At least those were the numbers when I wrote this! There is, indeed, always the chance of a big downturn, especially after strong growth.
Should you get out now? You might be glad later, or really annoyed at missing further gains.
As I’ve said so often it’s boring – and as you acknowledge – it’s not wise to move in and out of the markets, trying to avoid downturns while benefiting from upturns. Changes often happen really suddenly.
Every year, US investment research firm Dalbar publishes a comparison between sharemarket performance and how well individual share fund investors have done. It recently announced that the average investor’s return in 2024 was 16.5%. Sounds great, until you learn that the S&P500 return was 25%.
Why the difference? Investors either tried to time markets or switched to funds that had performed well, but didn’t continue to perform well – another common occurrence. It’s much wiser to just stay put.
However! It sounds as if you expect to spend at least some of your savings within 10 years. If so, I would move that money to a lower-risk fund now, regardless of what the markets are doing. High-risk funds are no place for shorter-term money.
KiwiSaver not covered
Q: We will retire next year and, although not cash-rich, have the option of selling our rental.
We’re currently in a major bank KiwiSaver moderate fund only. When we sell the rental, we will mix the money with some longer-term funds.
Is it safe to put it all in the bank KiwiSaver or should we mix it into other providers, due to the Depositor Compensation Scheme only covering $100,000 per person. Should we go to other banks?
A: Bank-run KiwiSaver schemes are not covered by the Depositor Compensation Scheme. It’s just for savings accounts, term deposits and the like. See tinyurl.com/DCScoverage.
Setting that aside, you can’t be in more than one KiwiSaver scheme. But if it helps you sleep at night, you could branch out into other providers’ non-KiwiSaver funds.
The most important thing, as mentioned above, is to put money you’ll spend in the next few years in a low-risk fund, three- to 10-year money in medium risk and, if you can cope with volatility, 10-year-plus money in higher risk.
More on gold v shares
Q: The comparison graph – Gold v NZ Shares and World Shares Indexes – with last week’s column is causing me some problems.
I presume the term “gross” means that the performance does not take into account taxes, brokerage fees and, in the case of managed funds, the regular charges levied – including performance fees and in some cases acquisition and withdrawal charges.
It looks like one of those comparisons regarding house prices and shares where the sale price of the house is presented, ignoring the amounts paid for rates, repairs and legal and accounting fees over the years. (My own annual fees for accounting are now due.)
Once purchased and held, the cost of holding physical gold seems to be zero. It would be interesting if those matters could be incorporated into such a comparison graph.
An argument in favour of gold should also point out that the holder of gold is less likely to sell as it requires a little more effort. Gold jewellery is also likely to enter the realms of personal attachment and less likely to be disposed of.
A: You’re right that it’s wise to take into account the costs when comparing investments. The trouble is that costs vary so widely in different circumstances. One set of reasonable assumptions favours one investment, another set favours another.
It’s true that there may not be many costs of holding physical gold, such as the ingots last week’s correspondent owns, although surely there would be insurance?
And I don’t think I would hold large quantities of gold at home, for fear of burglary, fire and so on. As a friend puts it, “If you hide it in the house, there is also the risk that on death no one knows about it and it goes to the person who next does a major renovation and finds it.” A note with your will would help!
But it might be better to pay for a safe deposit box or storage at a mint. Also, there will be transaction costs when you buy and sell, reflected in the difference between the buy and sell prices.
An alternative is to use a gold exchange-traded fund, or ETF. As long as it is backed by physical gold, this can be a convenient way to do it. But you would probably have to pay fees, including covering the manager’s storage costs.
Meanwhile, you make the costs of a share fund sound much higher than they need to be. I always suggest low-fee funds, which the Smart Investor tool tells us can charge below 0.1% these days – in and out of KiwiSaver. There are usually no separate brokerage fees. In index funds, which I recommend, there won’t be much trading and therefore much brokerage anyway.
Buy and sell fees are not common in share funds, and nor are performance fees. A well-chosen share fund can be pretty cheap.
The tax comparison is tricky.
Share funds – in and out of KiwiSaver – are PIEs, with a maximum tax rate of 28%. What’s more, if the fund holds New Zealand and Australian shares, it is taxed only on dividends – not on capital gains or losses. And New Zealand shares benefit from dividend imputation, considerably reducing tax.
Other overseas shares are taxed under the FDR (fair dividend rate) regime. You pay 5% of the value of the shares each year.
Tax on gold investments is also complicated, so I turned to tax expert Terry Baucher of Baucher Consulting.
