This article was published on 9 April 2016. Some information may be out of date.

Q&As

  • New index will tell more about how 65-pluses spend
  • Was I dismissive to a reader last week?
  • Is diversification the main point in a high-yield share portfolio?
  • Original high-yield correspondent explains his strategy
  • Sharebroker info useful but don’t get into frequent trading

QYou recently suggested not all is bad with this low interest rate environment,. as costs ought also to be stagnant-ish.

This is alarming as — even if prices stayed where they are — income from e.g. quality corporate bonds has dropped over a quarter in the last two years. This has a huge impact on the retired.

Plus petrol (and apples) aside, I have trouble thinking of anything that hasn’t gone up in the last 12 months. My power just went up (again) two weeks ago.

Even garlic and avocados — up about 20 and 50 per cent on last year and both something everyone should be eating — will soon just be Christmas treats. And they’re grown here. The lowering dollar is probably yet to be fully felt on the price of imported goods.

I think it better your advice leans more towards “get used to living on less private income, it may be a while for rates to rise… and don’t revert to the old finance company type risks”.

No need to publish this unless you want to. Maybe just think more about being flippant with those whose incomes are dropping substantially.

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”!

QI was disappointed at the seemingly dismissive manner in which you treated the letter (April 2 Retirees Face High Costs), almost scolding the writer for not being a regular Herald reader.

I enjoy reading the Herald daily enormously. However, recently I cancelled my subscription because I could no longer afford it. It had become a luxury. I now queue up with others to wait my turn to read the newspaper at my local library. I sorely miss the daily delivery, but needs must……

From the comfort of your own life, please remember that others may not be so blessed.

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.

QArguing that a high-yield portfolio may lack diversification — as you did last week — surely misses the point. A truly diversified portfolio would achieve average results by definition, but if you want higher than average growth or income you must focus your investments accordingly, sacrificing diversity.

Although, conversely, are you aware of Warren Buffett’s $1 million bet (www.longbets.org/362/ ) that he looks likely to win?

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.

QMary is correct (in last week’s column) that my $870,000 of shares has been bought over the years — nearly 20 years. The current gross dividend income is $78,000. At Friday’s close my portfolio is valued at $930,000.

All the investing has been done by myself, and no single company has more than $50,000 invested in it. I have a policy of selling and reinvesting when by doing so I can create greater taxable income ($1,500 to $2,000 a year).

Mary is also correct that I purchase solely for dividend, and any volatility in share prices is of no great concern as I am unlikely to ever need to sell the shares. I own a mortgage-free home in Auckland so that should take care of future housing.

Whilst dividends can change, they are nowhere near as volatile as share prices.

My investing is done via Forsyth Barr, who provide me with an emailed NZ Equity Weekly every Friday, and I also have online access to any research they have done on companies I am looking at.

My portfolio currently comprises : AWF, Cavalier, Chorus, Delegat’s, Genesis, Hallenstein’s, Heartland, Hellaby, Meridian, Methven, Mighty River, NZ Oil. Opus, PGG, Pyne Gould, Restaurant Brands, Skellerup, Sky TV, Spark, Steel & Tube, Team Talk, Tenon, Warehouse, Tower, Vector. As can be seen, some are very poor performers both from a share price point of view as well as a dividend point of view.

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.

QI am a client of a major sharebroker, First NZ Capital. Each month, occasionally more often, they send me a series of model portfolios to meet various criteria — growth, income, international etc, along with recommendations for changes. This costs me a small fee. I think it’s about $100 half yearly. Worth the money.

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.

Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd FSCL, a seminar presenter and a bestselling author on personal finance. 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.