SmartShares, SuperLife, Simplicity & InvestNow. ETF & Index Fund Investing in New Zealand

ETF and Index Fund are simple, low-cost and diversified investment option with a positive result in the long term. It plays an important part in my plan to achieve financial freedom by only do a few smart things and nothing much else. To put my money where my mouth is, over 90% of my investment are in ETF and Index Fund. I believe everyone should have at least some investment in those products. SmartShares, SuperLife, Simplicity, and InvestNow are the four investment services in New Zealand that I am currently using. Here is a breakdown of them.

The Breakdown

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Compare four ETF/Index Fund investment in NZ. Best option highlighted in yellow

SmartShares

New Zealand Stock Exchange owns SmartShares. They issue the ETF for local share markets such as NZ Top 50 (FNZ), NZ Top 10 (TNZ), NZ MID CAP (MDZ) and NZ Bond (NZB). They also repackage ETFs and index funds from oversea to sell to New Zealand investor. Those ETFs cover Austraila, Europe, Asia Pacific, US, emerging markets and world markets. You can check out the list of offering here. The most popular oversea ETF is US 500. It tracks the top 500 companies on US stock example, most of them are top international corporations.

Some people mistaken SmartShares as an investment service provider but in fact, SmartShares is an ETF issuer. Their job is to manage and issue ETF for New Zealand stock exchange. That’s why investor can’t log onto SmartShares site for track their holding because they are not managing the holding for you (hence there is no annual admin fee).

If you invested in their ETF, you are basically buying a share on the share market. You can but those ETF directly on share market if you wish.  SmartShares will direct investor to Link Market Service to register and track their ETF holdings. An investor can track their holding on other services like ASB securities, ANZ Securities or Share Sight.

SuperLife

Superlife offer the most ETF and Index Funds investment options in New Zealand. They not only offer SmartShares ETF in fund format but also provide managed fund and sector fund options for the investor. All of those funds invested in a passive index fund or ETF.

The Sector fund cover different country (NZ, AUS, Overseas), industry (Property, Shares) and investment vehicle (Cash, Bond, Shares). Those are great options to build your own balanced and diversified portfolio.

The Managed Fund is is a grouping of financial assets such as stocks, bonds, and cash equivalents. The nature of those financial assets can be classified into two groups, income asset, and growth asset. Income asset includes cash and bond. They tend to carry lower risk levels and, therefore, are more likely to generate lower levels of return over the long term. Growth assets are shares and property. They tend to carry higher levels of risk, yet have the potential to deliver higher returns over longer investment time frames.

Superlife managed fund have different names, like SuperLife 30 or SuperLife 80. The number at the end show the target portion of growth asset in that fund. Superlife 30 will aim to hold around 30% of growth asset and 70% of income asset in the portfolio. So this fund is a low risk (or conservative) fund. On the other hand, Superlife 100 will aim to invest 100% into the growth asset. So the risk is high. Here is a breakdown.

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SuperLife offer the most options, functions in the breakdown. The entry requirement is basically nonexistent, and the cost is relatively low. That’s why I recommend the beginner to start with Superlife.

Simplicity

Simplicity started as a nonprofit KiwiSaver provider. They provide low-cost KiwiSaver options to New Zealander while donating 15% their income to charity. Simplicity recently opened up their investment fund as non-KiwiSaver options as investors can deposit and withdraw their investment anytime they want. Simplicity only offers three managed funds as conservative, balance and growth fund. The majority of Simplicity fund invested in Vanguard’s funds or ETFs. The management fees are the lowest in New Zealand at 0.31% for managed fund. However, the initial investment requirement is $10,000.

InvestNow

InvestNow is a new online investment platform. Investors can directly invest into the selected fund on their platform with as little of $250. InvestNow does not charge any transaction, admin, setup or exit fee at this stage. Investor only needs to pay the management fee on an individual fund.

The biggest advantage of InvestNow is to allow the investor to directly invest into two Vanguard index fund in Australia. They are Vanguard International Shares Select Exclusions Index Fund (currency hedged and non-hedged version) with management fee at 0.20% and 0.26%. Those two funds are not PIE fund, means you will have to do your own tax return. For under 50k holding, you will only have to do tax return on dividend received, which is not that hard. You can check out the detail in this blog post.

Fund Comparison

I picked a couple of index funds and ETFs from each provider and made a comparison. Here is the breakdown.

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As you can see, most of the option’s underlying asset are Vanguard ETFs and Index Fund. That’s basically what I am trying to do on my international exposure, putting money into low-cost Vanguard cost for long term.

