Some need to know, with a bit of WealthDesign nice to know thrown in.

As good as gold ….

Today I had an interesting call. A lady rang to ask me how to invest in gold. She told me the story of her very affluent grandfather, who had always told her to buy gold as a way of protecting her wealth.

Her question was how to do it. Should she buy into a managed fund that buys and hopefully actually hold the gold, should she buy an ETF that is linked to gold prices using financial derivatives and futures? Or should she cut out the middle man and buy shares in a gold mine, or should she buy the real thing?

Gold prices have surged in recent weeks on the back of buying pressure by India and China. Uncertainty around the global trade war has investors spooked and moving into gold as a hedge to protect their wealth.

In my opinion, gold is like buying a residential section. The only way to make a profit is to sell it to someone else for more than you paid yourself. If you hold the section for 10 years and the cost of money is 3.5%, your section needs to increase in value more than around 50% to make a profit. Why, because the section doesn’t produce an income, just like gold. All the profits must come from inflation and there is a cost of not getting a regular return. This is called the opportunity cost.

If we don’t get gold inflation, we don’t get a profit.

My advice around owning gold was simple. If you really want an exposure to gold, take a visit to your favourite jeweller, buy a beautiful 24 carat gold necklace and keep it safe. Insure it and wear it out. Enjoy the tactile feel and the warmth of the gold and the joy of owning something so lovely. Even if you don’t get inflation that pushes up the value of your beautiful asset, at least you get the joy of owning it.

John Barber
WealthDesign – a life well planned

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Wall of debt coming – be prepared!

Today the world debt is US$217 trillion – and we should all be preparing for what that means.

10 years after the end of the great recession, the world is still a volatile place for investors. We have seen asset values continue to rise on the back of historically low interest rates.

We now seem to have asset bubbles in property, and in world share markets. This is on the back of the world reserve banks printing money. If money is cheap to borrow, it is only prudent for businesses and individuals to borrow and buy assets.  As the money supply has expanded and invested, then we’ve seen asset prices around the world grow.

To make things worse, the historically low interest rates have created “zombie companies”. These are companies only being kept alive by the low interest rates. In the US, 10% of the businesses are classified as zombies. If we see a 2% increase in interest rates, these companies will be killed off.

The impact of low interest rates doesn’t just impact on the share market, but it also impacts on the bond market. Since the global financial crisis, global credit has boomed. In the US, 49% of the corporate credit is BBB. This US $5 trillion is one step away from junk bond status. If a down grade comes, these company bonds will be sold off in the millions. To make things even more complex,  US $0.5 trillion of this debt is due to mature in the next three and a half years.  This has serious implications to us all as every recession is preceded by a bond crash. This is where interest rates increase and bond values fall.

New Zealand might be at the end of the world, but our financial stability is fragile. As a country we are tiny, and if the US economy sneezes, our economy will need to head to intensive care.

In 2001 we had the DOTCOM bubble and I remember reading about it the day after most of the news hit. In 2007 we read the news on the internet, but next time we are going to be reading the news at real time on our phones.

With three million people invested in KiwiSaver schemes, and most of them not taking advice, when the bubble pops, it is going to be an interesting time.

So here’s me shouting from the roof-tops:
GET SOME ADVICE TODAY!
Honestly guys – this is important. For your financial future (and your family’s) be well prepared for whatever is coming up. Give me a call today to make sure you have your KiwiSaver scheme set up optimally – it’s really not that painful, I promise you!

John Barber
WealthDesign – a life well planned

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I often ask myself if we learnt anything from the GFC a decade ago? The latest Morningstar report on KiwiSaver came out the other day and there is now $51.7 billion invested with various KiwiSaver providers. There are over 3 million individual accounts and these people have heavy exposure to both local and international shares.

I don’t believe all of these investors understand the KiwiSaver beast and I think there is going to be a day that proves my concerns are valid. Human nature makes us all react to fear. With investments, fear of losing is greater than the thrill of winning. For the past ten years, the sales pitch around KiwiSaver has been “you can see your daily balance on your phone”. This is great when things are on the up and up but not so cool when the prices are falling. For the past few years, a monkey could have run most KiwiSaver funds and made money.

