For those people, the main message has got to be: try really hard not to borrow. And if you must, try really hard to repay the debt as soon as possible.
Then there are the “over-savers”. They’re often single women, but not always. Fearful of the bleak future you describe, they put aside more money than they will need in retirement, and in the meantime miss out on treats and holidays. The main message to them: Enjoy life now, as well as later!
Too much AI
Q: You have frequently referred to the strong evidence that, over time and after fees, low-cost index funds outperform most actively managed funds. But does today’s unusually concentrated market qualify that advice?
America’s S&P 500 is now heavily weighted towards a handful of mega-cap technology companies, with much of their valuation influenced by expectations about AI.
A conventional market-cap-weighted index automatically increases its exposure as these companies become more valuable, and a sharp reassessment of valuations could therefore affect a surprisingly large proportion of an apparently diversified index.
As Milford’s CIO Wayne Gentle recently said in a Herald article, “AI may prove every bit as transformative as many expect, but being right about the technology is not the same as being right about the price.”
While this may not alter the long-term case for index investing, it could affect the 10-year picture.
Using a total-world index reduces this concentration, but does not eliminate it: US mega-caps remain a substantial proportion, while some non-US holdings share the same AI exposure.
Other index methodologies can mitigate this through caps on individual companies or sectors, or alternative weighting methods.
Are you aware of any low-fee index funds available through accredited New Zealand providers that incorporate such safeguards while retaining broad global diversification?
A: You’re right that some people are worried about passive (or index) share funds and ETFs – in and out of KiwiSaver – that invest in the shares in a US market index.
The big US indexes, such as the S&P500, have become increasingly dominated by AI companies as their stock prices have soared. Some say those prices are too high and might fall abruptly, bringing index fund returns down with them.
As you say, investing in a worldwide index fund – which is what I recommend – reduces the problem, but global indexes are still tech-heavy.
I asked three fund managers who offer index funds and ETFs whether investors should be concerned.
“Not necessarily,” says Dean Anderson of Kernel. “The top 10 companies are about 39% of the S&P 500 and 22% of a total world index, but they’re global businesses with global revenues. The US saw similar concentration in the 1960s. The difference now is that it’s tech-heavy, so diversification matters.”
Sam Stubbs of Simplicity adds, “We are less worried. Why? Because these companies in themselves are highly diversified and global, and most investors have a much more diversified set of investments.”
And from Matt Macpherson of Sharesies: “A global fund improves diversification, but still 60% of the world’s listed equity market value is US companies. But this is exactly how index funds are meant to work. The index is simply reflecting the market’s collective view of what those companies are worth. Markets can overvalue companies, but it’s hard to say an individual knows better than the market.”
Some index funds get around the “top heavy” problem by using an index in which no share makes up more than a certain percentage of the fund.
For example, the S&P/NZX 50 Portfolio Index invests, basically, in the biggest 50 New Zealand companies, but no company makes up more than 5% of the index. Smart has an ETF and SuperLife has an index fund based on this index.
But what about global shares?
I put your question to the fund managers – whether they know of any NZ-run broad-based global index funds or ETFs that cap each company’s weight in the index, or in some other way get around the problem.
Nobody came up with exactly that. But Anderson points out that, “The Kernel World ex-US Fund holds nearly 1000 companies across 23 developed markets (excluding the US), and its top 10 make up only about 12%.”
You can invest in Kernel’s ex-US Fund in KiwiSaver or outside KiwiSaver, and there are hedged or unhedged versions. The fees are a low 0.25%.
To add US shares to the mix, this could be paired with a total world or S&P 500 fund, letting investors “control their own US weighting and reduce concentration,” says Anderson.
Adds Stubbs, “For those wanting 100% US shares, BlackRock has a fund that limits the exposure of any one share to 3%.” This is the iShares S&P 500 3% Capped ETF.
A combination of the Kernel ex-US Fund and the BlackRock fund would go a long way to achieving what you want.
And, as Macpherson points out, “There are obviously a lot more options if you look to ASX or other offshore markets.”
A couple of final comments:
It’s risky to invest in any share fund unless you’re happy to tie up the money for at least 10 years.Investors and fund managers who have been avoiding or downplaying the US share market for several years, because of worries over technology dominance, have missed out on some really good returns. If a downturn comes, it will have to be sizeable to cancel out those gains.
I’m not saying such a big downturn won’t happen. I don’t know. But if it does, history tells us it will probably come right within 10 years, and in most cases much less.
‘Talk about generosity!’
Q: As it is time to examine the political parties and their budgets for promises in the forthcoming election, perhaps it is also time to examine social welfare benefits and decide whether the taxpayer is being rather extravagant with benefits payable to disabled people who are now living in a rest home or similar facility.