 

Me try to invest in NZ 2

Accurate description of my international investment strategy.

Conclusion

  • Superlife have the most function, investment options and easy to start. Also have the lowest cost aggressive managed fund in NZ. It is great for both beginner and experience investor.
  • Simplicity have the lowest cost managed fund in Conservative, balance and growth aera. Great for anyone with $10,000 to start investing.
  • InvestNow user can easily invest in Vangaurd index fund in Australia with 0.20% – 0.26% fee. Great for someone who can handle their tax return on dividend recived (not that hard) or calculate under FIF rule.
  • SmartShares is good if you wish to buy ETF on share market.
  • There are other ways to invest into passive fund and ETF in New Zealand, like ASB Investment Fund, AMP, and Lifestages. However, the cost on those fund are quite high compare to these four services, which defeat the purpose of low-cost passive investing.
  • New Zealand investors can buy Vanguard ETFs on Australian Stock market. The management fee can go as low as 0.04%. I will go into that later once I’ve done it myself.

 

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Compare ETF Fund Cost between Superlife and Smartshares (2017 Update)

Recently SuperLife and SmartShares lower the management fee on four ETFs. So it’s time to update the ETF cost comparison. Also, I am changing my initial recommendation on starting your investment with SmartShares then switch to SuperLife.

Cost update

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Both Superlife and SmartShares lower their cost on Total World, Europe, Asia Pacific and Emerging Markets ETF. The reason was Vanguard reduce their underlying fee, so SuperLife and SmartShares passed on the cost saving to its customer.

Should you start with SmartShare?

In the past, I recommended to start your ETF investment with SmartShares then switch to Superlife when the fund hit a certain amount. The main reason was Superlife charge a $12/year admin fee, it will cost more in term of percentage for beginners with a small amount of investment. However, that calculation ignored the $30 one-off initial fee, the cost of setting up extra funds with SmartShares and the exit cost.

Let’s look the following example for an investor started NZ Top 50 ETF with $500 initial investment and $50/month contribution for 5 years. NZ Top 50 ETF 5 years annualised return is 16.49%. I’ve put it in a simple simulation to compare investment between SuperLife and SmartSharesand for 5 years.

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SmartShaers started with $30 less due to the setup fee. That $30 initial different made Smartshares cost more for that first 3 years, (38 months to be exact). By the end of the 5 years, the different between Superlife and Smartshares is only $24.09. That’s about 2 years of SuperLife admin fees and represent about 0.44% of your holding. That percentage will decrease if we increase the investment amount. So, there are some saving with Smartshare, but the saving is insignificant.

Also, there are some other benefits with SuperLife.

  • Better user interface compare to Link Market Service
  • Easy to switch fund with no cost
  • No setup cost for new fund
  • More fund options included sector fund and passively managed fund
  • No withdrawal cost

Personally, I think those benefit worth that $12/year with Superlife.

My Recommendation

If you wish to invest in S&P500 ETF, NZ Cash ETF and Emerging Market ETF, start with SmartShares because their management fee is still lower than SuperLife.

For any other ETF, just go and join SuperLife. You will be much better off.

If you are currently holding SmartShares ETF and want to switch to SuperLife. There is a way to switch without open a brokage account and pay $30 to sell your Smartshare. However, you will have to email me on that.

Email thesmartandlazy@gmail.com or follow me on Twitter @thesmartandlazy if you have any questions.

Simplicity Cease Offering on InvestNow… but Don’t Let it Stop You

Last Friday I wrote about investing Simplicity non-KiwiSaver fund via InvestNow from as little as $250.

However, I am sorry to say this opinion is no longer available. Simplicity decided to cease offering on InvestNow.

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You can read the statement from InvestNow here.

I am personally disappointed as this is a great way for anyone to invest in a quality low-cost fund with a low initial investment. I was planning to invest in Simplicity fund but I don’t have the fund until next month, so I missed out on that.

What does it mean for the investors?

If you are InvestNow user and you already invested your money into Simplicity fund via InvestNow, you will be able to hold your investment in the fund, but you will not be able to make new investment.

For those who wanted to join Simplicity Fund but don’t have $10k available, you will have to keep saving until you reach $10k…. or not. Hear me out!

Don’t wait, Start NOW!

If you have some money to invest now, you don’t have to wait. I would suggest you invest those fund elsewhere rather than save for months and years to reach $10K.

I know Simplicity fund is excellent, and I may even say it’s the best fund in this country. However, that is just the best fund when you have $10k or more. It doesn’t mean you can’t invest in anything else before you come up with $10K.

