NZ Herald 9 April 2016

AOh dear. Apologies to anyone hurt by what I’ve said.

But I still feel bound to present a few of facts:

• In the year to February the food price index actually fell a tiny bit — 0.5 per cent. If garlic and avos soared, that must have been balanced by falling apples. (Shades of Isaac Newton. Oops, was that flippant? Sorry.)

  Over all fruit and veg prices fell, along with groceries and non-alcoholic drinks. Meat and fish prices were unchanged. The only category that rose was restaurant meals and ready-to-eat food prices. But maybe we all notice price rises more than falls.

• While income from savings has fallen, NZ Super may have made up for it. Super payments have just been increased by 2.7 per cent this year, and are now 34 per cent higher than in 2008, while inflation has risen 11.2 per cent, according to Bill English.

However, that leads us to the question of whether inflation, as measured by the Consumer Price Index or CPI, fairly represents the speed of price rises for retired people.

I mentioned a few weeks back that “Some have even suggested the government should calculate a Consumer Price Index for the elderly, to be used when they adjust NZ Super each year.”

It turns out that Statistics New Zealand has been putting together just such an index, along with 12 other indexes for different types of households: beneficiaries, Maori, five different income groups and five different expenditure groups. Quarterly publication of these new household living-costs price indexes, or HLPIs, will start later this year.

Why do this? Well, the CPI works well for monetary policy purposes — such as Reserve Bank decisions about interest rates. But it’s not so good when it comes to adjusting government payments, wages and so on.

One notable difference between the CPI and the new indexes: “The treatment of owner-occupied housing and interest payments will better align with individual household experience”, says Alan Bentley of Statistics NZ in a paper. Other differences will also make the indexes more fairly represent what’s happening in average households.

Bentley’s paper includes an interesting graph based on Household Economic Survey data. It’s for 2008, but he says the numbers change little over time.

The graph shows that, compared with other household types, superannuitants spend:

• A much bigger proportion of their budgets on health — predictably.
• A bigger proportion on household contents and services. And also, somewhat surprisingly, transport. This is despite free SuperGold Card trips, although those cards were introduced in August 2007, so maybe they weren’t used all that widely in 2008. In any case, perhaps retired people travel more.
• A bigger proportion on recreation and culture than all but the highest income households.
• A smaller proportion on interest payments, and booze and tobacco. The former will be largely because many have paid off mortgages. The latter? Perhaps it’s wisdom, or perhaps many heavy drinkers and smokers don’t make it to 65!

Several recent letters from retired people have mentioned the big impact of rises in rates and utility bills. While “housing and household utilities” are a major item in superannuitants’ budgets, they loom a lot larger in the budgets of beneficiaries and others on low incomes.

Before I’m flooded with letters from 65-pluses saying they can’t afford to travel or splash out on recreation and culture, let me add that this is data for the average superannuitant. For those living on just NZ Super or not much more, there are few luxuries. It must be difficult.

Could the new index be used for adjustments to NZ Super? Currently Super payments are adjusted each April by the higher of:

• The increase in the CPI.
• The increase in average net wages — set so that the married NZ Super rate continues to equal 66 per cent of the average net wage.

Wages tend to rise faster than the CPI, so the wage option is usually used. But if the new Superannuitants’ HLPI rises faster than wages, perhaps that will be used instead.

Is it likely that the new index will outpace wages? Data for 2008 to 2012 shows that prices for 65-pluses tended to rise a bit more than the CPI, probably because fewer superannuitants benefitted from falling mortgage interest rates. But there wasn’t much difference. Wages will probably still rise faster than the new index in most years.

But still, Bill English might use the superannuitants index next time he compares NZ Super increases with inflation. That should be a fairer comparison.

And no doubt superannuitants, politicians, unions, employers, researchers and others will find uses for this or the other new indexes.

PS: I agree that it may be a while before interest rates rise. And that it’s not a good idea to chase higher returns — from finance companies and the like — unless you thoroughly check the risk. But I’m actually not mean enough to say, “Get used to it”!

AOh dear again. My comment last week about what happens to old newspapers was meant to poke fun at me, not the correspondent. I’ve seen my column on sheets of newsprint serving all sorts of purposes. Humbling!

Beyond that, I think I responded fairly to the reader’s comment about tax rates. As for the fact that he made points that other readers have already made, I was just teasing when I said, “See what you miss when you don’t read the paper regularly!”

I didn’t get the impression he didn’t subscribe to the Herald because he couldn’t afford it. But if that’s the case, and my reply offended him, I’m sorry.

Good on you for persevering with reading the paper.

AI didn’t know about Buffett’s bet, which reads: “Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.”

Buffett — who became one of the world’s richest people through share investing — is betting against a US asset management firm that invests in smaller hedge funds. The winner gets to give $1 million to a children’s charity.

I assume your point in bringing up this interesting wager is that Buffett is backing a widely diversified investment — in 500 of America’s biggest shares.

And my point last week was that whenever an investment strategy reduces diversification, it’s important that investors see how that raises their risk. Sacrifice is okay, as long as investors know what they’re sacrificing.

The next letter is from the man who wrote two weeks ago about his high dividend income — a letter that led to your and other readers’ responses.

AThat helps to answer some readers’ questions, thanks. And it’s good to see you hold a wide range of shares, with a maximum of $50,000 in any one company. That certainly helps with diversification.

ASuch a service might be useful for other readers.

I’m not so keen on taking too much notice of the recommendations for change, though. Lots of research shows that investors who frequently switch their investments do a lot worse than those who buy and hold.

That’s partly because of brokerage, tax and other trading costs, but also because not even the experts are much good at predicting share prices.

Keep in mind that sharebrokers make more money if you trade often — but you probably won’t.