Market impacts of presidential elections

A lot of people are surprised and a bit shocked after last the US election results and while I won’t be discussing the actual results of the election and the fall out (plenty of the media, who were wrong about the election will spend time telling you what will happen), it’s important to know about the market impact.

kiwisaverThe expectation of a Trump presidency would be that the market would react negatively and we are starting to see that (though the DOW was actually up for a bit today, but this could change).

So what does this mean?

Well it means that in the states people are selling shares in companies as they react to the news of the new president and, as more people sell shares, the price drops. This price drop reduces the value of your KiwiSaver units, which results in the cash value of your KiwiSaver (and other managed funds) going down as well.

If you prefer to watch a video on this go here.

The three areas I am going to discuss are:

1. Changing your fund
2. Hedging
3. Historical impact.

Changing your fund:

So should you change your fund to Conservative?

In short no. if you have a longer time period (more than a few years), then you should leave your fund as it is, because markets always recover and the benefits of the drop, will be a positive for you.

If you are about to get your money out of KiwiSaver, then scaling down your fund to a more conservative fund, could be a good idea.

If you have a longer time period, then the benefit of this is that while the funds are down in value, you are buying these shares on a discount. So when they do go up, you will have more units and they will be worth more.

So counter intuitively, it’s the time to buy rather than sell.

To use an analogy, if the housing market drops 20%, would you sell your house or look for bargains to buy more?

Shares and managed funds are no different.

Hedging:

The other thing to think about is that most of the managed fund providers will have been hedging against this (at least one of them we spoke to was planning for this). In very basic terms, downside hedging involves buying a contract that states that at any time until it expires you can sell your shares for a certain value.

So for example, you have some shares worth $10 each, and you take out a contract to be able to still sell them for $10 over the next 90 days. If during this time the share price drops to $8, you can choose to trigger this contract and sell them at $10, rather than $8. And then of course you could use this money to buy them again at the new lower price.

Historical View:

Major events happen all the time, and markets drop all the time. Major events like 9/11, WW2, the dot com crash and many other events will result in the market dropping. But it always rebounds.

On the image below you can see the historical trends of the market overset with the momentous events. As you can see, the market recovers.

graphic-for-investments

So whatever the impact of a Trump presidency, the market will recover, like it always does.

Summary:

If you have any questions on any of this, or want some advice for your KiwiSaver, get in touch with us. And if you know someone not getting advice on their KiwiSaver, get them to give us a call.

By Alan Borthwick

Money Mind-set series – Credit Cards

Money Mind-set is the concept of having the right thoughts about money and setting your mind set accordingly.  It’s about focusing to spending only money you have, not racking up debt, and saving as much as you can for your goals.  A good money mind-set will help you grow wealth better over the years, and remove all the money stress most people have.

 

This entry into Money Mind-set is about Credit cards.financial-planning

 

One of the things that comes up a lot with the debt repayment strategies I help people with are credit cards that have been racked up quite a bit (overdrafts fit into this category as well, but are less common).

 

It’s easy to think of credit cards as only an issue for people who are bad with money, but I am going to go one step further state:

 

NO ONE NEEDS A CREDIT CARD!

 

Credit cards are only for spending money you don’t have.

 

That’s pretty definitive right?  Now you will have a bunch of questions and I will answer some of the key ones (feel free to email with any additional questions you have).

 

My reasoning is this; credit cards are debt, they are about spending money you don’t have, and far too easily allow the risk of you overspending.  If you don’t have a credit card you cannot overspend, but no matter how good you are financially, a credit card increases the risk of you spending what you don’t have.

 

Better to get rid of them and not have the risk.

 

The argument about buying off the internet no longer holds as you can get a Visa Debit card which will do the same job.

 

So, what’s the solution if you don’t have a credit card?

Save!  – have cash for this money, put aside money each pay to cover your expenses, so when an expense comes up you might have used the credit card for in the past, you use this money instead.  It’s a much better feeling to pay for something in cash like an emergency payment or trip, than to borrow money for it and then have to pay it back.

 

So, here are the common questions:

 

What are the downsides to not having a credit card?

For the most part there are none, though you will have to save some money for actual emergencies as you don’t have debt to fall back on.

 

So far the only two annoyances I have found (as I don’t have a credit card) are for hotel and rental car bookings.  They are a bit more of a pain when you ‘only’ have a visa debit card and they want you to pay a deposit.  All that happens is that the hotel so far just takes $100 off you and reimburses it when you check out.  A minor annoyance in the grand scheme of things.