You can invest in Superlife 80, which is similar to Simplicity growth fund. Superlife 80 holds 80% growth asset (Share, property) and 20% income asset (Bond, cash). They also invested in Vanguard fund and ETF. Superlife a higher management fee (0.50%) and small annual fee ($12). The most important thing is there is no minimum initial investment requirement. If you are young and happy with the risk, you can go with Superlife 100, a managed fund with 100% growth asset, something Simplicity do not offer.

If you already put the money in InvestNow, you can invest in their Vanguard fund with just 0.26% fee. Simplicity Growth invested 60% into that fund (and you will have to pay tax on dividends received). I’ve done a blog post on that.

My point is, there are lots different opinion for investor out there. Don’t let that $10K hurdles stop you and start investing. You will reach $10k before you know it.

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Do you need KiwiSaver if you plan to retire early?

(This post contains the concept of  Financial Independence & Retire Early (FIRE), and terms like 4% withdrawal rate that may sound confusing. If you like to know more, jump to the end of this blog post for more information.)

When we approaching June in New Zealand, you can see lots of personal finance articles tell everyone to put in some money into their KiwiSaver and get the free money. I want to focus on a group of people who is working toward financial independence and wants to retire early. They may think since they are planning to retire way ahead of 65, KiwiSaver is irrelevant to them. They could be in KiwiSaver, but not sure if they should include KiwiSaver as part of their financial independence plan.

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Return on your KiwiSaver contribution

If you wish to live off your saving and investment, you ought to find the best return on investment out there. For KiwiSaver, your employer has to match your 3% contribution, and some employer may go higher. That’s 100% return on investment! (Correction: Actually is not 100% return because the employer needs to pay tax on their contribution. So the ROI is 100% – Tax, from 10.5%-33% less. Still a great return)

The government also provide KiwiSaver member tax credit for the first $1042.86 contribution from you each year (not counting your employer contribution). The Government will pay 50 cents for every dollar of member contribution annually up to a maximum payment of $521.43.  That’s 50% return on your first $1042.

If your wife/husband/partner is not working and you are working full time, you should consider contributing $1042 into their account as well. Those credits are risk-free and guaranteed.  It is hard to find such return on the market with basically no-risk.

Locked until 65

Some people think the big problem of KiwiSaver is you cannot access the fund until you turn 65 or to buy your first home. For the people who are planning an early retirement, they like to put every dollar into their investment so the investment can generate enough income to support their living expenses.  They don’t count on KiwiSaver and NZ superannuation to retire. However, you should still put money into your KiwiSaver.

One simple question: Do you plan to live beyond 65? If yes, then you should contribute to your KiwiSaver because it’s your money! You will spend on your investment before 65, and you will still spend on your investment after 65. The KiwiSaver fund is just one of your investment funds, and you don’t draw on that fund before 65, it will still help you to achieve your financial independence.

KS Before and After

Include KiwiSaver fund into your early retirement number

Look at the graph below. We assume you need 1 million portfolios to retire early, $300k in KiwiSaver and $700k in a normal investment fund. Your annual withdrawal rate 4%.Blank Diagram - Page 1(1).jpeg

You just need to stack up your investment and put KiwiSaver at the bottom and only draw the fund at the top. You keep drawing your non-KiwiSaver investment fund before you turn 65 and let your KiwiSaver Fund untouched. Yes, your non-Kiwisaver fund may get smaller and smaller (depends on your withdrawal rate) because you are drawing $40K (4% of 1 million) on a 700k investment fund. However, your KiwiSaver fund will keep growing. When you reach 65, you can draw from both funds.

Therefore, you should keep contributing to your KiwiSaver and include KiwiSaver as part of your early retirement plan.

Don’t over contribute into KiwiSaver

The key is you should not put too much into your KiwiSaver. You don’t want your non-KiwiSaver fund run out of money before you reach 65. Although it’s unlikely but possible.

Let’s assume you are 40 years old and have 1 million investment portfolio. You plan to draw 4% on your investment every year for living expenses. The expected return on investment is 6%. However, for some unknown reason, 70% of your investment are in KiwiSaver, and only 30% of your investment are in non-KiwiSaver Fund. You can only draw from your non-KiwiSaver fund before you turn 65.

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By age 48, your total portfolio growth to 1.24 million but your non-KiwiSaver fund ran out. Most of your money are locked in KiwiSaver, and you are 17 years away to access them. You need to go back to work.

