WealthDesign

2020 – 2021. Oh what a year it’s been! Who could have predicted any of the events that have unfolded? The virus, the forced vacations (lockdowns), the variant, the “vaccine” ….  the past 12 months have been exhausting. And now I think there’s volatility to follow.

Interest rates have been at historical lows and asset prices have risen rapidly. We have also seen the fear of missing out (FOMO) drive house prices to record levels and no one can predict what will happen next.

If I were a gambling man, I would bet on interest rates heading up. At present you can fix mortgages below 3%. If you have a $500,000 mortgage and interest rates go up to 5%, your interest rate bill just increased by $833 per month. In a world of low interest rates, borrowing makes logical sense but make sure you can afford the increased monthly mortgage bills when they arrive!

It is human nature to project more growth on the back of the past and when things are good, people naturally predict it to always be good. As we saw in March 2020, when things are bad, it is also natural to predict things to get worse. The fact is it is somewhere between.

We have seen an amazing share market recovery but now it looks like ongoing market volatility comes next. All my reading tells me that full employment, strong retail spending and inflation equals increasing interest rates. And this means economic pain – and none of us are immune to that.

My advice is to build a war chest. Start budgeting and put the credit card away. If there’s one lesson I’ve learnt, it’s that cash is king in uncertain times.

Give us a call at WealthDesign. We’re here to help you navigate the upcoming “Vs.” Yes there may be volatility ahead, but if you have a robust plan in place, you’ll be prepared to make the most of the ups and downs as they appear.

John Barber
WealthDesign – a life well planned

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Most of us remember the now famous “okay, boomer” comment from Chloe Swarbrick in parliament, which may have been meant as a put-down to a fellow politician who allegedly heckled her during a debate on climate change. Funnily enough, we actually use life stages as part of our financial planning framework at WealthDesign. And we’re keen to see the “boomer” segment of our population in a more than “okay” situation!

We class the 55 year olds and above as “Planners”. This broad group are the boomers and above (those in 1964 or before), along with the top end of the Gen Xs (those born from 1965 to 1975). They are now either fully focused on their next life stage or are about to be. The fact is, there is a good chance they will live as many years in retirement as years they may have worked. Their problem is that KiwiSaver hasn’t been around long enough for them to rely on their KiwiSaver balance, to comfortably retire.

Often this group have their kids off their hands, their mortgages paid down and have higher disposable incomes, however this isn’t a time to coast.

Massey University did an extensive research paper in 2017 and established that a retired couple would need between $1,399 and $1,104 per week to live in relative comfort.

The good news is the New Zealand Government Superannuation provides $652 week, but leaves about $600 per week shortfall. The problem is we are now living in a low interest environment and to generate $600 per week to cover the shortfall, you would need around $2.7 million in the bank.

The answer unfortunately, is planning and compromising. Most boomers will work until they are 70 – not through choice, but through necessity.

If you are a boomer or a Gen Xer, give me a call as it’s time to plan for your next life stage.

John Barber

WealthDesign – a life well planned

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Today the market is increasingly volatile on the back of the coronavirus crisis. Prices are down and people are talking about the losses they have made on their KiwiSaver schemes.

It is at times like these that I remember why I don’t like managed funds! I’ve been running investment portfolios for clients for many years and I’ve lived through both good and bad market cycles (yes, I deserve these wrinkles!). In 2008 we saw the world equity markets lose around 50% of their value and lots of investors had a tough year or two. In the past few years it seemed nothing could go wrong. That was until the coronavirus struck.

I like investors to know where their money is invested. Why? Because when things are tough, smart investors get out their cheque books and start buying companies from those who want out of the market. They are armed with knowledge and make the most of the timing to make the best of the circumstances.

Funnily enough, the sellers at these times are often the fund managers. In my opinion, this is because investors in managed funds (including KiwiSaver) are completely disjointed from where their money is actually invested. They don’t know if their fund manager is holding shares in great companies or if they are invested in the next get-rich-quick share. It’s not until after the event, who owns what becomes apparent.

For me, I want to invest in companies that have strong balance sheets, robust business models and conservative debts. As a by-product of this, these companies normally pay solid dividends.

A current example would be Contact Energy. Trading today at $6.02 and paying a gross dividend of 8.0%. This share is down from $7.66 on February 20.

My question is, has the Contact Energy business changed? Will the coronavirus impact on their business in the next twelve months? Will Contact Energy be around in 10 years’ time and making money?

My view is simple. As an investor, it’s your money and you should be in control. Don’t pass the responsibility and decision making to someone else. If you do, don’t be surprised if the outcome is average at best.

If you want to come and talk to me about my approach to investing for me and my clients, contact me now. I’m always happy to be helping people reach their investing goals. And your initial chat is always free of charge.

Disclaimer: The market is volatile and share prices can and do change. This is not a recommendation to buy or sell any asset as each individual should get personalised advice suitable for their circumstances.

John Barber
WealthDesign – a life well planned

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Sounds like a title for a movie and a scary one at that! Well zombies and black swans could well have an impact on your KiwiSaver fund, so settle in while I give you the heads up. What you don’t know can hurt you!

Today there is over $10 trillion of US Corporate debt. This debt bubble has been created by reserve banks and governments around the world trying to fix the last financial meltdown by printing money. All it seems to have done is fuel a borrowers feeding frenzy. Companies in the US have been able to borrow capital for next to nothing  – hence the problem. Instead of investing for growth, many companies in the US have just borrowed and bought their own shares back – everyone’s been happy, the share price goes up so the shareholders are happy, the directors pat themselves on the back for making their shareholders more wealthy and the CEOs get bonuses. The only problem is that some of these companies are only surviving because they can borrow cheap money. In a true market they should have gone broke and died – as in become a zombie.

