won’t affect employment agreements entered into before that date.

It’s time for last week’s correspondent to have a chat with her boss about changing the company’s pay offer.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding 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.