To avoid that, you just simply contribute up to wherever your employer will match and enough to get the member tax credit every year. Put all extra cash into your non-KiwiSaver investment, including paying off mortgage, shares, bond, property, etc.

Now, if we reverse that situation and put 30% investment in KiwiSaver, 70% in non-KiwiSaver. That non-KiwiSaver fund will least 30 years. Here is the how the fund works.

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How long will you non-KiwiSaver fund least?

I actually worked out the formula on how many years your non-KiwiSaver fund will least base on percentage of your portfolio in KiwiSaver. The graph was based on 4% withdraw rate. KS empty at 4.png

X is the percentage of your KiwiSaver and Y is the number of years will your non-KiwiSaver fund last.

If your Kiwisaver is about 18% of your total investment and you are 28, do you need to worry? Using that formula y = -24.61(0.18) + 0.3429, y =42.5. Your Non-Kiwisaver fund will least 42.5 years, by the time your non-KiwiSaver fund runs out, you are already 70 years old.

If you plan to retire at age 38, you will have to draw on your non-KiwiSaver fund for 27 years. Using that formula 27 = -24.61 In(x) + 0.3429, x = 33.85%. So your KiwiSaver needs to be less than 33.85% of your total investment portfolio.

That formula only works with 4% withdraw rate. You can work out how long will your non-KiwiSaver fund least with your own figure. Check out this google sheets. Make a copy and play around.

Conclusion

  • KiwiSaver is a great investment with a high return on investment due to employer match and government tax credit. It is one of the best investment in New Zealand.
  • You should contribute toward your KiwiSaver to achieve Finacial independence and include your KiwiSaver amount into your equation.
  • Do not over contribute into your KiwiSaver.
  • If you are employed, you should contribute up to your employer match and no more.
  • If you are self- employed, just put in $1042.86 to get your $521.43 tax credit every year.
  • All extra cash goes into non-KiwiSaver investment.
  • If you are not retiring extremely early (in your 20s) and your KiwiSaver is below 20% of your total investment portfolio, you will be alright.

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About FIRE

If you want to know more about Financial Independence & Retire Early, I will cover that in the future. Meanwhile, Check out the link below.

What is Financial Independence & Retire Early (FIRE)

The Shockingly Simple Math Behind Early Retirement

The 4% Rule: The Easy Answer to “How Much Do I Need for Retirement?”

Kiwi Mustachians – New Zealand FIRE community (Facebook Group)

Email thesmartandlazy@gmail.com or follow me on Twitter @thesmartandlazy if you have any questions.

Investnow – Invest in Vanguard Fund with 0.20% Fee

Investnow is a new online investment platform and fund management service just started this year in New Zealand. It is NOT an investment firm but a marketplace for investment funds. Kiwi investor can directly invest into the selected fund on investnow platform without the middle man. I’ve done some research on the company and invested some money via the service. Here are my findings.
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Range of Fund

Investnow offers 33 different investment funds from both local and international fund manager. The investor needs to deposit minimum $1000 $250 into Investnow transaction account and invest into the fund on their platform at $250 minimum.
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Here is the list of the fund provider
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No Transaction/Admin/Joining/Setup/Exit Fee

The main selling point for Investnow is no transaction/admin/Joining/Setup/Exit fee at all. When you put $1000 $250 into Investnow, Investnow won’t charge anything on your money. You can invest that full $1000 $250 into different funds. You only need to pay the cost of each investment fund.
Investnow made their profit by charging investment fund providers to list their funds on their platform.

The REAL selling point

Since investor can contact most of those investment funds directly and set up an account, no transaction/admin fee is not a real selling point here. For me, the real selling point for Investnow is low barriers to entry and Vanguard fund.
If you want to invest into those funds directly without Investnow, the majority of those funds have a minimum initial investment amount from $2000 to $500000. For example, Fisher Fund’s International Growth fund require minimum $2000 initial investment and Mint asset management’s Australia New Zealand Real Estate Investment Trust minimum investment is $5000. If you invest from investnow platform, you can put only $250 into those funds. It dramatically lowers the entry requirement for those funds and makes it more accessible to the average retail investor.

