Don’t get too cocky just because you’ve picked a few winners

I am not a fan of fund managers. They do nothing but take fees.

In the last six months, I’ve been managing my own funds. I feel sorry for those who put money into managed funds. Let me show my investments. Anyone can do this.

A: With your email, you sent a list of six shares, mostly huge multinational companies. And your gain that day was 1.5 per cent — which is fantastic!

If you could get that return every day, after a year $ 1000 would turn into almost $ 230,000. Keep that up and you’ll be a billionaire in no time.

But I don’t like your chances. While having six shares is a lot better than having just one or two, you are still seriously undiversified. If one or two of your companies start to perform badly, you could easily face losses.

What’s more, all your shares are in technology companies. Don’t you remember the Dotcom bubble? From 1995 to 2000, the technology- heavy Nasdaq share market index rose more than five- fold. Exciting! Then, within a couple of years, it was back to its 1995 level, and many companies in the index had gone broke.

Concentrating on any single industry is not wise — and the volatile technology industry is particularly risky.

I would strongly suggest you spread your money over more shares, and in a wide range of industries.

And once you’ve done that, leave it alone. Research shows that investors often do worse than the share market indexes because they keep trying to pick winning shares and trying to time markets, and often they get it wrong.

As Nobel- winning economist Gene Fama has put it, “Your money is like a bar of soap. The more you handle it, the less you’ll have.”

Meanwhile, I will continue to be one of those people you feel sorry for, who invest in managed funds. And I recommend that to others. Why?

● You get much wider diversification than you can with individual shares. That lowers risk without reducing average returns.

● You can easily deposit and withdraw small or large amounts, and many fund managers let you set up regular deposits or withdrawals.

● The maximum tax is 28 per cent, because the funds are PIEs — portfolio investment entities.

● You can set and forget your investments — changing them only when you need to reduce risk because you expect to spend the money soon. Dividends, tax and so on are taken care of.

The downside, of course, is fees. But you can choose low- fee funds whose charges don’t eat into returns much.

For you, maybe the second point above is not an issue. And the last point may be a negative. It sounds as if you enjoy watching your investments. Fair enough. But please diversify, don’t trade often, and don’t invest next week’s grocery money.

Rainy- day money Q: People are dipping into KiwiSaver to pay for emergency use! Maybe it’s time for people to put aside 1 to 2 per cent of their money and invest it in nonKiwiSaver accounts.

A: Yes, the increase in financial hardship withdrawals from KiwiSaver is worrying. Too much of that and people will end up struggling financially in retirement.

Inland Revenue recently said 2800 people took this step in October, compared with 1570 in October last year. And the total amount withdrawn more than doubled.

It would be great if everyone set up rainy- day accounts. But those who have bitten into their KiwiSaver balances are unlikely to be lining up to do that any time soon.

Perhaps people need a nudge. A great way to do that would be to set up

KiwiSaver “sidecar accounts”. This was a recommendation in the 2019 Review of Retirement Income Policies from the Retirement Commission — which, I should declare, I worked on.

The idea is that employee members of KiwiSaver would contribute an extra 1 per cent of their pay, unless they opt out. That money would be put into an emergency fund of up to $ 3000, within their KiwiSaver account, which the member could access when they need to. Withdrawals would be much easier than hardship withdrawals.

Once the $ 3000 was reached, the extra money would go into the person’s ordinary KiwiSaver account. If they withdrew any sidecar money, the extra 1 per cent would replace it until the sidecar reached $ 3000 again.

At the time of withdrawal, the member would be offered help with running their finances — in the hope they wouldn’t need to keep emptying their sidecar.

The beauty of this idea — as opposed to simply encouraging everyone to set up rainy- day money — is that it would happen automatically. But if anyone really didn’t want to do it, they wouldn’t have to. Joining KiwiSaver itself operates that way, with non- members auto- enrolled when they get a job but allowed to opt out. That is surely one reason the scheme is so widespread.

I reckon most people would like the sidecar idea. After all, 1 per cent of your pay, if you earn $ 50,000 a year, is less than $ 10 a week. On $ 100,000 it’s less than $ 20 a week.

The upshot: fewer KiwiSaver retirement accounts would be raided in hard times. To those who say KiwiSaver should be for retirement only, this change would mean more savings would make it to retirement.

I actually wrote about this back in April. At that time, MBIE said they were looking into “potential enhancements to KiwiSaver”. How about sidecars, new Government?

Selling the rental Q: I own one property, a rental unit in Auckland. The current value of the rental unit is about $ 750,000, and it has $ 150,000 left on the mortgage ( with six years left to pay it off), leaving about $ 600,000 in equity.

The rental is a 1970s concrete block unit and will require significant maintenance in the coming years as well as the usual ongoing costs and interest.

My partner and I live in Christchurch and are currently renting, as we’re not sure where we want to live longer term.

Would it be worth looking at selling the unit and buying another new- build rental for $ 600,000 in Auckland or elsewhere, and therefore having no mortgage? Rental income ( after expenses) could then go into an investment fund.

A: Nobody knows which option will make you better off. Trying to forecast returns on property and the shares and bonds in a fund is impossible.

But I can see several advantages in your selling plan:

● Paying off a mortgage is never a bad move, and it’s particularly effective given current interest rates. If you’re paying, say, 7 per cent, getting rid of the mortgage will improve your wealth as much as earning 7 per cent, after fees and tax, on an investment, risk- free. That’s pretty good.

● You would be diversifying beyond property – although I hope you are already in KiwiSaver.

● You could buy a rental unit in Christchurch – or wherever you are most likely to end up. It usually works better if you live near a rental property, especially if things go wrong with either the building or the tenants.

● You could invest the net rental