 

When is a good time to have a card?

Never!  Well almost never.  If you run up expenses for work and there is no work card you can use, it might be ok to use a credit card and reimburse it from work, but really eftpos is fine.  You just need to have a bit of a buffer.

 

If you were travelling overseas to a really odd place, maybe having a credit card loaded up with a bunch of cash might help if you get stuck, but again, having enough for your trip will be fine in most cases.

 

What about an emergency fund?

A lot of people justify having a card as an emergency fund in case life hits the wall, the car dies etc.

 

In theory this is okay, if the card sits in a cupboard and has a $0 balance and is only ever used for the 2-3 things that constitute an emergency.

 

But in reality, most of this can be avoided by saving an emergency fund.  Ideally a 2-3 months’ income fund is what we should have, but that’s a longer term goal.  What I am referencing is a $1-$2,000 fund (depending on your family size and need) to cover a few emergency expenses out of the ordinary like medical expenses, car repairs, family emergency or giant power bill.

 

You should really be saving for this.  I will briefly allow a card with $1000 limit on it, with a $0 balance, that once you get to $1000 in savings, the card gets cancelled.  But this card has to be hidden (or with your mum who has rules about when you are allowed it) and never used unless you hit the parameters as above.

 

But I am good with money, and I get points/rewards/cashback, what’s wrong with having a card?

 

It’s a false economy.  Are you really that good with money?  Do you only spend what you need and never spend a little extra and justify it on the points?

 

For the most part those points are rubbish and the credit card companies would not give them out if they did not know you would most likely overspend because of them.

 

If you set a limit on an eftpos card of $250 for a fortnights groceries you can only spend $250.  If you have a credit card with $2,000 available there is a very good chance you will end up spending more than this $250 on multiple occasions, because the points have given you permission.

 

Don’t risk it, dump the card.

 

How do I transition away from the cards?

The first thing to do is to stop using the card.  Cut it up, cancel it if it’s paid off or freeze it if it still owes money, and then just stop.  Get a visa debit card for buying online, and make sure you have a robust budget and set aside money each pay for longer term expenses.

 

Work out a payment plan to pay it off, do a balance transfer for a low rate if you want, but just chip away at it till is gone.

 

Once the card is paid off, never get a new one, build up cash etc. if you have to have a credit emergency fund to start with, cut the limit down to the fund requirement and then cut the limit as the fund grows.

 

What do you think about the concept of Money Mind-set?  Let me know if there are any other areas you want me to cover and I will add it to the list.

 

By Alan Borthwick

Easy Finance Is Not Always Easy

It’s not a surprise to read about people racking up lots of debt on the mobile lenders.  People will always find a way to borrow if they are that way inclined.

What is interesting and relevant is that the lady has no idea what she bought or what it cost.

This is because the focus of the client in these case is to get the item, not what the cost (bar the initial price) is.  They have no interest in the long term price because that’s tomorrow’s problem.

When you only live for today, it’s easy to dump stuff on tomorrow.financial-planning

The way to avoid falling into the (self-inflicted) trap of borrowing for consumer purchases is to be very aware of today and tomorrow.

What I mean is:

  1. Be very clear about what your income is.
  2. Be very clear about what your expenses are – i.e. do a budget.
  3. In this budget have a clear breakdown of what is allowed for discretionary spending.
  4. If an item is over this, you cannot by it.
  5. Only buy things with cash, i.e. you have to save. And if you have to save, you have to budget an amount each pay to save so you can spend this money.
  6. have a goal for the future that is more important than borrowing more, i.e. buying a new car, a house, a holiday etc. it’s easier to save for a goal and not spend than to just ‘not spend’.

Doing this will mean you are less likely to wander into a shop and just borrow money, as you will be aware of the impact on your future if you do.

But let’s also get away from this nonsense of these companies ‘preying’ on people.  They don’t drag you into their truck/shop and you have to sign the dotted line to get the money/loan.

Yes, if they are not fulfilling their legal obligations on disclosure, sale of goods act etc., they need to be dealt with, but offering a loan at 25% is not illegal (its less than GEs standard rate btw), as long as you know its 25% and take it with no pressure or fraud.

as you can see from the article most of the companies have already written off much of what she owes them, which shows why they charge so much, to cover the cost of those who they never get money from (it also shows they need a better assessment process).

High interest lenders are a pain in the ass and I enjoy helping them lose money by cashing them out early, but they are part of the market and there is demand for them, otherwise they would go out of business.

