MONEY MATTERS

If you’ve got cash set aside for a house, what should you do with it while you wait?

IWith MARY HOLM f you’re investing in shares, always assume a downturn might be just around the corner – as recent volatility shows. The same applies to saving in higher-risk KiwiSaver and non-KiwiSaver funds – usually called growth funds or aggressive funds – which largely invest in shares.

This does NOT mean it’s best to avoid shares. They bring higher average returns over the long term. But it’s foolhardy to put money you expect to spend within 10 years in shares or a higher-risk fund.

Your balance will fall quite often, and occasionally it could halve or worse. It will recover – it always does. But sometimes that takes several years, and you don’t want to be withdrawing the money in the meantime.

WHY NOT JUST AVOID SHARES WHEN PEOPLE ARE SAYING IT’S LIKELY THE MARKET WILL DROP?

Let’s bring Ruth into the story here. She’s recently moved back to New Zealand after living in the US.

“I have north of US$75,000 sitting over there, some in term deposits, some just sitting in my bank account,” she writes. “I plan to buy my first home in the next two or three years in Auckland, and this cash will play a part. In the meantime I’m not sure what to do with it. Term deposits are too safe and low return, but the stock market is perhaps too risky for the short time frame.

“It feels like we’re on shaky ground with ‘recession’ being thrown around regularly. Thoughts on what to do with the cash? Leave it in the US or bring to New Zealand? Invest where and in what?”

IT’S NOT UNCOMMON FOR SO-CALLED EXPERTS TO PREDICT RECESSIONS AND SHAREMARKET DOWNTURNS.

Sometimes an “expert” is right, and they gain followers who think they can time the sharemarket – buying when the guru is optimistic, and selling when she or he (usually he!) is gloomy. But sooner or later, and it’s usually sooner, the guru gets it wrong. There are so many factors that can cause share prices to rise or fall – including natural disasters or disease outbreaks, such as coronavirus – that only a fool thinks they can gain by predicting market movements.

Heaps of research shows that people who get into shares and stay there, through the ups and downs, end up with lots more than those who attempt market timing.

SO WHERE DOES THIS LEAVE RUTH, WHO EXPECTS TO SPEND HER SAVINGS WITHIN A FEW YEARS?

Not in shares, unless she’s a risk taker.

The disappointing truth for her is that she’d be wise to put the money in bank term deposits despite their low interest rates – shopping for the best rates on interest.co.nz. In any other investment, there’s too big a chance her money will lose value over a couple of years.

Ruth also faces another decision: should she bring her money here or leave it in America? Again, she could try to forecast – this time the exchange rate between the US and New Zealand dollars. And again, it’s a fool’s game, only more so. While shares trend upwards over the long term, the value of one dollar against another moves down as often as up.

“Only a fool thinks they can gain by predicting market movements.”