Kiwi Saver, Mary Holm financial writer and columnist

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Weekend Herald

Mary’s Q&A column appears in the Business section of the Weekend Herald. Mary was a finalist for the "Best Columnist – General" award for this column in the 2014 Canon Media Awards.

NZ Herald April 12 2008

Q&As: Monkey story a great yarn, but it's not about the share market.
Reader's concerns about banks' exposure to foreign exchange risk are unfounded.
61-year-old should think hard before selling her house and enjoying some of the proceeds.
Man about to retire can still get plenty from KiwiSaver.

Question: Once upon a time, in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each.

The villagers, seeing that there were many monkeys around, went out to the forest and started catching them.

The man bought thousands at $10 and, as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at $20 for a monkey. This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back to their farms. The offer increased to $25 each, and the supply of monkeys became so small that it was an effort to even find a monkey, let alone catch it!

The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.

In the absence of the man, the assistant told the villagers. "Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35, and when the man returns from the city, you can sell them to him for $50 each."

The villagers rounded up all their savings and bought all the monkeys.

They never saw the man nor his assistant again, only monkeys everywhere!

Now you have a better understanding of how the stock market works.

Answer: What a great story. But it's absolutely not about how the stock market works. I suppose you could say it's about how a single stock occasionally fails, but it sounds more like what sometimes happens with non-stock market investments.

The story is one of out and out swindle. And the managers of companies listed on the stock market could, of course, engage in that. But analysts and other experts keep an eye on the performance of listed companies, looking to see whether to buy or sell the shares. I think they might spot such monkey business before too long.

By contrast, many non-listed investments come under much less scrutiny. And to the extent they are researched at all, it is often by non-experts. A lot more wool can be pulled over eyes.

The other point about the stock market is that it makes it easy to invest in many shares, so that if one company does get up to monkey business you don't lose the lot.

Everyone with any smarts spreads their share investing over many companies. Or, if they haven't enough money to do that, they invest in a share fund that does the spreading for them.

Not only does diversification greatly reduce risk, but it removes the necessity to closely check out your investments.

The moral of your monkey story is: Don't trust a fast talker, and know what's going on. But if you invest in many shares you don't need to bother with that - partly because the professionals are doing it anyway.

You can sit back, confident that as long as you have at least ten years to play with, most of the shares will do well.

Question: I am happy to accept the Reserves Bank's assurance in last week's column that our banks are not over-exposed to US sub-prime debt instruments. However, I am concerned about their exposure to exchange rate risk.

We read that banks have borrowed heavily overseas and assume that this has continued at a time when the New Zealand dollar has been above 80 US cents. What will happen if the New Zealand dollar drops suddenly to its normal 60 US cents?

Obviously this will depend on what currency the banks have been borrowing in, but the banks will have to repay a lot more in New Zealand dollars than they have borrowed. I recall in the 1970s cheap interest rate offshore borrowing suddenly became very expensive to repay.

Answer: Good point, and your recollection about the 1970s is right. But rest assured, times have changed. Since then, banks have hedged their currency risk on the money they borrow overseas, says the Reserve Bank.

There are various ways of hedging, but the result is that changes in the value of the New Zealand dollar don't affect how much they have to pay back.

Asked whether all banks hedge all their risk, a Reserve Bank spokesman replied, "We're not sure whether they hedge all, but they certainly hedge the vast majority of their offshore borrowings."

By the way, I would be careful about assuming that 60 US cents is the normal value for our dollar. History shows that currency ranges change over time. I wouldn't make any move assuming the New Zealand dollar will fall far - any more than I would assume it will rise far.

Question: I am a 61-year-old who has taken semi retirement after many busy years as a health professional in senior management.

I own a property that is valued at $400,000 in a desirable area with water access. I purchased this five years ago at $200,000, so it has appreciated well.

I also run a home business in health that brings in a small income - around $25,000 - but is in initial stages and expected to grow. I do not have any savings or investments other than my house and return from my business.

My dilemma is that my income at this point in time is limited and does not allow me to enjoy the lifestyle that I would wish.

I am considering selling my property, renting and investing some capital to allow me a better lifestyle. Would appreciate your advice.

Answer: I wish I could say, "Go for it". But it's not clear that it's a wise move.

You, like many other New Zealanders, have seen the value of your home soar. But think before you cash in on that gain.

It's true that having a pleasant place to live into your old age doesn't necessarily meaning owning a home. If you sold your house and put the proceeds into a fund that you drew on only for rent, it's quite possible that you could live in as nice a home as your current one for the rest of your life.

But you would almost certainly need to eat into your capital as well as the interest. That may not be true in the current environment, in which house prices have risen much more than rents, but market forces will tend to change that. We can already see rents rising faster, and house prices stagnating.

And eating into your capital means that, if you live a long life, you could run out of funds.

There's also the worry that a landlord may raise the rent lots or kick you out because he or she wants to sell the property or move into it. Because of this lack of security, most retired people prefer to own their homes.

In any case, we're talking here of putting your entire house proceeds into the rent fund. But you want to spend some of the money on a better lifestyle.

If you do that, you will probably have to settle for less pleasing surroundings, or live in an area in which housing is cheaper. Would you be happy there? And could you cope with the insecurity of renting?

On the other hand, there are some clear advantages to renting. There's less responsibility and maintenance, and you can move easily and quickly if you wish. But you need to weigh it all up.

On a more positive note, your business may grow, enabling you to have your cake and eat it - spending more on your lifestyle as well as maintaining your standard of housing, whether rental or owned.

Which leads to another point. If you should need to borrow to expand your business, it will be easier to do that with a house as security. All in all, it may be better to stay put for a few years and see how the business performs.

One more thing: I can't resist saying that if you haven't joined KiwiSaver, you'd be silly not to. As a non-employee you should contribute $87 a month or $1,043 a year, which will be matched by the government.

I realise that means you will have even less spending money. But by the time we add the $1,000 kick-start, the government will more than double your money, and you can get it all out five years after you join.

That will give a nice little boost to your lifestyle spending in your later sixties.

Question: I'm currently in full-time employment and will be 60 in September. I plan to retire in a few months, but it will definitely be before September.

I can't see any real benefit in joining KiwiSaver, other than the $1,000 freebie, which wouldn't be available until I'm 65. Foregoing the $1,000 is not of any real concern to me.

I'd appreciate your confirmation that I thinking correctly!

Answer: Your thinking is off to the tune of at least $5,215.

You have two good options:

Join KiwiSaver while you are still employed. Up until retirement, you will have to put in 4 per cent of your pay. But after that you can contribute whatever you want. The advantage of this option is that your employer will put in 1 per cent of your pay while you are working.

Join after you have retired. At that stage you can contribute zero if you wish - as long as your provider will accept that, and many will. If you do that, then you're right - all that is in it for you is the $1,000 kick-start.

But it would be much better to contribute $1,043 a year, as I'm recommending to the reader above. Over five years of government matching, you'll get $5,215 in addition to the kick-start.

* Mary Holm is a seminar presenter and author. Her website is www.maryholm.com. Her 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 or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.

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