The best way to run these people out of business and to lower their rates is for people to stop borrowing for items they should save for, and to live for today and tomorrow, not just today.

DUX Financial Services can provide some advice in this area if you need it.  Check with your Citizens Advice Bureau (CAB) and budget services as well.

By Alan Borthwick

Changes to KiwiSaver Homebuyer’s withdrawal

mtgeThe government has announced some changes to KiwiSaver withdrawals for 2nd chance first home buyers that will come into place on the 1st of July 2016.

 

I have read a couple of articles and there is some confusion about what it all means, so I thought I would clarify this for everyone.

 

Current situation:

There are two aspects to KiwiSaver assistance for buying a home.

 

First, the KiwiSaver withdrawal, and secondly the Home Start Grant.

 

If you are a first home buyer and have never owned a home before, you get your KiwiSaver provider to confirm you can withdraw your funds, and you apply to Housing New Zealand Corporation for the Home Start Grant.

 

If you are a 2nd chance first home buyer, you have to first apply to Housing NZ for permission to withdraw your KiwiSaver, on the same form you use to apply for the Home Start Grant. Once housing NZ approves you as a 2nd chance buyer, you go back to your KiwiSaver provider with that approval to get your KiwiSaver withdrawal confirmation.

 

So far, all makes sense right?

 

The current rules for both the withdrawal and Home Start Grant are:

 

First home buyer

Withdrawal Home start
No income requirements $80 000 max for 1 borrower, $120 000 for 2 or more
No maximum assets 20% maximum assets compared to the max purchase price (so $90 000 for a $450 000 house).

 

2nd Chance First Home Buyer

Withdrawal Home start
$80 000 max for 1 borrower, $120 000 for 2 or more $80 000 max for 1 borrower, $120 000 for 2 or more
20% maximum assets compared to the max purchase price (so $90 000 for a $450 000 house). 20% maximum assets compared to the max purchase price (so $90 000 for a $450 000 house).

 

So what’s changing?

The bit that is changing is the maximum income for the 2nd chance first home withdrawal is being removed, so it does not matter what you earn, you can get your money out.

 

It’s not changing for the Home Start Grant, but just to get your own money out.  And there are no changes for people who have never owned a home before.

 

What difference will this make?

Well if you have owned a home before, but earn over the cap, you can now get your money out of KiwiSaver to fund your first home.

 

This could well speed up your ability to get into a home, and I can already think of a lot of clients this will help.

 

It won’t help if you already have over the asset cap, so it’s for genuine cases of people in a first home buyer’s situation, but it’s a good boost for those who used to own a home, came out with little to nothing, but have a bunch of money still in KiwiSaver.

 

If you have used KiwiSaver before, you cannot withdraw it twice, and you cannot take out any Australian super or UK pensions that have been transferred in, but other than that, you can withdraw all but the first $1,000 of your fund.

 

The Housing New Zealand Corporation site has an official notice of the change, but if you have any questions on this, let DUX know, and we can provide advice and make it easy for you to get into your (2nd chance) first home.

By Alan Borthwick

Student Loans – No Interest, Doesn’t Mean No Cost

financial-planningI am guessing the journalist on this story was not a student in the mid to late 1990s when you could download your entire living allowance money in one go.

That meant that many people used their money to buy cars, travel, stereos (back when CD players cost money) and alcohol of course.  Me, I bought magic the gathering cards with my first loan money (I was 17 and a career in financial advice was a long way away in my own defence).

So, none of this surprises or worries me particularly, students have spent their loan money on whatever they want for a couple decades now.  Sure there is the issues that this money is only for course costs, but that’s minutiae more than anything.

With student loans essentially free now, there are some bits relevant to students to think about.

  1. Just because it has no interest, does not mean no cost. You have to pay this back when you are earning more than $19,000 a year, at 12% of every dollar you earn above that. This is going to take you a few years to repay, and the more you borrow, the longer it will take.  The longer it takes, the longer before you have the money in your pocket to do more fun things.
  2. It’s going to impact your ability to go overseas with no worries. If you go overseas, you need to pay the loan back at a higher rate and so you cannot quite so carefree head off on your overseas experience.
  3. The expense makes it harder to buy a home. The balance of your loan is not taken into account by the bank, but they will take the actual cost into account. For example, if your loan payment is $100 a fortnight, they take that off your available money, which could impact your ability to get the loan you want.
  4. Saving will be harder, as you have less surplus funds left each pay, making saving for goals take longer or require bigger sacrifices.

