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 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.

My First mortgage as a noob

I was sorting my paperwork and saw my old mortgage paper. I was such a noob back then and made a lot of mistakes when I set up that mortgage.

Hunting for our First home

When I and my wife start hunting for house couple years back, we’ve done the first timer mistake by walking into my friendly local bank which I’ve been banking with for 10+ years, ask about home mortgage and got introduced to a personal banker. Had a 30 mins meeting where the banker took our account statement and worked out our income, expense, and deposit. We walk away with a 600K loan pre-approval.

So, we went on to house-hunting and luckily got a house at auction (passed-in then negotiate). We took the purchase agreement to went to the bank again. This time stayed there for an hour. Got a 500K fixed 2-year at the advertised rate home loan, pay monthly plus a life insurance for both of us, house and content insurance. I was so proud of myself because I also got a $1000 cash back and used that to pay the lawyer. The mortgage payment was about $2400/month plus $180 for the insurance. I remember when I walk out of that bank I felt a sense of accomplishment. I knocked down home ownership, mortgage, life, content, and house insurance on the same day.

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The list of stupid things that we’ve done.

Now I look back at the mortgage statement, I was such a NOOB!!!! I’ve made so many first timer mistakes!!!

  1. I walked into a bank and get the personal banker to do my mortgage.
  2. I took the advertised rate.
  3. I 100% fixed my mortgage.
  4. I pay my mortgage based on what the bank said.
  5. I pay monthly.
  6. I accepted the $1000 cash back.
  7. I did not get a friend to do a referral despite heaps of my friends are with that Bank.
  8. I buy insurance from the bank.
  9. I did not ask for fee-free credit card
  10. About 18 months into that fixed term, some news headline saying interest rate is going up. I considered very hard to break the contract and refinance.

The ONLY thing we did right was the downpayment. At that time, you can get a home mortgage with just 5% deposit and lots of people did that. We decided to put over 20% as deposit since we saved up some money already.

At that time we didn’t know much about mortgage….actually, we don’t know much about money, personal finance, saving and spending at all. We were stuck with this deal for 2 years and within that time, we had a money crisis that forced me to educate myself about money. I read books from the library, research online,  builds home loan model in excel and ran a bunch of analysis. Now I have a nice setup on a home mortgage with every dollar working to reduced the interest expense.

I am interested to know any of you made those mistake when you first took on a mortgage?

Also if you don’t know what I’ve done wrong or you actually doing the same thing, check out the next blog post and I will explain what I’ve done wrong.

Will you switch KiwiSaver plan during a market correction?

[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. The reason was he thinks there is a market correction coming in late 2016 or first half of 2017, 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 defensive scheme will do better in a down market compared to growth plan.

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

superlifeincome2015.PNGsuperlife60.PNG

During 2008 GFC, most markets were down by A LOT. Superlife income returning 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%), switch back to Superlife 60 at 2010 (15%). You will be doing average 8.45% p.a. while Superlife 60 doing -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 took 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 initial crash.

I am personally not sure about this. I was trying to time the market back at 2014, and I was wrong. The conventional wisdom was to ignore the ups and downs of the market and keep it 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 turns 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 2016.

However, is not about growth fund did better than the defensive fund. In fact, I’ll still be happy if the defensive fund did better because the performance for my KiwiSaver in a single quarter only have a tiny impact on the lifetime of my fund. The lesson I learn was to stick to right fund for me, just sit back and let it growth.

Compare ETF cost between SuperLife and SmartShares

In case you don’t know, I am in the camp of passive low-cost investing. So most of my investment are in ETF and index fund.

Currently, the easiest way to buy and hold ETF in New Zealand is with SmartShares and SuperLife. Both companies are owned by NZX and they are selling basically the same ETF product. However, the cost of the ETF are different with those 2 companies and I’ve put together a table to compare it.

In general, Superlife offers lower fund management fee. However, they do charge a $12/year admin fee which makes Superlife more expensive when you are starting out. So you should start with Smartshare and once your hold reaches the “When to Switch” amount, you can move your fund to Superlife to enjoy the lower cost and the better user interface.

My table is based on you have only 1 fund in SuperLife. If you have multiple funds with SuperLife, that $12 Admin fee will be shared by those funds and you can divide the “Switch to SuperLife” amount by the numbers of funds you’ve got.

Here is an example:

You are holding $15000 Global Bond ETF and $12000 Aust Property ETF with Smartshare. Both of them alone did not pass the “When to switch” limit. However, if you switch both of them to Superlife, the “When to switch” will be divided by the numbers of funds, which is 2, and the new “when to switch” amount will be $24000/2 = $12000. So you should switch both of them over to save fees.