‘It’s called risk for a reason’
With deposit rates so low, investors are seeking riskier places to earn a return, writes Rob Stock.
Jordan Rae has dialled up the risk in a bid to save a decent deposit so he can buy a first home in his home town of Rotorua.
The young civil engineer pulled his money out of low-yielding bank accounts, and has invested it in Kiwi Wealth managed growth funds.
Rae is one of many New Zealand investors trying to achieve their financial goals in the topsy-turvey world in which share prices are high, economies stuttering, and interest rates are at rock-bottom levels as central banks around the world try to stimulate economies.
‘‘I had it in bank accounts for five months, but it did nothing,’’ Rae said.
Low and falling interest rates created a double whammy for people trying to save a house deposit.
Not only are they getting a poor return, but the prices of assets such as homes rose as the cost of mortgages fell, said Westpac chief economist Dominick Stephens.
BNZ suggests those saving for a deposit use a high-interest savings account, but it was currently paying only 1.4 per cent in its highinterest account. At the same time, home deposit savers are being warned to brace for another increase in house prices. Westpac predicts a rise of around 7 per cent in the coming year.
Before placing his deposit money in bank accounts, Rae had tried his hand at direct share investing. He’d turned a profit, but realised he didn’t have the time, energy or expertise to do that safely.
Rae, who follows the financial advice of US money guru Dave Ramsey – a staunch advocate of avoiding all consumer debt – is aware he’s taking more risk going into share funds, but he said even a substantial fall in share prices would not end his first-home dream.
‘‘I’m able to purchase one now between me and my partner, but I will probably wait until the end of next year until we have got $100,000,’’ he said.
Like many aiming to buy a first home, Rae was also using his KiwiSaver to build his wealth, and was saving into a growth fund.
falling interest rate environment is likely to mean rising asset prices, and that’s what we are observing now,’’ Stephens said. ‘‘Share prices are through the roof. I think there’s a turn in the housing market going on.’’
But when interest rates stabilised at a low level, and asset prices had already priced in the lower cost of debt, investors should not expect to continue to earn high returns.
‘‘That’s a one-off adjustment.
You can’t expect that to continue forever,’’ Stephens said.
Investors could really only respond in two ways, if they wanted to carry on prospering as they had done in recent years of high investment returns.
‘‘Ultimately what it means is either you need to save more to yield the same, or you increase your risk. It’s as simple as that.’’
But, he warned: ‘‘It’s called risk for a reason.’’
Nelson-based authorised financial adviser Meredith Cornelius said the current environment had to be seen in perspective.
‘‘We’re coming off 10 great years of great returns,’’ she said.
Older investors needing to take income from their investments should talk to their advisers about their options, but should remember the finance company collapses of the late 1990s and early 2000s before opting to sink money into higherrisk investments, she said.
The finance companies issued high-interest debenture bonds to the investors, but used the money to issue property and car loans which were often far riskier than investors realised.
Options for older investors included spending some of the money they made in the past decade, Cornelius said.
‘‘It may be that you spend some capital.’’
Things were easier for long-term KiwiSaver investors who continue to drip-feed money into their funds through all points in the interest rate cycle.
Both Stephens and Cornelius had been watching the emergence of higher-risk, income-paying investments like property and property development syndicates.
Joe Bishop, Kiwi Wealth’s general manager, customer, product and innovation, said: ‘‘We’re getting a number of inquiries from Kiwis interested in other investment opportunities to generate a little more bang for their buck. They’ve decided that the low rates on offer just aren’t giving them the return they need to achieve their investment goals.
‘‘People are actively seeking out alternative investment opportunities to round out their portfolios.
‘‘They’re keen to understand the risk involved, the potential returns and the mix of investment classes for them to achieve their goals.’’ Kiwi Wealth’s annual
report released in May found 43 per cent of New Zealanders had money in term deposits and savings accounts, but just 12 per cent had investments in higher-risk, potentially higherreturn managed funds.
He expected next year’s report to show Kiwis having an increasing appetite for risk in pursuit of higher returns.
‘‘We’re starting to see that shift already. In the last six weeks total funds under management in our Managed Funds product has grown by over 25 per cent,’’ he said.
‘‘We’ve also fielded a lot of questions from customers new to investing about risk and what risk they should take on. The most important piece of advice we give is that investments that promise the highest rates aren’t always the best investment.
‘‘Adjustments to risk should be well thought through and incremental.
‘‘For example, the time horizon for the investment will greatly influence approaches to risk, as will the age and net worth of the investor.’’
‘‘We’re starting to see that shift [to higher risk] already.’’
Joe Bishop of Kiwi Wealth