The government who made student loans interest free stated that no one would borrow more money.  And they were proven to be very wrong, as governments who ignore incentives always are.  Borrowing has gone up, and voluntary extra repayments dropped 99% when the changes came in.

There is a block of young adults, (anyone who was studying in 2005 and past), who has a bigger loan than those before them, and now has to deal with it.

So, before booking that stripper on your student loan, thinking about how long it’s going to take to pay back.  Are they worth it?

By Alan Borthwick

Don’t Let The Media Scare You With Interest Rates

mtgeAs of right now, banks don’t charge more for investment property interest rates.  Competition between banks and New Zealanders refusal to accept them contributes to this.

So, the idea that buying a holiday home will invite higher rates, is laughable.

Again, it’s driven by the idea of Auckland where there is 30% deposit requirements, but the media needs to stop taking Auckland and extending it to the rest of the country.

For investors there is a limit to how many rentals you can have before they will hit you with commercial rates.  Many investors get around this by having lending spread among more than one lender, extending the time before they get hit with commercial rates.

It does not always work, but if you keep your LVR reasonable and stay below the radar, the banks won’t hit you with commercial rates (because if they do, you can find another one who won’t, losing the original bank, a million or so of lending).

Basic lending does not change, do you have the equity, do you have the income, and is the property solid?

Beyond that it’s much the same. If you are renting your holiday home out sporadically they probably won’t let you use it for income, but beyond that, it’s buying a 2nd home essentially.

So the answer?

Don’t listen to the media, don’t listen to the bank staff who don’t do the day to day lending, talk to a good adviser who has done millions of lending for people and get advice, not just on the lending, but on structuring it and paying it back faster.

By Alan Borthwick

KiwiSaver Withdrawals and Tax Credits – Get Advice

kiwisaverTime to learn some facts about KiwiSaver. There is too much misinformation out there.

There are not many situations where by you can withdraw your KiwiSaver:

  1. You turn the age of retirement (currently 65)
  2. You die (goes to your estate)
  3. You permanently emigrate (after a year of leaving)
  4. You suffer a serious financial hardship
  5. You are buying your first home

That’s it, and the rules are pretty strict around each area of early withdrawal.

The tax credits (stupid name, nothing to do with tax), are paid out each year on a 1:0.5 ratio up to $1042.86. What this means is that for every dollar you put into KiwiSaver between 1 July and 30 June each year, the government matches you 0.50c up to a max credit of $521.43.

Everyone from 18 years old and up (to age 65) is due it, and all you have to do is contribute the money.

Most people pay this via PAYE, from their wages, but if you are self-employed (and not on PAYE) or not employed, you need to contribute directly to your KiwiSaver.

In theory, you are only due this money if you are a tax resident of New Zealand, but they seem to pay it to everyone regardless, as I guess they cannot tell who is not here.

So, everyone seems to get the funds.  The government does do a check when you go to buy a home to make sure you were not overseas, but beyond that, I am not sure how they double check.

If you need to query any other facts about KiwiSaver or have questions about your own, best to talk to an Authorised Financial Adviser (AFA).  There are 1,800 of us in New Zealand and I (Alan Borthwick) is one of them.

By Alan Borthwick

Early KiwiSaver Withdrawal – Who Benefits?

Mortgage_first-home-150x150While the changes to the KiwiSaver rules are a good thing, the idea that they are primarily for the purchase off the plans is an odd one and strikes me that the person from Gareth Morgan (and the article writer) don’t really know how the mortgage side of things works.

If you are buying off the plans and doing a full land and build package, where you only have to pay a small deposit on signing, then you won’t settle for 9 months or so.

During that nine months, you will keep putting funds into KiwiSaver, plus your employers’ funds, and possibly tax credits depending on the time of year, which means that by the time you get close to settlement, you will have a bunch more money in your KiwiSaver.

You only get to do the withdrawal once, so doing it at the point you sign the loan contract is not the ideal time.

Clients of mine recently ended up with $10K more between them to put down as their deposit, which nicely reduced their loan and saved them money.

Now, if the property you are signing up for requires a large deposit up front, and will use all your KiwiSaver, then maybe you have to do this at that point, but if you can swing it, hold off till just before possession.

The deposit you pay to the agent at sign up (unconditional phase) is pretty much pointless for the buyer.  It’s a relic of the old days.  The vendor does not get the deposit till settlement, it just pays the agents commission 10 days after you pay it.