I’m reading the old platitudes rolled out by fund managers and regulators. Things like, “don’t try and time the market, it’s important to be in the market, get your risk tolerance right.” These are all valid points, but experience has shown me that people are emotional beings and when things go south, they make decisions with the heart not the head, and they just won’t listen.

Here’s an example:

Just think, your KiwiSaver balance is $50,000 – you are feeling great and every time you look at your online banking app on your phone,  you know you are  in line to meet your retirement goals. You are in a balanced fund so you are comfortable you have things in hand. You feel great. It’s worked for the past 10 years, so why worry?

Let me tell you why. Tomorrow you wake up to the news that the DOW Jones is down 25%, the NZX and ASX are following suit. The papers are full of bad news. You look at your KiwiSaver account balance and it’s down to $40,000. You are a bit concerned but you remember the FMA has been telling you it will be okay. The next day the DOW Jones bounces and you KiwiSaver account follows suit and the balance comes up to $45,000. You blood pressure recovers and you start to feel better.

Two days later that DOW drops again, your KiwiSaver drops to $38,000. You have a sick feeling in your stomach. You know in real terms you have lost $12,000.  You try to phone your provider but there are hundreds of other investors doing the same.  You get that cold feeling that things are only going to get worse. What if it drops another $5,000? You start to question the glib one liners coming out of the FMA and the managed fund industry. You go online and start to do some research and find that the cash accounts in KiwiSaver have only dropped a couple of percent.

You feel you need to do something.

This is the day that thousands of KiwiSaver investors will make the same terrible mistake. They will hit the transfer button on either their phone or computer and move to a defensive cash based fund.

They will realise their losses and by transferring, the fund managers will be forced to sell shares both locally and internationally. Worst still is this will happen on a falling market. Compounding this even more is the size of the total KiwiSaver, and the amount invested in our local share market.

There aren’t enough qualified independent advisers to influence this action after the event.  I don’t  believe for a minute that market briefing, emails or newsletters or hand wringing by the regulator, will alter this behaviour. We are just human.

 Smart investors will line up to buy great shares in awesome companies at hugely discounted prices. The question you need to ask yourself is which side of the table will you sit on? The panicked seller or the smart buyer?

My advice? Get advice now! Make tactical decisions and have a plan for when the markets change. The markets will fall and this scenario will pay out, it’s just a matter of when.

Reach out! Call me now and let’s make sure you’re ahead of the game.

John Barber
WealthDesign – a life well planned

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Good news travels and bad news flies

It’s been 10 years since the world suffered the greatest recession since the 1930s.  The first couple of months of 2008 was eerily calm and then all hell broke loose. A major economic meltdown was underway. Banks wouldn’t lend to each other and institutions such as the Lehman Brothers, AIG, Merrill Lynch, and the Royal Bank of Scotland all got wiped out. Mortgage companies in the USA such as Freddie Mac and Fannie Mae also took a hiding. It was tough for a lot of people and New Zealand didn’t miss out on the pain. We had our equivalent of the USA bank failures with the finance company sector falling over, and losing investor’s money.

I remember reading reports and looking at different graphs comparing the start of the recession to tough times of the past but it wasn’t until I started seeing graphs that matched the 1930 depression, that I really got to understand just how bad things had got.

Looking back, it took a while for the news to spread out. You had to be on line, watching TV or reading the news – but today the world is even more connected, bad news circulates instantly, as people’s love of smart phones intensifies. And this intensifies too, the impact of the bad news.

Today there is $46 billion dollars invested in KiwiSaver schemes by average kiwis, and most of these funds are at risk of losing value if things go south.

After every bull market (when everything goes up in value) we have a pull back, or a bear market. For 10 years we have seen the world capital markets increasing year on year. We will all see the turning point after it happens.  In my opinion when it happens, there will be a repeat of 1987, 2001 and 2008. Ill-informed investors will panic and move their funds to less volatile funds. In turn this will force the KiwiSaver manager’s to sell on a falling market. How would you feel if your KiwiSaver balance lost 20% over night?

My advice is to have a strategy in place now. If you have five to eight years left until you turn 65 – make sure you are in a capital stable fund.  But whether you have five, 15 or 40 years until 65 rolls around, come and get some advice. It will prove invaluable – now that’s a promise.

John Barber
WealthDesign – a life well planned

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