WealthDesign

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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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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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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