“If a person is a dealer or trader in gold bullion then any profits will be taxable at the person’s highest personal income tax rate, ie up to 39%. But if a person is not a trader and can demonstrate the gold bullion was not acquired with a main purpose of disposal, then any gain on disposal would not be taxable,” he says.
Couldn’t any investor argue they’re not a trader? Baucher refers to an Inland Revenue document, found at tinyurl.com/NZTaxGold. “It notes that gold doesn’t provide a return”, and “The commissioner therefore considers that, for gold bullion, the nature of the asset is a factor that strongly indicates that it was acquired for the dominant purpose of ultimately disposing of it”.
“The counterargument is that gold is a part of a sophisticated investor’s portfolio and therefore in such cases can be treated as capital and not taxable. So, clear as mud, as usual,” Baucher says.
On your final point, yes, a share fund investment might be easier to sell. But I can’t imagine someone selling any investment simply because it’s easy. If anything, the ease of selling shares is a plus, given that we never know when we might unexpectedly need the money.
So where are we? My main reason for running last week’s graph was to show that while gold prices have soared lately, it’s not an extraordinary investment over the long term. Too many people make rash decisions based on short-term trends.
On whether gold beats a share fund on costs, the answer has to be: “It depends.”
Sunny-day umbrella
Q: I just read your recent Q&As on cash funds and term deposits. One thing you didn’t mention is preference shares, which both BNZ and ANZ have offered and trade on the stock exchange. ANZ pays 7.6% and BNZ 7.3%.
Both are perpetual and trading between 5% and 8% above the issue price of $1. Yes, you would pay a premium, but they seem a good option to bonds or term deposits for retirees in a declining interest rate market, as they don’t expire. And there is little price volatility.
It would save monitoring and rolling over term deposits, and no break fees if you need to sell. I haven’t checked market liquidity, mind. What do you think? What downsides?
A: Preference shares sit somewhere between shares and bonds. If the company gets into financial trouble, the first investors it pays are bondholders, and then those with preference shares, before shareholders get anything.
I asked financial adviser and columnist Brent Sheather how he rates them. He’s no enthusiast!
“I do not think bank preference shares are good substitutes for bank deposits for either short- or long-term investment,” Sheather says.
“That’s because these preference shares are subordinated to all the other debt of a bank, and banks are highly leveraged entities,” meaning they have lots of debt.
“For example, as at September 2025, BNZ’s balance sheet showed that the company had $135 billion in assets but just $13.9 billion in equity (shares). So if BNZ suffered a loss equivalent to 10% of its assets, that would be more than enough to wipe out all its ordinary equity and the value of its perpetual preference shares.”
He continues: “Looking specifically at the BNZ preference shares that your reader highlights, they might not be particularly attractive in ‘a declining interest rate market’ because their interest rate is reset at a floating rate in June 2029, and in any case, BNZ could opt to redeem them at that date as well.”
It’s true that in normal times, these bonds are not particularly volatile and it’s reasonably easy to sell them, Sheather says. “But whenever there is a sharemarket crash, liquidity in junk bonds tends to disappear.
A writer in the Financial Times alluded to the risks of junk debt when he described them as “umbrellas you can only use when it is not raining”.
“It is important to note that institutional investors tend to limit their exposure to junk debt to about 5% of their bond portfolios, and within that exposure, they diversify widely,” Sheather says.
Another downside: unlike term deposits, bank preference shares are not covered by the Reserve Bank-run Depositor Compensation Scheme.
“If a bank gets into trouble, they can suspend interest payments on their perpetual preference shares,” Sheather says. “If that happens, you can imagine how difficult it would be to sell them. And distributions are often non-cumulative, which means that if one isn’t paid, the bank is not obliged to pay it at a later date. Last, but not least, because there is no fixed maturity, investors may be unable to sell unless the bank chooses to redeem them.”
His final comments: “We don’t recommend them to our clients, in the belief that if they have a balanced portfolio of bonds and equities then their bond portfolios should be genuinely low risk. The high level of gearing of banks, both locally and around the world, makes me even wary of having too much exposure to their senior debt.
“A prolonged deflationary environment would be very bad news for bank customers – debt levels would be fixed but asset prices would be falling, which might mean big losses for banks.”
My conclusion: Let’s stick with cash funds or term deposits for short-term money.
PS: Last week we had a Q&A about a 92-year-old investing short-term money in a property fund. Now you’re suggesting bank preference shares.
Probably in both cases, the appeal is the higher interest rates than on term deposits. But whenever you’re offered a higher return, think about why the financial institution is offering that rate – which of course increases its costs. It must be because astute investors won’t take on the higher risk without being rewarded.
Higher interest will always mean more risk.
* 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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