Vanguard fund

Vanguard

The most significant benefit with investnow (for me at least) is you got access to Vanguard International Shares Select Exclusions Index Fund. That fund launched for AUS and NZ market in late 2016. It contains about 1500 listed companies across 20 developed international markets (without Australia). This fund is an ethical fund as they excluded Tobacco, controversial weapons and nuclear weapons investment.
Simplicity Kiwisaver invests heavily into this Vanguard fund. 61% of Simplicity Growth fund invested in Vanguard International Shares Select Exclusions Index Fund.
There are two versions of this fund. Vanguard International Shares Select Exclusions Index Fund has a low managed fee at 0.20%. The Fund is exposed to the fluctuating values of foreign currencies, as there will not be any hedging of foreign currencies to the Australian dollar. So this fund has a higher risk due to foreign exchange fluctuation. Vanguard International Shares Select Exclusions Index Fund – NZD Hedged are hedged in New Zealand Dollar with a higher management fee at 0.26% but with lower risk.
For individual investors, if you want to invest into this fund directly, you will have to start with $500,000 AUD. Investnow lower that entry barrier down to just $250. In my opinion, this is a great fund to invest because of the low-cost, diversified portfolio and low barriers to entry.

Everything sounds good, so what’s the catch?

Yes, there one thing not so good about Investnow. You’d need to do your tax return if you invested in Vanguard funds.
Admittedly, I am not good at tax. So the following information may be wrong.
From what I understand, those two Vanguard funds are not the same with other listed fund on their platform as they are not PIEs fund. Vanguard funds are Australian Unit Trusts. Accordingly, they are taxed under the FIF rules (that apply to global shares). Investors need to do their own tax return. Investnow produces consolidated tax information to help investors to complete their own FIF tax return.

My Experience

After some research and background check on the company, I invested $1000 into Investnow and tested it out.
The sign-up process was quite simple; I managed to complete in 5 mins. The interface is easy to understand. The funding and investing took 1-2 days to complete. You can check out your holding and performance any time.
Check out the screenshots below. 
 
One thing worth mentioning is Investnow use a Two-Factor Authentication for login. You need your username, password and a six-digit passcode that send to your email or phone to log in. I recommend using your phone to received that passcode in txt.

Conclusion

So far I am happy with the Investnow as its allow me to access Vanguard fund with just $1000 $250 investment AND no one charging me extra fees in the middle. The service is straightforward and easy to use. The only concern will be the tax implications on its investor if you invest in the Vanguard fund. (Personally, I need to figure that out before next April.)
InvestNow is free to join. You don’t have to deposit $250 to become a user. You can just sign up with an email address and check out the offering.
Investnow is a new company; some investor will (and they should) question the legitimacy of the company/service and the safety of their investment. I’ve done research on that and I will share that in the next post.
(UPDATE: InvestNow recently lower their minimum deposit amount to just $250.)
Email thesmartandlazy@gmail.com or follow me on Twitter @thesmartandlazy if you have any questions.

How Easy to Get Your Money out from SmartShares ETF

SmartShares offer 23 exchange-traded fund (ETF) in New Zealand. They tracked different stock and industry index in New Zealand, Australia, United States and international market. It is an excellent opinion for Kiwis investor due to the low-cost and diversified portfolio. So, how easy to get your money out? (Spoiler alert: Very easy)

ETF is tradable share

ETF is similar to an index fund that tracks an index, a commodity, bonds, a sector or a basket of assets. However, ETF can be traded on the stock market like any other stock. ETF shareholders are entitled to a proportion of the profits, such as earned interest and dividends paid.

Liquidity of shares

Since ETF is a share, i. In order to get the money out, you will have to sell your ETF in the stock market, just like any other stocks. This brings us to Liquidity of a share.

Liquidity means how easy for you to sell your share into cash on the stock market. If lots of people wanting to buy that share and lots of willing seller on the market, the liquidity is good.

We use trade me as an example here. If you are selling a brand new iPhone on trade me at a price closed to everyone else is selling, you will be able to sell that iPhone quickly.  Also, you can use similar amount cash to buy an iPhone on trade me without any problem. So the liquidity of an iPhone is good on trade me.

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However, if you want to sell an expensive and rare antique phone on trade me, it may take months and multiple listing to sell that phone. You may have to lower your price to get it sold. It also hard to find another expensive and rare antique phone on trade. So, the liquidity of an expensive and rare antique phone is bad.

Let’s take a look at Auckland International Airport’s stock info.

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You can see there is lots of buying (Bids) and selling (Asks) order. Lots of trade happened in 13 mins. The different between buy and sell price (a.k.a. Bid-Ask Spread) is only $0.5c.

Now compare that to Delegat Group Limited’s Share.

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There are some buy and sell order, but there was no trade at all. The different between buy and sell price is $10c. There is a seller want to sell 2000 units of share at $6.25, but there is no one taking that offer. If the owner of that 2000 share intends to liquidate the stock quickly, they will have to lower their selling price by $10c to $6.15 to meet the closest bid. That is $200 less on 2000 share.

