But perhaps those issues are not important to you – or to your wife, who I assume knows about this idea!
And there are several advantages to renting. As you say, you don’t pay rates or house insurance – although you should, of course, insure your contents. And you don’t need to worry about maintenance. The roof is leaking? Call the landlord.
On the downside, your landlord might ask you to leave when it doesn’t suit you. And, generally, you have less control over your accommodation.
Then there’s the big question: would such a move make you better off?
I think you might be suffering from “short-termitis” – the tendency to look at how markets have performed in the recent past, and assume that will continue.
It’s true that some share funds, which I would recommend because of their diversification, have made annual returns above 10% in recent years. But there’s absolutely no guarantee that will continue. The markets might even plunge. See the next Q&A.
Still, if you have 13 years to play with, the chances are good that your money will grow pretty healthily over that time.
Meantime, if you stay put, what might happen to the value of your home? It won’t necessarily stagnate, just because that’s what happened recently. The future of the house market is anybody’s guess too, as discussed below.
In short, your idea might make you better off in retirement, but it might not.
If you and your wife enjoy a pretty big gamble, and would like a change of scene – perhaps living in the middle of a city, or way out in the countryside – give it a go. But please don’t come back to me and say it didn’t work out as you had hoped.
Gimme shelter?
Q: I run my own share and bond portfolio but, like you, I have long backed index funds to outperform active funds over the longer term.
However, I think we are approaching a point when the best active funds will have a distinct potential advantage. I am referring to the ever-growing concentration of risk around AI in funds such as the S&P500 funds.
The Bank of International Settlements (BIS) is certainly concerned, and in a working paper, “The AI Investment Race”, said in the summary that the current artificial intelligence build-out “ranks among the largest technology-driven investment booms in US history”.
Could it share the same fate as prior episodes? These were the canal and railway manias and the dotcom boom.
All my reading leads me to believe there is indeed a mighty bubble just waiting to burst. Of course, I don’t know when this will happen or what the catalyst will be, but the index funds are powerless to take any avoidance action; they must just ride the coming storm.
There are straws in the wind, such as the 50% fall in the Oracle share price.
I wonder if this is something you would like to address in your regular column.
A: This situation reminds me of when we are told to prepare for terrible weather. Sometimes it happens, but quite often it’s a bit of a fizzer.
But while it doesn’t matter much if we overprepare for a storm, switching investments because of a possible downturn has its price. Our returns – including on many KiwiSaver higher-risk funds – end up lower than they could be.
There’s no doubt the US share market is dominated by a small number of shares.
A recent newsletter from financial advisers Bloomsbury Associates says this has been the case for at least a century.
It cites research by Hendrik Bessembinder on US share returns from 1926 to the end of last year. He found that, out of nearly 30,000 companies, just 89 created half the total gains in the 90 years from 1926 to 2016.
And since then, the concentration has become even more intense. When we include the last 10 years, just 46 companies created half the gains over the century. Extraordinary.
The fact that most of the recent heavy lifters are in one industry is clearly worrying. If the AI industry falters, so do investment funds that are overweight in that industry.
That includes many index funds and ETFs (exchange-traded funds) – sometimes called passive funds – that invest in all the shares in the big US index, the S&P500.
What’s the future for those funds? Who knows? But I have a few thoughts on the situation:
Switch to a fund based on a global share index, such as the MSCI World Index, rather than just a US index. To some extent, global indexes are AI-heavy, but less than US ones.
In a global index fund, you’re exposed to a really wide range of industries and many different economies. Those funds are the Kings of Diversification.
And while US shares have grown more than world shares over the past 20 years, that’s certainly not always the case when you look back.
Invest only long-term money in any share fund, whether active or passive. I’m talking about money you don’t expect to spend for at least 10 years, ideally longer.
If there is a big downturn, stay put. It will come right. And in the meantime, consider how well you have done in recent years. From the bottom of the global financial crisis in 2009, the S&P500 index has grown more than tenfold. It’s been quite a climb!
While you say that “the best active funds will have a distinct potential advantage” because they can reduce their holdings in AI shares, they have to get their timing right.
Some active managers cut back their AI holdings some time ago, and as a result have slipped behind S&P500 index funds. The managers need to make up for that in their future decisions.
It’s really hard not only to successfully pick which shares to buy and sell, but also when to buy them, and later when to sell them. We can’t know in advance which fund managers will get all those decisions right.
