A: Well done for investing steadily throughout your life. It’s wonderful how that can build up.
And your choice of investment certainly looks good these days. So I feel a bit like a wet blanket in pointing out that it’s not the only way – and perhaps not the best way – to build wealth. Sorry!
The obvious comparison is between gold and a share fund – both investments you can make and then “forget” about, as you say.
Our graph shows that, over the past 15 years, both New Zealand and world shares have, on average, performed quite a lot better than gold, before tax.
That’s not true over just the last few years, when gold prices have zoomed up. And there are other periods in which gold has performed better.
For example, if we look from the 2000 to now, New Zealand shares have more or less kept pace with gold, but world shares have not, because of the tech stock crash in 2000-2002 and the Global Financial Crisis of 2007-2009.
But if we look over the really long term – which is what you’re talking about – gold is not a star.
The Deutsche Bank Research Institute in Germany recently published a report using data from 56 countries, including New Zealand. Over the last 200 years, it found that, after inflation adjustment, global shares returned 4.9% a year and government bonds returned 2.6%. Meanwhile, gold returned just 0.4% a year above inflation and cash -2% (all in US dollars).
“History shows that investors have been consistently rewarded for taking risk and compounding the dividends and coupons available in equities (shares) and bonds,” the bank said. It acknowledged how well gold has performed since 2000, but “over the long term, gold has struggled far behind financial assets”.
Note that all the above share returns include reinvested dividends – which is what happens if you invest in a share fund, in or out of KiwiSaver. Direct investors in shares can also reinvest their dividends, or use them as income. With gold, there’s no similar return.
As hugely successful US investor Warren Buffett puts it: “It is an entirely different game to buy a lump of something and hope that somebody else pays you more for that lump two years from now than it is to buy something that you expect to produce income for you over time.
“If you own one ounce of gold for an eternity, you will still own one ounce at its end.”
What about volatility? Your observation that your gold has risen steadily can’t be quite right. The price can certainly wobble around. It dropped 6% in just one day on October 18 – the biggest percentage fall in 12 years, Investopedia says. Still, a glance at our graph suggests gold is less volatile than shares.
Another plus: if you also invest in shares, gold has some tendency to do well when shares do badly, and the reverse. So it sometimes calms down your total volatility. Having, say, 5% or 10% of your savings in gold can work well.
It seems you have more than that. Still, as long as you’re not planning to sell it to buy the groceries in the short term, go for it. It clearly brings you pleasure.
Not for you!
Q: Four years ago, I invested $200,000 in the Oyster Large Format Retail Fund, specifically the Albany Lifestyle Centre. The investment had a forecast interest rate of 5%.
Over the years, I have been aware that the “unit” resale value had been declining, but I was still receiving a reasonable monthly interest return.
However, lately the market resale value has dropped drastically. It is now down to approximately $135,000. I am receiving a reasonable interest rate return at this figure. I am 92 years old. I do not understand the finer details of the investment. I do not require the money today but might “tomorrow”. Is there any point in me “hanging in there”, or do I just take a loss and move on?
A: The most concerning thing about your letter is that, at 92, you’re investing in a property fund.
Like gold and shares, a property fund is a 10-year-plus investment. If you think you’ll want to spend the money in less than ten years, there’s a risk that you’ll take a loss when you withdraw. And if the withdrawal might be “tomorrow”, that risk is huge.
I asked Oyster whether it warns would-be investors of the risk.
“Prior to investing, Oyster provides all potential investors with a detailed Product Disclosure Statement (PDS) and encourages them to seek independent advice,” the company says.
“This document clearly outlines the risks associated with unlisted commercial property – including its long-term nature and limited liquidity – and makes it clear that these investments may not suit those who need to access their capital quickly.”
I checked the PDS. It does say, near the start: “There is a risk that you may lose some or all of the money you invest.” And: “Commercial property is a long-term investment.” And: “Investments in managed investment schemes are risky. You should consider whether the degree of uncertainty about the fund’s future performance and returns is suitable for you.”
But are warnings in the PDS – a document of more than 60 pages – enough?
I reckon the company should clearly outline the risks on its website, for people to read long before they sign on the dotted line.
Anyway, what should you do now?
The numbers in your letter are broadly correct, Mark Schiele, CEO of Oyster Property Group, says.
If you wanted to quit the investment now, you couldn’t get your money back from Oyster, but could sell your units on a secondary market facilitated by Oyster.
Why the big drop in value? “Like many sectors, unlisted commercial property has been affected by elevated interest rates and wider economic volatility over the past two years. These conditions influence investor sentiment and resale activity, which is reflected in the secondary-market pricing your reader refers to,” Schiele says.
