- Pros and cons of employee share ownership schemes
- Mortgage interest lower than 80s, but …
- Ask your bank for higher interest on term deposits
- Laddering term deposits when drip feeding in
- A reader, columnist and subeditor all got it wrong!
QAs part of a bonus package, my daughter has been offered the opportunity to buy shares in the company she works for. In considering this offer, what kinds of things should she consider?
And why do companies offer this kind of deal to their employees? I’d be happier if she didn’t have to buy them but was given them. It seems strange to me that they would give a cash bonus and then ask the employee to spend it buying into the company, but hey, what do I know?
AI just heard an expert on the radio saying more employers, eager to keep their staff at a time when it’s hard to recruit new people, are setting up employee share plans.
Usually it’s a good idea to take advantage of such a plan, as the shares will be offered at a lower price than if you bought them in the sharemarket. You’re getting a bargain.
If you could sell them in the market straight away, it would be great, as you’re sure to make a gain. But nearly always the company will require you to keep the shares for, say, a year, before you can sell. By then, of course, the price might have dropped. But given you bought at a discount, hopefully you won’t lose much, and there’s a good chance you’ll make a healthy gain.
Through these schemes, companies hope their employees will take more “ownership” of their workplace. They have a slice of the pie — albeit the tiniest sliver.
And I have to say that once when I was in such a scheme, my workmates and I occasionally said to one another something like, “Hey, get back to work, or the share price will fall!” It was spoken in jest but, if repeated enough times, it might have made a bit of a difference to productivity and loyalty.
From the worker’s point of view, one advantage of taking part in an employee share scheme is that, as a shareholder, you will receive information on how the company is performing. And you might go to the annual shareholders’ meeting and question the chair of the board.
On the other hand, if we’re looking just at investment rules, you should sell the shares as soon as you are allowed to. Investing in a single share is risky. If you put the money in KiwiSaver or a managed fund that holds many shares, it will probably be considerably less volatile.
There’s another risk too. If the shares are a major portion of your investments, and the company went belly up, you would lose your job as well as your savings.
When big US energy trader Enron Corp collapsed in 2001, many out-of-work employees also saw a large proportion of their retirement savings, invested in the company’s shares, become worthless. There were some horribly sad interviews in a movie made about it all.
Over all, though, as long as we’re talking about a small amount of money, the advantages of remaining in the scheme will probably outweigh the disadvantages.
On why your daughter’s employer offered a cash bonus, perhaps they thought many employees wouldn’t have cash available to buy the shares otherwise. And if the company gave away the shares, employees would probably value them less.
QI have not forgotten the very high interest rates in the 1980s (peaking at around 18 per cent maybe, if my memory serves me well ?), when short term (one-year) interest rates were typically higher than the longer terms, and we invested accordingly.
I can’t remember when that began to “normalise” back to increasing rates with longer terms, but I do clearly remember the pain of the mortgage going from around 16 per cent at the start, increasing to over 21 per cent before things began to ease back. By comparison, today’s rates are a doddle.
AI also remember those high interest rates. They looked great if you were saving to buy a house, but horrific if you were paying off a mortgage.
Note, though, that in the 1970s and early 80s inflation was higher than deposit rates, and then the two moved roughly together for most of the 80s — both usually well above 10 per cent.
That meant that our savings didn’t really grow, in terms of what we could buy with the money. But it also meant mortgages weren’t all that big a worry, because our incomes were growing roughly with the high inflation. The whole balance of things was different then.
And before we upset people struggling with today’s rising mortgage rates by using words like “doddle”, let’s acknowledge one other important difference.
In the 1980s, the average house cost two to three times the average annual household income. That has soared to about ten times — give or take, depending on the region. In other words, houses are about four times as expensive, relative to incomes. That huge change outweighs the fact that mortgage rates are lower now.
“The current ability of a new buyer to finance a mortgage at prevailing mortgage rates is extremely low,” said Harbour Asset Management in a recent article. “It currently requires 64 per cent of the median household disposable income to service a 30-year mortgage on a median house.”
For people in that situation, nearly two out of every three dollars they earn, after tax, goes to their mortgage. It wasn’t anything like that hard back in the 80s.
A few numbers: On a $300,000 30-year mortgage, with a one-year fixed rate a year ago of 4 per cent, monthly payments were a bit more than $1,400. Now, at 6.5 per cent, they are nearly $1,900. The homeowner needs to find $500 more a month.
On a $800,000 mortgage, monthly payments have risen from $3,800 to more than $5,000. The homeowner needs to find $1,200 more a month. And there may well be more rate rises.
I take my hat off to all the people who are coping with huge mortgage payment rises. And I feel for those who are struggling to cope.