Fees are higher in active funds because they cost more to run. That’s always a hindrance for them in the active-versus-passive race.
After considering all that, I’m sticking with a global index fund through thick and thin.
Bad forecast on all fronts
Q: Thank you for your articles in the Herald. You appear to be one of those who expect some things to boom again, as they usually have done.
Many, many people do not recognise that “this time it really is different”. The huge price of houses was the biggest disaster to ever hit NZ.
Listen to Lee Kuan Yew, who said that, for Singapore, home ownership was critically important. It gives people a stake in their country. But overpriced housing is oppressive.
And shares should be valued at what they are worth, not speculated on.
Finally, we are heading for a 1929-type Depression. Remember, the main reason for the Depression was very simple. People stopped buying stuff.
A: Oooh. Someone got out of bed on the wrong side this morning!
But I agree that New Zealand house prices are still way too high. As I pointed out in a recent column, average house prices from the 1940s through the 1970s were about two or three times household income.
Then they rose sharply – albeit with some big bumps along the way – to more than 10 times income in 2021. That’s an extraordinary rise.
In the past five years, prices have fallen back to about six to seven times income – a big drop over a short time.
Nevertheless, prices are still too high for many people. And that’s not good. I would like to see a government give higher priority to helping people into their first home.
I’m not sure where you got the idea that I expect future booms.
I said in the last column, “Meanwhile, of course, we can’t predict what will happen to balances in KiwiSaver or other managed funds either. It’s quite possible growth in shares and bonds will be slower than in houses. Or both types of investments will boom. Who knows?”
That’s a far cry from saying a boom is coming. All I’m saying is that it’s possible.
I’ve been watching market movements for more decades than I care to admit, and I’ve learnt:
Never rule out either a big jump or a big fall in the price of any asset. While markets are usually rational in the long term, they certainly are not always in the short term.Never say, “This time it’s different.” Actually, it’s always different. But pointing that out as a justification for predicting big long-term changes in any asset price is a fool’s game.
On shares, I’m not sure how we could value them at what they are worth, other than the way it’s always been done: letting all the would-be buyers out there come up with their assessments.
Nobody sensible buys a share because the company is doing well now. They buy because they think the company will do better in future, so the share price will rise. And, as I said above, nobody can predict that with accuracy.
On the causes of the Great Depression of 1929-35, we’ve had nearly a century to learn from what happened.
I’m not saying we won’t get another recession or even worse. Again, that’s getting into the forecasting trap. But the fact that downturns since the 1930s have never been as bad tells us that the experts do know more than they did back then.
Give singles a break
Q: As a follow-up to the Q&As about “just dating”, why does the Ministry of Social Development discriminate against married couples and long-term relationships?
Singles get full benefit, but couples have to use up all their combined savings before they get the Government help. Yet another way the Government penalises traditional values.
People ask, how can we avoid using up all our savings when one of us needs government assistance for medical/residential care? It’s obvious. Blow all your money on travel and pampering while you’re healthy, and let other taxpayers pay for your care later.
A: Oh no. Another wrong side of the bedder!
Let’s start with the facts. Couples don’t have to use up their entire savings before one of them receives the residential care subsidy.
In one common scenario, once a couple’s assets (excluding the family home and car) are below $164,731, they can get the subsidy for the care of one partner. The other partner is not left destitute.
For details, see the Work and Income website at tinyurl.com/ResCareNZ.
You could well argue the cutoff amount should be higher, but there are always other points of view.
Many, many people, single and couples, are living in retirement with way less than $164,731 in savings. They might well consider that couples complaining about having to spend their savings down to (that ridiculously complicated number) of $164,731 are spoilt brats!
Imagine you are running the Government, and you have to make all the decisions about how income received from taxpayers should be spent.
Do you really think we all – including many people really struggling – should pay for the care of comfortably-off people, so their children can inherit more of their wealth?
Sure, singles are not obliged to support a partner. But, at the risk of stating the bleeding obvious, that’s because they don’t have a partner. And while some would argue to the contrary, I think most people think those with a partner are better off in general. Give singles a break, mate!
* Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a former director of the Financial Markets Authority, the Banking Ombudsman Scheme and Financial Services Complaints Ltd. 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.
Catch up on the debates that dominated the week by signing up to our Opinion newsletter – a weekly round-up of our best commentary.