“Property markets are cyclical by nature – as interest rates ease and market conditions improve, it’s reasonable to expect secondary-market pricing to adjust accordingly. If your reader doesn’t require access to the funds today, remaining invested may allow them to benefit as the property cycle turns and confidence rebuilds. Ultimately, though, the right decision depends on individual circumstances and investment needs.”
Schiele sounds fairly optimistic. But will the unit value rise from now, or fall further first? And when might a rise occur?
There’s no way of knowing for sure. In these circumstances, I often suggest a 50-50 solution. Assuming you don’t need the money to spend, sell half now and half in a couple of years. That makes for less remorse when you look back later. At least you made a wise move with half your money.
Act now?
Q: I am a 66-year-old woman with $166,000 in my KiwiSaver. My husband and I have a mortgage-free home in Auckland.
A year or two ago, my KiwiSaver dropped $14,000. It has now caught up again, plus a few grand extra. I would rather not watch this happen again! Would I be best to now withdraw all or some of my money and put it in term deposits?
A: Good on you for waiting until now to make your move. Too many people panic when their KiwiSaver balance drops a lot and move out of the fund then, making the loss real. By sticking with it, you have avoided that loss.
But yes, if it made you really uncomfortable, now is the time to move out.
Where you move to depends largely on when you expect to spend the money. If it’s within about three years, term deposits or a cash fund are good ideas. See last week’s column on cash funds, and the next Q&A today.
But if you don’t plan to spend some of the money for several years, you might want to move that portion to a low-to-medium-risk balanced or conservative fund. That will probably give you a higher return, although with a bit of volatility.
You could switch funds with the same provider. But note that the provider you mentioned tends to charge higher fees. Consider a low-fee provider. You can use the Smart Investor tool in sorted.org.nz to rank funds by fees – in or out of KiwiSaver.
Cash fund v term deposits
Q: Re the letter about cash funds versus term deposits (TDs) in your last column, my own observation has been that over the long term (a full interest rate cycle or more), cash funds on average provide better returns than short-term TDs (1-3 months). But TDs outperform cash funds for terms of six months or more.
In the short term this can vary, depending on whether interest rates are rising or falling. However, rather than trying to constantly juggle within the cycle, which is likely to be complex and unreliable, my own strategy has been to keep money that I intend to use or may use in the next six months in a cash fund, and beyond that in laddered TDs to cover a five-year horizon.
This has the added advantage of flexibility to deal with uneven short-term expenditure (eg timing of insurance policy renewals, rates installments etc) which average out in the longer term.
These observations are supported by my own “bush” analysis over the recent interest rate cycle, but I wonder if you could comment.
A: Interesting. As you say, the winner will probably vary depending on interest rate trends, but that’s not always obvious at the time. Besides which, most of us have better things to do than monitoring the markets closely.
I really like your solution. It’s simple and easy to operate. Every now and then, you must move money from a maturing TD into the cash fund to keep up the roughly six months’ money supply.
When you think about it, your observation is what we would expect. Generally in investing, you get a higher average return if you’re willing to tie up your money for longer. We see that not only with term deposits in most market conditions, but also with shares and property. They’re too volatile for short-term investing, but on average they give us higher long-term returns.
For those who don’t know how to ladder term deposits, you invest in several longer-term deposits and set them up so that you have one maturing every six months or every year. By doing that, you benefit from the usually higher interest for longer terms, but you still have access to some of your money fairly frequently.
One honest, one resentful
Q: Two disgruntled letters in your column last week.
Letter one from the Coromandel retirees owns up to their reckless financial decisions and accepts their responsibility. And offers lessons for others.
Letter two from an irate employee resents the withdrawal of other taxpayers funding the lure to continue saving for the writer’s retirement.
Just as interest-free loans for students – and now a potential CGT – are political meddling with taxpayers’ earnings, one correspondent is honest, one merely resentful. Both exhibit the need for New Zealanders to be more aware of their personal financial management – as your column is at pains to remind readers.
A: Hang on a minute. The second “irate” letter wasn’t mainly about the Government ending its KiwiSaver contributions to those who earn more than $180,000 – although that was the sour icing on a bitter cake.
The main issue is that the correspondent’s employer uses total remuneration, which means the employer contribution to an employee’s KiwiSaver is taken out of their take-home pay. That has nothing to do with taxpayer funds.
What’s more, the correspondent was concerned about many employees at his workplace, not just himself.
And I’m intrigued to see which government policies you’ve chosen to complain about. Is the huge amount of government money that goes into health care, or NZ Super, political meddling? Why pick on students? And is PAYE income tax political meddling? Why favour property gains over wages?
* 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 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 mary@maryholm.com. 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.
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