Why get $20-30K out of KiwiSaver and leave it with the agents trust account for 9 months when it could be in your KiwiSaver earning you growth and letting you get more out later?

While the early withdrawal has some benefits, it’s not really for a land and build package.

But this is the difference between knowing headlines of a rule and knowing how it applies in real life. The KiwiSaver product provider does not get this. The DUX Financial Service difference is that because we do everything, we know how it all interacts.

By Alan Borthwick

Insurance Commission Means You Can Afford Insurance

Insurance-Personal (Custom)The commission issue pops up every now and then, and currently while every part of the adviser space is being reviewed, this is too.

Churn is moving a policy for no benefit to the client.  Moving a bad policy to a good policy is not churn, but the sellers of bad policies forget this.

Lots of people get paid on commission, and for some reason its only advisers who get tainted on this.  The idea is that the incentive of commission encourages the wrong advice or pushing of products.

The issue is not commission, the issue is the quality of advice.  The bank staff member on salary who has to sell 10 policies a week has an incentive to keep their job, is that better or worse than commission?

An Authorised Financial Adviser (AFA) has to disclose the commission they get (at DUX Financial Services we do this before we do any work, and then again when we recommend the insurer), but the bank staffer does not.  So who is hiding their incentives?

So why move a policy?  There are many reasons to move an insurance policy:

  1. The existing cover is terrible – i.e. it does not cover what it should, or has wordings that put the benefits to the advantage of the insurer not the client.
  2. Clients’ needs may have changed and a new insurer has a policy that works better for the client.
  3. The existing provider has a bad track record of claims paying.

 

Now which of the above has anything to do with commission?

For example, if I met you and pointed out that the mortgage payment cover you have only covers you while you have the loan, and only with that bank, the terms can be changed by the insurer at any point in the policy life time (like, as your health is getting worse), and had high thresholds for paying out, and offered to exchange that for a policy that pays regardless of whether you have a mortgage or not, regardless of which lender has it, the insurer cannot change terms once it’s in place and has a low threshold for pay-out.  Would me moving that policy and getting commission be a good or a bad thing?

Is it churn?  The bank I took it away from might say so, but have I done the right thing by the client?  I would say so (assuming the health conditions of the client keep it a good idea).  The client has a better policy, has more protection and greater security, which was the point.

To determine if this is a good idea I need to do full research on both policies and highlight the pros and cons of moving and declare it to the insurer at application.  And I cannot use price as the key reason to move.

Plenty of times I have recommended not moving a policy when the benefit is not for my client.  At no point did the commission come into it.  Yes, I have gone out of my way to get less income because it’s the best for the client.  That’s what good advisers do.

Now, when my clients with that policy go to a bank and the bank staff offer to move their policy as it might be cheaper and they don’t do any analysis of the benefits of the policy, but they don’t get commission, was the right thing done?  The client has less coverage, worse benefits and does not even know it.

The review is looking at more ways to isolate the bad things that bad ‘advisers’ (who are not really advisers) do.  Unfortunately, like most of these reviews, it’s everyone else who suffers.

We are playing a two tier game, the adviser has to do full analysis and advice, and the banker does not.  But commission is the issue right?

Commission enables clients to get good advice without paying for it upfront.  Take away commission and low income people lose access to advice.

By all means make sure that commission is disclosed (good advisers do this anyway), make sure that the reasons for moving and the potential downsides are disclosed (good advisers do this anyway), and make sure that the reason for cover is well determined (good advisers do this anyway).

But if you do this, do it for all advisers, not just Registered Financial Advisers (RFA)s and AFAs, but for salaried bank staff as well, so we are all playing the same game.

By Alan Borthwick

DUX Financial Smart Tip: KiwiSaver Benefits

KiwiSaver benefits› Member tax credit


To help you save, the New Zealand Government will make an annual contribution towards your KiwiSaver account as long as you are a contributing member aged 18 or over.

To get the full member tax credit automatically you have to contribute at least $1,042.86 a year.  If you contribute less than $1,042.86 from your pay, you can make voluntary contributions to ensure you receive the full member tax credit payment from the Government.

Your KiwiSaver provider will claim the tax credit on your behalf after 1 July each year.

DUX Financial Services contacts all their KiwiSaver clients and reminds them about the Member tax credit and gives them help in reaching the goal to get the “free money”.  Does your current Financial Adviser do that?  If not, talk to us at DUX!

By Alan Borthwick

kiwisaver