WealthDesign

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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AMP has agreed to sell their life insurance business for $3.3 billion to Resolution Life.

Resolution Life is an investment company that specialises in buying “legacy life insurance” books. The company has 27 life insurance companies that they manage in the UK, US and Europe.

Obviously, they want a return on their $3.3 billion investment, and I don’t believe that AMP policy owners will benefit from this deal in the long term.

Historically, AMP policy owners shared in the profits of AMP, by way of bonuses on whole of life policies. Since listing, the bonuses have continued to be eroded by a number of changes. Many of the changes are hidden from view.

If you have an old AMP policy, I suggest you get advice from an experienced adviser who understands AMP policies, and who isn’t conflicted (as an AMP agent is). And that someone could well be me. I’ve been in this industry for thirty years and have a comprehensive policy knowledge of all AMP policies.

Give me a call, and I would be happy to give you the impartial advice that you need.

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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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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Have you heard all the talk about investing in passive or active managed funds?  

I’ve been hearing plenty recently, from the front man for Simplicity KiwiSaver Funds, Sam Stubbs. He argues that by investing in their passive funds, an investor will be better off in the long term. This is based on the simplistic concept that lower fees (by using an index based fund) will reward the investor long term. And that active management (where managers are trying to add value by stock picking and moving funds around within sectors and between sectors) can’t beat the market, long term. Therefore by not paying for this expertise, the running costs can be much lower. And this sounds great – in theory – doesn’t always pan out in reality.

Simplicity’s fees are the lowest in the KiwiSaver fund market. There’s no denying that. Their results though, over the past 12 months for their balance fund? Average, at best and 27% below the top rated fund (excluding fees and according to Morningstar research).  To date their value proposition hasn’t yet got the numbers to back up their theory, in my opinion. However in time, this could change.

Chasing cheap fees is one strategy as is using low cost index based investment strategies. If that is what you are comfortable with, that is okay. But I suggest anyone using this strategy really gets to understand where their money is invested, and how it would perform in a bear market.

I don’t care what colour your KiwiSaver fund investment folder is, but what I do care about is if you have the right investment strategy for your situation? And who can help you with that? A qualified and objective investment adviser.

For almost 10 years we have seen world share markets increase on the back of increasing money supply. One day this will change and we will be in a different economic cycle. On that day, I suggest you will want to have a human on your side of the desk, making calculated decisions, not a computer algorithm that just sells based on an index calculation. It doesn’t end well.

We don’t know when the market will change and I’m a firm believer we will all read it online or on our phone, all on the same day. The speed of information transfer is faster than ever before. From history, at these times good financial management counts. If the market falls, it will be too late to put any constructive plan in place.

In fact, I believe it is really important for KiwiSaver fund investors to be looking at their investment strategy today and having a plan in place – regardless who your money is invested with. Advice is vital, especially as your KiwiSaver fund balance starts to grow.

I’m only a call, email, or facebook message away. I’m always happy to have a chat to see whether WealthDesign can help you get to where you want to be. The first meeting is complimentary, so give me a call to tee up a time.

John Barber
WealthDesign – a life well planned

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