If you are an owner of Auckland International Airport share, It will be very easy to liquidate your stock in a short time. On the other hand, if you hold shares in Delegat Group Limited, you will have to wait or lower your price for someone to buy your share.
Here is the info on two popular SmartShare ETF, NZ Top 50 and US S&P 500.

 

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Both of them have a good amount of bid/ask and the spread is small. Therefore, the liquidity is good.
Also, there is a market maker for all Smartshare ETF.

Market Maker

A market maker is an investment firm that guarantees liquidity of stock by putting out buy and sells order on the stock market. They make sure investor can always buy or sell the shares.
The Bid and Ask below are the market maker order.
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At December 2014, SmartShares appoints Craigs Investment Partners as the market maker. Craigs will offer two-way quotes of agreed minimum volume and maximum spread for an agreed minimum period of the full trading day. This will cover all current Smartshares ETFs, plus future ETFs launched by Smartshares.

Always ready to sell

With a market maker on all Smartshare product, its very easy to liquidate your Smartshares holding. However, you will need a stock broker to sell your shares. Especially for those who purchase Smartshares via monthly contribution plan since you don’t need a broker account to do that. Smartshare is not an investment fund, they will not cash out the ETF for you. Lots of people don’t know that.
In order to sell your Smartshare ETF, you will need a broker to put your holding on the stock market. You can google “Stock Broker NZ” to contact any broker firm and set up an account. The cheapest way for most people is to use ASB and ANZ securities to trade online. ANZ cheapest rate is $29.90/trade under $15000. However, you have to be an Online Multi-Currency Account (OMCA) holders with sufficient cleared funds available to fully cover the purchase of securities prior to submission of the order. Otherwise, ANZ charge $29.90 + 0.40% on trade. If you are not an OMCA holder with ANZ, go with ASB Securities, they charge $30 or 0.30% per transactions, whichever higher.
If you currently hold SmartShares ETF and don’t have a brokerage account, do it ASAP. You never know when you need to sell you share in a short period. It will take 2-10 days to set up account with ASB and ANZ. If you starting a monthly contribution plan with SmartShares, make sure you open a brokerage account as well.
Email thesmartandlazy@gmail.com or follow me on Twitter @thesmartandlazy if you have any questions.

Investing: it’s only getting easier

I think the hardest part of investing is the beginning. When you are starting out, the return on investment seems minimal (unless you start out with 50k+ lump sum). I started my investment with $500 each in Smartshare and Superlife. I remember the first couple months, returns are under $10 and I lose money in some months as well. However, as I slowly build up my investment by monthly contribution and reinvest my returns, the returns are getting better over time. My portfolio passes its milestone with less and less time. Investing is getting easier
Here is a simulation for someone who investing into a growth asset with $500 a month. The average annual return is 7% and the goal is to reach $100,000. It took 11 years and 2 months to reach 100K
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If you break down the investment by $10,000 block and measure the months it took to reach each one of them, it took less and less time.
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The first $10,000 took you 20 months and the last $10,000 only took you 9 months. It’s just getting easier.
Also, around the 10th year mark, the monthly return on investment actually is more than your $500 monthly contribution.
Overall, you’ve only contributed $66,500. The rest came from the return of your investment. investment easy 3.png
You may think you only got a tiny amount right now, it won’t make a difference. From our example, the first $500 contribution turns into $1,226 at the end. That small $500 contribution is only 0.75% of your total contribution. However, with the power of reinvesting, continues contribution and compounding interest, the return on that first $500 represent 1.23% on the $100,000. So if you haven’t started your investment, start now! That small initial investment could be your biggest return. If you already started, the hardest part is already over, just enjoy the downhill ride.
Also, don’t be afraid to aim for a big number. The path to get there is a lot shorter than you think. Currently, I am only 5% on my investment goal, but I know the hardest 5% is over. Investing, it’s only getting easier.

Where to invest your money in New Zealand (Part 2)

At the last post, I made a simple graph to explain where to invest your money. Now let’s break it down in more detail

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Within 1 year – Cash in Savings

For such a short terms, your best bet will be keeping your money in a savings account. Most banks offer serious saver or notice saver accounts with interest around 2.25 – 2.75%. I know it’s not a good return but its better than nothing. You may also consider a 6 months to 1-year term deposit for higher interest (3 – 3.5%). However, if you need to get your money out early, you may lose the interest and pay a break fee.