QYour correspondent last week who is considering investing at 5.25 per cent for four years should be able to achieve 5.30 per cent with a simple (hopefully) phone call to their bank.
Two of the “big four” banks are offering 5.30 per cent. In my experience telling you bank that does the trick quite easily, if you say what you want rather than ask.
Certainly in the past you have advocated checking what is on offer. On larger amounts in particular even just 0.50 per cent can make quite a difference.
Your comments on the laddering make perfect sense. Laddering over five years can be a really good option too.
AIt’s always a good idea to check other banks’ interest rates and, armed with that info, tell your bank you want more. Interest.co.nz lists the rates the different banks offer.
On laddering, yes, doing it over five years — or ten years or three months — is fine. It depends how often you want access to some of your money, and how long you want to tie it up for.
With short-term money, for example, you could invest one third for a month, one third for two months and the rest for three months. And then, as each term deposit matures, reinvest it for three months.
QA lot of the questions in your column about term deposit laddering have focused on lump sums. How do you go about laddering if you are saving a bit each month?
For example, I am fairly new to the workforce, and do not have a lump sum which I am willing to lock away just yet. I have previously focused on building up an emergency fund, and am now looking to put a portion of future savings in term deposits. I can save enough for a term deposit with Heartland Bank ($1,000 minimum term deposit) every six weeks.
Should I ladder these term deposits, by setting up the first as a 1-year term, the second as a 2-year term, and the third as a 3-year term, and then back to a 1-year term, and so forth? Or would you recommend I set up only 3-year terms, and let my drip feeding the savings take care of the laddering for me?
AI think you’re misunderstanding one point about laddering. If you had a lump sum, you would set things up by investing some money for one year, some for two years and some for three years, as you describe. But then, as each lot matured, you would reinvest it for three years. No more one- or two-year deposits.
There are three advantages to laddering:
- You spread out your investments over time. While some of your money will mature when interest rates are low, some will catch high interest rates. Most people prefer this to taking the risk that the whole lot will mature when rates are low.
- You are investing over longer terms which, despite the current situation, usually give you higher interest.
- You gain access to some of your money fairly frequently — yearly in our example.
As you say, it works well for people with a lump sum. In your situation, drip feeding money in, you automatically benefit from the risk reduction of spreading your investment over time anyway. That’s great. But it changes the set-up plan.
If you don’t expect to spend the money for several years or more, you could make each deposit for, say, three years. By continuing to deposit every six weeks, three years from now you’ll have 26 deposits on the go, with the first one about to mature. Reinvest if for three years, and keep doing that as each one matures — unless, of course, you want to use the money.
If you might want access to the money sooner, you could do the same as above but making each deposit for one year.
One thing to keep in mind: If this is a long-term investment, of more than, say, five years, you might want to instead use a KiwiSaver or non-KiwiSaver middle-risk fund. And if it’s for more than ten years, a higher-risk fund. Over the years you will probably get higher average returns than in term deposits.
Good on you for building up an emergency fund first, and then making a regular savings plan. That’s how to get ahead.
QIn your last column, under the heading “the best share picker”, your correspondent says of Warren Buffett, “He assesses companies and buys when he’s convinced a company is worth significantly less than the share price”. Please explain.
AIt should of course say, “…significantly more than the share price.”
The explanation? I’m guessing the writer wrote that too fast. Then I read it too fast, and so did the subeditor. We all knew what was meant. Not good, but human!
I can’t help but note that you say you are a retired accountant — presumably a detail man. Well caught!
Over the Years
Next weekend, this column will have been published for 25 years. Over that time, it’s been great to hear how readers have found suggestions or information — as often from other readers or financial experts as from me — that has helped them in their financial journeys
It would be wonderful if, in the anniversary column, we could run some letters explaining how people have found the column helpful over time. It might have been encouragement to: set up regular savings, pay down debt, take part in KiwiSaver, be braver with long-term investments, diversify widely, switch to a more suitable mortgage, organise retirement savings, or not react when markets tumble. Or perhaps it was a suggestion to spend less or spend more — depending on your circumstances. Or something else entirely.
The idea is that other readers might benefit from hearing people’s stories.
I would really appreciate receiving short emails along these lines, with a maximum of 200 words please, sent to [email protected]. The deadline is midnight this coming Monday. Please put “My story” in the subject line.
If your story is published, you will receive a copy of either of my two latest books, “Rich Enough” or “A Richer You”. Please say which you would prefer, and include your mailing address. There’s information on the books here.
No paywalls or ads — just generous people like you. All Kiwis deserve accurate, unbiased financial guidance. So let’s keep it free. Can you help? Every bit makes a difference.
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.