The theory is that companies going broke and then being rebuilt is a healthy part of a thriving market, as it allows new blood to come in and take over the assets, and then rebuild a more efficient business. Artificially cheap money is mucking with this evolutionary system.

Another problem is that around 40% of this $10 trillion debt is BBB credit rated debt, just one step away from junk bonds. The scary thing is we really don’t know who owns all this debt. Think of it like you owing someone a mortgage but you really don’t know who.  Part of me worries that the smart Wall Street bankers have packaged it up and sold it off around the world. It could very easily be hidden in your KiwiSaver fund, and you don’t even know.

If we see a black swan event such as an Iranian War, we could see a GFC scenario with a repeat of 2007.

KiwiSaver is a great thing, you hear me telling you through the years. And it is. But just by having money invested in a KiwiSaver fund is not the answer if you want to ensure your money works for you through to age 65. You need to know how to manage it. The scary movie scenario described above, could play out.

So expect the best but plan for the worst. Review your KiwiSaver now. Make sure you aren’t unknowingly exposed to events that could jeopardise your investment.

Give me a call and let’s check out your KiwiSaver situation and ensure your hard earned funds work for you optimally through the years.

John Barber
WealthDesign – a life well planned

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Let’s face it – the economy has been great.  The New Zealand Listed Property sector returned around 35% last year, and the New Zealand share market around 18%. So if the market comes back a bit, it’s hardly a surprise.

In lots of ways, New Zealand is a micro climate that mirrors what’s happening globally. Economically we have had a sunny financial period for over the past 10 years. This great economic period has been based on cheap money due to quantitative easing. This was part of the answer to the global financial crisis. Quantitative easing is basically central banks of Europe and the US, printing extra money. This increased money supply has seen interest rates fall globally to historical low levels.

This cheap money has also seen all capital assets (such as shares and property) strongly increase in value over the past 10 years. Employment and business confidence has been strong as we have all felt wealthier and more confident. This has lead to us all spending more and the economic treadmill has been spinning overtime.

Unfortunately though, things aren’t all rosy out there. We are seeing redundancies in the rural support industries as farmers put their cheque books away. The banking industry is starting to put the squeeze on farmers and businesses. I am getting calls weekly from individuals telling me that the bank is limiting access to funding. This isn’t entirely the banks’ fault as the New Zealand Reserve Bank is leading the charge with talk of increased capital reserves and favouritism towards residential mortgages.

In my opinion, we are also seeing extremely poor leadership from politicians, both locally and on the global stage. You only need look at the US or UK to see what I mean. Short term populist thinking isn’t helping the potential economic disaster that could be building. A great example is what is happening in the US. I think a lot of why Trump can get away with his trade war is the underlying belief that somehow China’s success is America’s loss.

We do expect the markets to become more volatile in the near future. This is going to create opportunities to make money. It’s a story I’ve been telling my clients for a couple of years now – “keep some investment money as cash!” That way, we’ll be able to take advantage of the opportunities as they appear.

An example would be Z Energy (ZEL). Two years ago ZEL was trading at $7.70 per share. Today it’s trading at $5.62 per share, with a gross cash dividend of 10.66%. At these rates, this is a great buy. Has anything changed with ZEL as a company? Well nothing apart from it becoming a political football (as the government tries to deflect criticism of their regional fuel tax they have added to our fuel costs).

ZEL is a truly integrated utility organisation, from refinery to its sale of 45% of all New Zealand fuel usage. It is profitable and well run, yet market sentiment has forced the price of this stock down around 13%. 

If you bought your ZEL two years ago and then doubled up your investment today, your average cost per share would be $6.70 per share. This would still mean you are earning a 9% gross dividend on your total investment. Not bad considering term deposits are at around 2.8% for 12 months.

Another example would be Metlifecare (MET). Today this share is trading at $4.47, down around 30% for 12 months. MET is trading at basically a 40% discount to the NTA (net tangible asset value) of the company. Think of a company’s NTA as the zombie value of the company. It is the value of the assets if the company died and went broke, and the assets got sold off. To be able to buy a company at 60% of their underlying asset value seems an amazing deal to me. The retirement sector isn’t going away. Today, people 75 years old and above make up around 7% of the population – this will grow to around 17% of the population by 2040.

I believe the next 12 to 24 months will provide an opportunity for informed investors to make a lot of money. But there are a few things I would advise:

• Have a strategy in place for the coming volatility. This might include taking profits and moving into assets you can see and understand. I’m not a great fan for managed funds where you don’t know where your money really is invested.
• Don’t ever delegate the decision of where you invest your money. It’s your money and you need to have control.
• Never give your money to someone who controls the cheque book. Don’t ever give your money to anyone who can’t prove that the money can’t be misused or accessed by a third party. Keep the ability to sign off any change and never delegate this to anyone.
• Don’t follow the crowd – what happened last year doesn’t mean it will happen again this year.
• If you do use a managed fund, be sure you understand the structure and the assets you are investing into. You need to understand how the fund is benchmarked, how much cash the manager can hold, and how far away from an index they can be within the fund managers’ rules. Interestingly this isn’t that easy to find out from straight research. It takes a bit of digging.
• Understand the fees you are paying. We often see people paying up to 2.75% of the total portfolio value in fees.

If you want to talk to me about investing or you would like me to review an existing investment portfolio, give me a call. I will happily meet for a free initial investment chat.

John Barber
WealthDesign – a life well planned

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