NZ Herald 8 November 2014

November 8, 2014

This article was published on 8 November 2014. Some information may be out of date.

Q&As

Early Brierley investment brings back memories of 1987
Reader and I disagree on share market performance — and who reads this column!
Family loan suggestion 1: put it in borrower’s will
Family loan suggestion 2: put it in lender’s will
Family loan suggestion 3: borrower should try elsewhere first
Why KiwiSaver Fund Finder idea wouldn’t work

QI enjoy greatly your weekly articles, which I read from Singapore. I feel compelled to add my own comments on the recent question from a reader whose son is turning 17.

Way back in 1985, I was given 100 shares in Brierley Investments when I turned 15. Two years later I also lost almost all that initial capital in the 1987 crash.

However, that birthday present was the spark to a lifetime of learning about money, finance and markets. I went on to work in the financial markets in Asia and now run my own equity fund. I am financially independent. Given the woeful understanding of money in general, starting early can only be a good thing.

Keep up the excellent commentary. You have readers wide and far.

AGosh, that was a baptism by fire.

I remember the day, in the aftermath of the October 1987 crash, when the Brierley share price dropped below $2 — down from more than $5 just a few weeks before.

On the same day, the Barclays Index — which became the NZX50 index — fell below 2000, down from close to 4000 earlier that year. I was business editor of the shortlived Auckland Sun newspaper, and we ran a front page story about how both the Barclays and Brierleys had crashed through the “2 barrier”.

One out of 20 New Zealanders owned Brierley shares. Up until the crash, many saw that investment as a path to riches. Afterwards, many abandoned the share market and, sadly, have never gone back.

It was somewhat similar soon after KiwiSaver started in mid 2007. Share markets plunged because of the global financial crisis.

That whacked the account balances of people in higher-risk funds. While they couldn’t bail out of KiwiSaver, no doubt some took fright and switched to lower-risk funds, right at the bottom of the market. Not a clever move.

Many, though, stayed put. Perhaps that was because everyone’s KiwiSaver balance was pretty low at that point so they weren’t too worried. Or perhaps — she says hopefully — it was because they had read about having the courage to invest in higher-risk funds for the long term, and to stick with them through thick and thin.

Those who didn’t panic and move have since seen their KiwiSaver accounts grow impressively, thanks to the super share returns of the last few years.

Clearly you, too, were made of tough stuff back in your teens. And it sounds as if your career certainly backs up the wisdom of sticking with the markets.

Thanks for your kind comments about this column. I usually edit them out, but this time I’ve left them in, as a sort of counterbalance to the next letter!

QThere are two main reasons why share markets have performed well in the past 13 years:

Money printing by the privately owned Federal Reserve Bank — $800 billion per month, enough to prop up trade with China and the cause of our 100 per cent increase in food and rent prices in the past eight years here in New Zealand.
Illegal wars/genocide/the Holocaust in the Middle East for oil and other minerals.

Maybe you could do an article on that? Around 1.2 million innocent children have been slaughtered violently in the past 13 years (since the same gang that owns the Fed Reserve staged the 9/11 attacks) to achieve those growth figures, whilst around 100,000 Kiwi children have gotten sick, abused and gone to school with no breakfast or lunch also.

That is the math behind the “glamorous” growth figures. Dehumanised by our love of money — to the point of murder/ war crimes and genocide. The sickness in our society — and the sickness so clearly in you and all the plastic/soulless corporate (corpse) turds that read your BS.

AThere I was, thinking that sharemarkets have performed well — not just over the past 13 years but over the past few centuries — because most companies listed on stock exchanges produce goods and services that people want to buy, and so the companies grow.

I share your concern about children, but not your ideas on what causes what. And several of your “facts” aren’t facts. Perhaps you and I will just have to disagree.

One thing puzzles me about your insights into who reads this column. If you’ve read it, does that mean you are also a P/SC(C)T? Happy Saturday!