I am of course referring to your reader’s recent query about a sister in her 60s living in a rest home. The sister has never worked and not only receives various benefits courtesy of the taxpayer but apparently can also afford to have sufficient left over to accrue $80,000 in her KiwiSaver account!
Talk about generosity from her supported living payment and various entitlements. Apparently, there is no limit to how much we provide in the way of various assorted benefits courtesy of, again, the taxpayer.
A: And apparently there is no limit to the meanness of some people.
Let’s review what the reader wrote: “My sister, now in her 60s, has been disabled from birth and needs 24-hour care. She is in a rest home, funded by her disability and accommodation benefits, but also topped up from a trust left by our parents, in order to get her her own room, and to buy better food and toiletries (pads), because the rest home’s food is woeful and pads are inadequate.
“For many years, she has been putting aside whatever she can into KiwiSaver and will have maybe $80,000 by the time she reaches 65.”
Does it sound to you as if this woman lives a life of luxury – with meals out, travel, and fun times with friends?
If she’s been able to gain some security and dignity from growing her KiwiSaver account, she’s very welcome to a portion of my tax dollars to do so.
Deserved top billing
Q: Just had to write and say how impressed I was by the letter last time from the man with the clean pair of sneakers. How inspiring and a lesson to us all. It certainly deserved “top billing” in your column!
A: Agreed.
The right life insurance
Q: Just a quick comment on the first letter last time, where you suggested that someone get life insurance for himself and his wife.
A lot of people might think that refers to “whole of life” insurance – which of course means that, if you keep paying the premiums, the insurance company must at some stage pay out, so generally the premiums are relatively high.
But for most people, it is probably sufficient to just have life cover until children become adults, or a mortgage is paid off, or perhaps to age 65 when superannuation starts.
Since there’s a fair chance that the insurance company will never have to pay out, the premiums are much lower.
A: Really good point. The correspondent should get the cheaper term insurance, not whole of life cover.
There’s a good article on Consumer NZ’s website about life insurance. It includes, “The amount you get covered for should be enough to pay off your mortgage, clear any immediate debts, and provide an income for your family.
“One rule of thumb is to be insured for 10 times what the highest earner in your family earns annually. This means the mortgage can be paid off and leave your family some money to deal with other expenses.”
If you are a Consumer member – and I recommend joining – you can access a calculator to help you work out how much insurance you need.
How about Huntly?
A comment on your advice to the sneakers guy. With $160,000 to put into a property, they could buy something for around $500,000. Maybe not in Auckland. (Palmy, maybe.)
A $340,000 mortgage would cost $490 a week at 5.6% floating for 25 years. Rent would be higher than that so they could keep on saving.
It is always a risk, but fortune favours the brave. We are in a property slump at the moment, but historical trends are always rising, so this is highly likely to be a good time to buy property.
We make kitchens and see the cost of building going up a lot, so don’t expect prices to drop much more unless we get some dumb change in government coming in with policies that would result in New Zealand becoming a Third World country.
PS: I just saw a house in Huntly, asking $450,000, three bedrooms, double carport plus garage, freehold.
A: You’re ignoring one important issue: what we called “the immobility of labour” in economics lectures.
The family in the last column, and most others, probably wouldn’t find it easy to up roots and move from Māngere to Palmerston North or Huntly.
The father has been working for the same employer for 21 years, and in the current employment climate he might well have trouble finding as good a job elsewhere.
And there are four children in school. It’s no small thing to move 10, 12 and 16-year-olds to a new town. Some of my friends still carry scars from having to move towns and friends in their teens. What’s more, there are all the family’s social and whānau networks, which can be really important to wellbeing.
Still, you’re quite right, the family probably could afford to buy a home in some parts of the country – if they want to.
On what’s going to happen to house prices, while building costs are an important factor, so too is the balance between supply and demand.
I’ve been saying for years that the long-term rise of house prices relative to incomes can’t continue. And it has certainly changed recently – dropping from about 11 times household income to about seven times. But that’s still way higher than the two to three times income all the way through from the 1940s to 1990.
I’m not saying prices will get that low again, relative to incomes. But who knows?
By the way, your mortgage calculations are a bit different from the ones I get on the Mortgage Calculator at sorted.org.nz. But they give a rough idea.
Bruised about browsing
Q: Re last time’s correspondent in the affluent suburb who didn’t appreciate older people from nearby retirement villages browsing in her shop without so much as buying a cake of soap: Times may be tough for up-market businesses, but with that attitude it would most certainly be the last time I stepped into that shop again.
A: That’s telling her!
Tauranga Talk: I will be speaking at an event called Money, Money, Money! in the Tauranga Arts Festival, at noon on Saturday, October 31. To book tickets, go to tinyurl.com/TalkTauranga
* 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.