Recommended products: ASB Saver Plus, ANZ Serious Saver, BNZ Rapid Save, Westpac Online Bonus Saver, Kiwi Bank Notice Saver, RaboDirect Premium Saver and Notice Saver.

2 to 3 years – Cash in Term Deposit

You still want to play it safe so you should keep the money in cash. In this time frame, you can use a term deposit as they have a higher return of interest, around 3.5 – 4%. As mentioned previously, watch out of the penalties for early termination.

Recommended products: Term Deposit for all major bank.

3 to 5 years – Income Asset (Bond and Dividend Stocks)

If your money can stay in the market for 3-5 years, income assets become a feasible opinion. BBonds are not as stable as term deposit return, but they do offer the potential to earn a higher yield. I would suggest investing in a Bond ETF or a Bond Fund over buying individual bonds via a stock broker for small investors due to the cost of trade. Bond ETFs and Funds  invested in multiple corporate and government bonds, which should reduce the risk

If you are willing to dip your toes in the share market, you can buy some dividend shares at this stage. Dividend shares are usually associated with established and mature companies on the board that pays out dividends constantly. Don’t expect those companies to have rapid growth but they usually pay out dividends every quarter. The volatility of those shares is smaller compared to other shares on the market. Spark, Auckland Airport, and power companies are considered dividend stock in New Zealand.

Recommended products: NZ Bond ETF, NZ Dividend ETF, NZ Bonds Fund, Global bonds ETF, Overseas Bonds Fund.

5 to 7 years – Shares, Property, and Bond

At this stage, growth assets will play an important part in your investments. Growth assets are shares, properties, and managed funds. The reason we shouldn’t touch growth assets until this stage is because of the volatility of the return. Year-to-year return can be ranged from -80% to +80% , but over longer periods it usually goes up. Take a look at the graph below. It shows the NZ stock market’s return in 2 years from April 2007 to April 2009.

If you invested in the stock market in April 2007 and planned to exit the market in April 2009, you would have lost about 35% of your investment.

Screen Shot 2017-03-30 at 10.57.14 PM.png

On the other hand, if you had stayed in the market for 7 years, you would have gained 24% on your investment.

The same principle applies to property investment. The House Price index from 2000 to 2016 shows New Zealand property prices are trending up in the long term. You can see there was a dip during the 2008 GFC and the price recovered within a few years.

HPI.png

Therefore, in this timeframe, you should invest more and more into growth assets and the ratio of Bond and Dividend stocks should decrease.

Recommended product

30-80% of Growth Asset: NZ Top 50 ETF, S&P 500 ETF, Total World ETF,  Property Fund, Oversea Shares Fund, Australian Shares Fund.

70-20% of Bond and Dividend shares.

 7 years+ Mostly Growth Asset 

At this point, I recommend invest 90% of your investments in growth assets and expect a long-term positive return on share and property. You may wonder why the income asset portion goes down to 10%. Although income assets are considered a safer investment, but they cannot match the high return of growth assets. Having a small amount of income assets in your investment will help offset potential downturns in your growth assets. Income assets don’t crash like growth asset, it will act as a cushion to soften any drops in the market.

Some people think if you are young and you can handle a market crash, you should have 100% growth assets as your investment. Whilst I agree with this point of view, it basically comes down to risk tolerance and personal preference.

Recommended product

90-100% of Growth Asset: NZ Top 50 ETF, S&P 500 ETF, Total World ETF,  Property Fund, Oversea Shares Fund, Australian Shares Fund.

10-0% of Bond and Dividend shares.

What’s Next?

So this is the guide that I used to decide where to invest my money based on how long I was going to invest. In the next post, I will talk about risk tolerance adjustment and how KiwiSaver funds fit into this graph.

The timeline and investment ratio used in the graph are based on my own studies and conventional wisdom. Investment suggestions are based on neutral risk tolerance. Investment products listed are based on popularity, ease of access in New Zealand and a bit of personal preference.

Just a reminder, this graph is for GENERAL ADVICE ONLY. Your own situation may be different. Please thoroughly research everything you read here and seek professional advice if you need to.

Email thesmartandlazy@gmail.com or follow me on Twitter @thesmartandlazy if you have any questions.

A Simple Graph that explains… where to invest your money

The No. 1 personal finance question being asked online is “I have $XXX in saving, where should I put it?” or “What should I do with my term deposit?”. People who are unfamiliar with personal finance usually have no idea where to investment their money except term deposit and property (Oh, the old Kiwi dream). While property seems out of reach and interest rate on term deposit are hitting all time low, Kiwis are looking for another way to invest for their future.