QWe much appreciate the comprehensive response to your first correspondent (two weeks ago) on the topic of lending to family — notoriously treacherous as you so rightly say.

May I suggest that a valuable addition to the formal agreement would be for the borrower to make or amend their will, with a provision for the loan to be recognised as an asset to be repaid with priority over any other bequest or debt?

AA really good idea — which could prevent big problems down the track.

The original correspondence was about parents lending to their son for his study in Australia. Many young borrowers won’t have wills, and a provision like this could prompt them to change that, which is all to the good.

Our next letter suggests the lender’s will should also be amended.

QAs a lawyer since 1972, I agree with all that you said about documenting loans to children.

I would like parents to consult their lawyer, not only about the form of the IOU documentation (no-one can advise about that better than we can — particularly about the IOU being a joint one if the child is in a relationship and the loan/gift is to benefit both the child and the partner) but also about the benefits of amending the parents’ wills to include a hotchpot provision.

The provision should:

Record the loan or gift.
Mention any past or future loans or gifts to be brought into account (possibly excluding any below a certain $ figure or before a certain date).
Provide for those gifts and any unpaid loan balance being deducted from that child’s share of the parent’s estate.
Thereby prevent “double dipping”.

In an estate of $800,000 left to children A, B, C, and D, with a loan or gift of $40,000 to child B still outstanding when the parent dies, the $40,000 is treated as part of the estate. So there is $840,000 to distribute. That’s $210,000 each.

Children A, C and D would each receive that amount. Child B would receive $170,000 ($210,000 minus $40,000). And that would deal with the $800,000 estate because $210,000 x 3 = $630,000 + $170,000 = $800,000.

The hotchpot clause means that the parent doesn’t need to involve other family members at the time the loan or gift is made. A parent might want to help a child without other children knowing at the time.

The greatest benefit is harmony and fairness among the children after the parent has died.

One bonus I’ve seen is where the remaining siblings acknowledge that the favoured child needed and deserved greater help than the rest of them and resolve to ignore the hotchpot provision and direct the executors to divide the parents estate equally. The parents have given the siblings the chance to show how they care if they choose to override the hotchpot.

AWhen I started reading your letter, my reaction — to be honest — was, “Here’s a lawyer just drumming up business for himself and his colleagues.” But you put up a pretty good argument, which I suppose is what we should expect from a lawyer!

The hotchpot idea makes a lot of sense, and I particularly like your point that it can remove the need to tell other family members about a loan. While open communication is often good, there are situations when it may not be.

By the way, I love the name “hotchpot”, which Wikipedia says means “the blending or combining of property in order to ensure equality of division.” Apparently the word comes from a kind of pudding.

QMy wife and I (60’s) have made a habit of supporting our three children with loans etc. It has proven a very successful way of assisting them as they grow up and mature.

Some points that we have found are important.

These are transparent transactions as far as the other children are concerned, and available to each and all of them.
In each case the children must first go to one or more financial institutions regarding the proposed loan and receive a response/proposal from them before coming to us. Sometimes that has not been possible, but in most cases it has been.
We agree to meet the best offer they receive. Since we are generally using funds that would otherwise be invested, these loans form part of our investment portfolio, and (if you like) our estate, which the children will all one day enjoy.
The loan is documented as if it is with a financial institution, and a monthly bank transfer set up from their account to pay the interest and principal as agreed.
However, because these are loans to family members, if there is some temporary financial hardship we do agree from time to time to suspend repayment for a period, or to make the loan interest only etc. etc.

In 20 years of doing this we have never (touch wood) had a loan not repaid. Nor has it created any bad issues within the family. To the contrary the children express gratitude for the existence of this facility.

We are expats living nine months a year in USA and 3 months in New Zealand. We have children living in both countries.

AA good list. Your second provision is particularly interesting. It means the borrower has to make a clear case for borrowing the money, and showing they can repay it. It would also teach them how financial institutions operate.