The Reserve Bank of New Zealand has released a new guide, upside, downside: A Guide To Risk For Savers And Investors, written by financial expert, Mary Holm. The guide updates a 2004 version –Snakes and Ladders – to include guides on investing in KiwiSaver. More than 70,000 copies of the original guide have been distributed!
Have a look at some of the key investment pointers to consider:
Focus on paying off high-interest debt first
Thinking about how to maximise your savings is a great habit to get into. But before getting in to the ins and outs of shares and savings accounts, it’s important to consider any debt you may have. Putting your savings into paying off debt as fast as possible offers a fairly high return and virtually no risk, as the investment guide explains.
And it makes sense to tackle any high interest debt first, such as credit cards.
“Paying off a loan which you are being charged 20% interest improves your wealth in exactly the same way as receiving an investment return of 20% after tax and fees, with no risk,” Ms Holm says.
And, just as an aside, it is also worth comparing your credit card interest rate with other providers and products on the market. There is no sense paying more than you need to. And, in some circumstances, you may even want to look into whether transferring your credit card balance to another provider will work out more profitable. Check out CANSTAR’s annual credit card ratings to see what interest rates and fees providers are offering.
However, if you have a student loan and are staying in New Zealand – where the loan is not accumulating interest – this is probably an exception the debt rule. Keep your focus to paying off debt that is hitting you in the pocket in terms of interest.
Increasing home loan repayments can mean long-term savings
If you’re a home owner with a mortgage, you’ll be well aware of the costs of servicing the debt. But something you might not have taken into account is the potential long-term savings by increasing repayments.
Here’s an example, as laid out in the guide:
If you have a $200,000 loan at 6% over a 25-year period, repaying an extra $50 a month will save you about $17,500 in interest over the loan term.
Aside from these returns, reducing your home loan is good financial insurance.
For example, low debt makes it easier for you to borrow more in the future for any possible emergencies, such as ill health or redundancy.
Fixed home loans may be the exception to this rule. In some situations, lenders will sting you with early repayment penalties – particularly if you try to make large lump-sum payments. If the lender is going to charge such a penalty, it’s a good idea to consider alternatives, such as putting any extra cash into a term deposit until your home loan fixed term ends.
Investment risk is not always a bad thing
For the financially conservative, taking an investment risk may seem nausea-inducing. But when it comes to investment schemes, such as KiwiSaver, taking a risk is not necessarily a bad thing, especially when in it for the long haul.
“Those who keep their long-term savings in bank term deposits or low-risk KiwiSaver funds will probably end up with a much smaller total than those who take on some investment risk.
“Sometimes they may even find that, because of inflation, the buying power of their savings decreases over time,” Ms Holm says in the guide.
Here’s how KiwiSaver fund types are split:
- Conservative, defensive or lower-risk funds hold mostly cash and bonds.
- Balanced funds hold a balanced mixture of higher and lower risk assets.
- Growth, aggressive or higher-risk funds mostly invest in shares and property.
Riskier KiwiSaver schemes – which hold a larger proportion of shares and sometimes property – are likely to fluctuate more than low-risk funds.
Many banks warned KiwiSaver members to hold tight following Trump’s controversial US presidential win. KiwiSaver balances fluctuated, but investments outlast this tumultuous period. These riskier schemes are expected to have a higher return in the long run.
Have a look at CANSTAR’s KiwiSaver product comparisons to see how they stack up.
Choosing the right KiwiSaver fund type for your own needs
There is a lot of talk about matching KiwiSaver fund types to your age – there are even schemes that will adjust your investment split depending on where you are in the life cycle. But it’s also important to think about when you are likely to withdraw your funds – and for what purpose.
For example, those far off retirement are often encouraged to choose higher-risk fund types, the theory being that these KiwiSaver members will have the funds open for longer and are likely to see higher return in the long term. But, if you’re likely to withdraw your funds within ten years to help buy a home, then less risky fund types are actually more suitable, Ms Holm advises.
Property investment: don’t get in over your head
Investing in property is generally easier than investing in shares because property is less volatile, the Reserve Bank of New Zealand guide states. However, it’s important to not get in over your head with a home loan for an investment property; don’t assume that because the bank approves a large loan that you can afford the repayments.
Sometimes, banks get it wrong – and you get caught out.
“Within the last decade or so, people have ended up with negative equity. This happens when the value of the property falls to below the mortgage.
“If you’re forced to sell during such a period, you will end up owing extra money to the lender, with no asset to show for it,” Ms Holm says.
Always stress test to check you can afford mortgage repayments should the interest go up. Online calculators make it easy to do this.
Staying informed with KiwiSaver
Knowledge is power when it comes to KiwiSaver but, sometimes, the information you need won’t be right in front of your face.
KiwiSaver funds will typically invest by buying a range of assets – usually cash, bonds, shares and/or property. However, there are some more complex KiwiSaver funds that cast the net a bit wider. If you’re unsure of how your KiwiSaver investment is split, feel free to check with your provider.
If you find your provider is vague on the details – or won’t answer your questions – you might want to compare KiwiSaver providers and find one that will tell you what you need to know.
Knowing what you’re paying in fees is also extremely important. If you’re getting a high return, it may not seem to matter as much. But when the return on a KiwiSaver fund is low or negative, fees can make a big difference.
One point to keep in mind, though, is that riskier KiwiSaver investments will generally come with higher fees. After all, you’re paying for someone to manage your investment for you.
Good news on the transparency front, effective March 2018, all KiwiSaver providers will have to show how much they are charging in fees as a dollar figure.
Also, it’s a good idea to keep an eye on what is happening in the KiwiSaver market in general. In a market downturn, you can expect many KiwiSaver funds and investments to perform badly. But if yours is performing particularly badly – and it’s not the case for most other KiwiSaver providers with similar investments – this may be more relate to how the manager is picking investments. In this case, you may want to consider switching providers.
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