- Where should a 13-year-old put his regular savings?
- Extra repayments on a fixed mortgage.
QI am 13 years old. I have savings of around $3000, currently in a Westpac savings account.
I earn $52 per month in pocket money and $60 per month doing a paper round.
If I mow the lawns I can earn another $30 per month. I also receive cash from my grandmothers for my birthday and at Christmas.
I am keen to invest my savings and earnings in a way that will earn more than I currently get from putting it into a savings account.
I am interested in the share market. What do you think? What other forms of investment might be suitable?
AI’ve got a great idea. It’s a particularly good way to invest via a share fund — which is the best higher-risk, higher-return vehicle for those with a small amount of money. And it’s just been announced this morning!
But before we go into detail, let’s make sure it’s right for you.
First question: When do you think you will spend your savings?
If it’s more than ten years from now, a share fund makes good sense. Over that period, you are almost certain to make higher returns than in the bank.
But, as always, higher return comes with higher risk.
In some years share values fall. Over shorter periods, the good years might not outweigh the bad.
If, for example, you expect to spend your savings on university in five years, there’s a one in nine chance that you’ll end up with less money than you put in, and a considerably greater chance that the money won’t grow as fast as it would in the bank.
On the other hand, there’s still a better than even chance that you’ll be better off in a share fund.
You must decide if you want to take the risk.
Second question: Can you stomach periods of loss along the way?
Many people say they can. But when a downturn comes, they lose faith that their share fund will recover and get out while the value is low.
If you invest in a share fund I can promise you that your money will sometimes decrease. Can you promise me back that you won’t bail out?
Third question: What sort of share fund is best?
For years I’ve been a fan of index funds. They invest in the shares in a market index in proportion to the different companies’ weightings in the index.
For instance, New Zealand’s first index fund, TENZ, invests in the NZSX10 index of our ten biggest listed companies. Telecom is biggest in the index and in the fund.
The managers of index funds change the share holdings only as the index changes. This means investor fees are relatively low.
By contrast, the managers of active share funds do considerable research on which shares to buy and sell. And, while index funds perform only as well as the market covered by the index, active fund managers say they will beat the market.
But, as any bright 13-year-old knows, only about half do better than any average. And different funds are above average in different years.
Add the fact that active funds charge higher fees to cover their research and trading, and we find that only a small number beat index funds, after fees, over say ten years.
If we knew in advance which they would be, we would all invest in those. But we don’t. So index funds are a better bet.
By the way, index funds also have a tax advantage over active funds. But it seems likely the government will soon level that playing field, so we won’t go into that.
New Zealand has several index funds, including some good ones that invest in the world’s biggest companies.
But, with your small amounts of money, I suggest you concentrate on the four Smartshares index funds run by the stock exchange, NZX.
Why? The NZX is about to announce a new regular savings plan through which you can invest as little as $50 a month into these funds.
First, you make an initial investment through a sharebroker, perhaps with your $3000.
Then you set up a transfer of a fixed amount from your bank on the 20th of each month. “You can stop, restart, increase or decrease your contributions at any time,” says NZX. You can also make extra lump sum payments when you have spare money.
The best bit is there no charge — although NZX does earn interest on your money until the end of the month, when it is invested in your fund.
One big advantage is “dollar cost averaging”. Because you make the same investment each month, regardless of how the market is doing, you buy more units when they are cheap than when they are expensive.
That means your average price is lower than the average market price.
I recommend that you also get your dividends reinvested. That costs you 1 per cent of the amount reinvested, and will really boost your savings over the years.
Question 4: Which of the four Smartshare funds?
The funds are TENZ; MIDZ, which invests in middle-sized New Zealand companies; FONZ, which invests in our top 50 companies; and MOZY, which invests in mid-sized Australian companies.
I like FONZ, because no company can make up more than 5 per cent of the fund, so you get a really good spread.
If, after reading all this, you don’t want to take on share market risk, move your money into bank term deposits.
With interest rates currently much higher than inflation, they are perfectly good shorter-term investments.
QAfter reading your article last week I rang BankDirect re repaying $1000 extra a month off my fixed-rate mortgage.
I thought I would be able to do this randomly on those months when I had extra money available.
However, according to BankDirect, once I increased my payment by $1000 for one month I would be locked into making that payment each month thereafter.
Was that your understanding of this?
AYes it was.
Unfortunately, when this column was shortened a little last week, a phrase was deleted that affects you.
The paragraph should have read: “At ASB/BankDirect … you can repay up to $500 extra a fortnight or $1000 extra a month without penalty, provided you stick with that increase for the rest of the fixed rate term.”
There are, however, a couple of steps you could take:
- If your interest rate is lower than the current fixed rate, you could repay the whole loan now, without penalty, and replace it with a new mortgage that is part fixed and part either revolving credit or floating rate.
BankDirect spokeswoman Anna Curzon says you could possibly negotiate to do this without charge.
You could then make extra payments off the revolving credit or floating portion at any time, without penalty.
The trouble is that your new fixed rate would be higher. So it’s not worth doing unless the rate is only marginally higher.
- You could commit to repaying an extra, say, $500 or $300 a month for the rest of the fixed term.
When you have a spare $1000, you could use some of it on that month’s extra repayment and save some of it for the next month or two.
In any case, when your fixed term expires, it would be a good idea to switch part of the loan to revolving credit or floating rate at that point.
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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.