Before you jumping into the world of investing…

You should put your money to invest after you pay off your consumer/personal debt, join KiwiSaver, and have an emergency fund. I believe you are not in the position of investing if you still haven’t got your financial basic sorted out.

The most important question

The first thing you’ll need to work out is How long can you leave the money in the investment? or how long before you will need to use that money?

If you are saving for a new car in 3 years, then 3 years is your answer. If you are saving for retirement and you are 30, 10+ years will be your answer.

Make sure you have money set aside for emergency before you invest. You don’t want to be in a situation where you plan to invest in the stock market for 8 years, some emergency happen in year 2 and you are forced to sell your investment at a loss.

Once you’ve worked out the time, apply that to the graph below.

where to invest HMobile-friendly version

Example

Let’s say if you plan to invest for 6 years, according to the graph, you may want to consider invest 60% of that money into growth assets such as stock, property, ETF, and index fund, while the other 40% investment into Bond or Dividend stocks.

If you invest for your retirement in 20 years, you may want to have a portfolio with 5-10% bond and the rest with stock.

On the other hand, if you wish to use the money to buy a car in 2 years. It’s best to put it in a term deposit.

Break down your plan

You may have multiple plans for your money, such as $3000 for travel next year, $12000 for a new car in 30 months, and $20000 for the first home in 8 years.

You need to apply those plan individually to the graph.

$3000 travel fund in saving account

$12000 car fund in term deposit

$20000 in a 10:90 mix portfolio while you keep adding more into the investment every month.

What’s next?

I will explain the basic idea of this graph, the mix of investment in this post and how to apply risk tolerance in the next post.

The timeline and investment ratio on the graph are based on my own study and conventional wisdom. Investment suggestion is based on neutral risk tolerance. Investment product listed on the graph are based on popularity, ease of access in New Zealand and a bit of personal preference.

Just a reminder, this graph is for GENERAL ADVISE ONLY. Your own situation may be different. Please thoroughly research everything you read here and seek professional advice if you need to.

Email thesmartandlazy@gmail.com or follow me on Twitter @thesmartandlazy if you have any questions.

Will you switch KiwiSaver plan during a market correction?

as [I wrote this back in 5th Oct 2016]

I’ve got into a discussion with a colleague about changing KiwiSaver plan. He is in his 30s and he decided to switch his growth plan to a defensive scheme. His reasoning was that he thinks there is a market correction coming in late 2016 or the first half of 2017, so by switching to the defensive scheme, he can avoid a drop in his investment. He will switch back to growth once we are out of the correction.

I do agree there is a market correction coming and a defensive scheme will do better in a down market compared to a growth plan.

Let’s use Superlife income (defensive scheme) and Superlife60 (growth) as an example.

superlifeincome2015.PNGsuperlife60.PNG

During the 2008 GFC, most markets were down by A LOT. SuperLife income returned about 6% to 8% during 2008-2009 and SuperLife60 was returning -8% to -14% at the same time. So if you start your Kiwisaver in 07 in SuperLife 60 (returning 4.8%), then switch to SuperLife Income at 08, 09 (6% and 8%), and finally switch back to SuperLife 60 at 2010 (15%). You would have returned on average 8.45% p.a. while SuperLife 60 was returning -0.55% in those four years.

By looking at the math, it’s all great, but the main question is HOW DO YOU KNOW WHEN TO SWITCH? We are trying to time the market. The return looks great when we do it retrospectively, but in reality, it takes lots of time, resource and knowledge to time the market and people who are experts in that area still don’t get it right. If we switch too early, we may miss out on the last bit of gain. On the other hand, if we change too late, we will take the hit of the initial crash.

I am personally not sure about this. I was trying to time the market back in 2014, and I was wrong. The conventional wisdom was to ignore the ups and downs of the market and keep your investment in a growth fund. You will ride it out eventually. However, somewhere in my mind I still think I can get a better return by switching. Not to a defensive scheme but a balanced scheme to smooth it out.

[Now, back to March 2017]

I ended up keeping the growth fund and it turned out great. The return on those months is far better than the defensive fund. The main reason was due to the poor performance of income asset in the last quarter of 2016.

However, this post is not about growth fund doing better than the defensive fund during that time period. In fact, I’d still be happy if the defensive fund did better because the performance for my KiwiSaver in a single quarter only has a tiny impact on the lifetime of my fund. The lesson I learned was to stick to right fund for me, just sit back and let it grow.

Email thesmartandlazy@gmail.com or follow me on Twitter @thesmartandlazy if you have any questions.