Becoming an Investor*
If you would prefer to listen to this blog post, please click on the play button.
As our balances grow in our KiwiSaver accounts so will our interest in where we put it, that is why I attended a seminar this week given by Martin Hawes who is the Chair of the Summer KiwiSaver Scheme. It was right here in my home town Alexandra and even though I’m not actually in the market to change my fund provider and was initially sceptical about a heavy sales pitch, it was a no brainer that I went. It was Martin Hawes who I can credit with giving me the nudge to stop putting off, well, STARTING to invest.
I read Martin Hawes book Twenty Good Summers - Work less, live more and make the most of your money about nine years ago and it really struck a chord. Our mortgage was nearly paid off and I was looking to the next chapter, saving and trying to work out where and how to go about it. This book helped with my financial education.
So, I sat with about fifty others and listened with rapt attention hearing him speak and miraculously I understood every word. I was motivated and inspired to hear from others who have made it and to reinforce that I’m on the right track when it comes to investing. I respect his opinion, he is not a fly by nighter but has instead been around for years quietly giving the same message. His years of trying, perhaps failing, building and climbing (he literally climbs up mountains) mean I can jump on board his learnings without having to reinvent the wheel myself. He was happy to share what has worked for him and others he has helped and I was more than happy to listen.
But when we were done a friend turned to me and said “Well Ruth, looking forward to reading this week’s blog so you can explain what he was on about!”. So Claire, this is for you!
Martin is an Authorised Financial Advisor, he is qualified to give decent advice about investing (I’m so not!) and with him were three other AFA’s who work for Forsyth Barr. They are a company that help you invest your money.
The gist was this:
Add up all of your money that you have and deduct from it everything you owe. The figure you are left with is your NET WORTH. All your working life you are trying to increase your net worth (the accumulation phase) so that when you finally stop working you start to slowly spend it to live on (the de-cumulation phase).
He prompted us to think about the following points:
- What will your living costs be in retirement?
- Will you have investment returns?
- How much money your house is worth?
- Will you work in your retirement?
- Will your kids inherit anything?
You will have a certain amount of money and it is going to be a trade off amongst these five points where you allocate it. He identified three stages of retirement, each of which will require different amounts of cash:
Active 65-74 - YAY, finally stopped working, let’s go on a cruise each year. This is where you will spend the most.
Passive 75-84 - Done all the cruising I can do, might stay at home a bit more. Spending eases up.
Supported 85 + - Spending may be more focussed on your own personal care - and having the family over to show them all the pics of all the great cruises you have been on.
Claire, both you and I have about “twenty good summers” to prepare for this if we don’t want to be skint in retirement, dependent solely on the government pension. So we were not too young to listen to this talk, in fact I think it is exactly the right time to start thinking seriously about retiring. Right now, while we are YOUNG and ABLE (and awesome) we need to be making conscious decisions about how we spend our money today so we can make sure we save enough for tomorrow.
THE 4% RULE, what was he on about? This is how you work out how much you might need by the time you retire.
If upon retirement each year you take 4% out of your pot of savings (this includes interest you have earned AND the money you put in the pot in the first place) it will take about 30 years to boil the pot dry. So what can you live on a year? Do you need to invest $100K, $200K, $500K or more?
Apply that rule to the five points again and they may change:
- Living costs in retirement - Nespresso or Nescafe? Champagne tastes on a beer budget will eat into your investments quicker.
- Investment returns - this is the point of the seminar - they are suggesting places for you to invest your cash so you get a good ‘return on your money’ in retirement.
- How much money your house is worth - no point living in a $3 million mansion if you don’t have enough cash to buy the groceries. Will you downsize the digs?
- Will you work in your retirement - every hour of paid work means you will then use less of your investment and your savings will last longer.
- Will your kids inherit anything - the more you want to leave for them the less you have to use on yourself. Perhaps the kids can sort themselves out instead?
He mentioned Warren Buffet, he is an American investor extraordinaire. Google him, he knows his stuff. He has TWO investing rules:
- Never lose money
- Refer to rule number one!
Remember all those Kiwi finance companies that were around a few years back? They were offering very high returns, Kiwi’s invested a heap of cash with them and a large number of them went broke. High risk often means you have the potential of high returns but the opposite is the potential of large losses.
Look at the return your bank is offering on a Term Deposit at the moment, it is really low - you will potentially make less money but the risk of losing it is lower too.
So, risk is just about working out what you are comfortable with. If you invested in a company and its share price dropped would you freak out or would you be an optimist and think “oh well, it will recover next week”. When you are younger you can generally afford to take more risk because if it goes wrong you still have many years of earning ahead to cover that loss. Not so when you reach retirement age, you need to be more risk averse.
Your KiwiSaver Fund has the following categories where the risk goes from low to high:
- Defensive Low Risk
- Aggressive High Risk
The Summer KiwiSaver Scheme he was talking about lets YOU choose where to invest OR they can do it all for you based on your appetite for risk being low or high. Perhaps you let them do it for you but over time you start to take an interest in what they have you invested in and you can then have a go at doing it yourself?
What? But WHERE are you actually putting your money?
Say you have $100, instead of lumping it all into one investment which would be risky, you spread it around. Every KiwiSaver fund has a mix of areas to invest in. When investing in their fund you spread your money in the following areas:
- Property - he mentioned he loves investing in commercial property. He buys into a portfolio that is made up of 50 commercial properties for example.
- Shares - he has a mix of NZ, OZ and International. Just a few of your choices.
- Cash - money close by where you can access it at any time, not to fritter away mind you!
- Fixed interest - things like Bonds where you get a fixed rate of return.
This is diversification. Another way of looking at it Claire:
Say you were entering the pikelet competition at the next A & P Show. If on the morning of the show you discover that your baking powder is old and NONE of your pikelets are going to rise you are in a whole lot of trouble. BUT if instead of entering just the pikelet competition you enter the entire baking competition, preserves competition, best home brew competition AND best scarecrow competition then chances are you are going to come last in the pikelets competition but hopefully first in some of the other areas. It’s the same with investing your $100. If you spread it out over a range of investments, some will do better than others and it balances out your risk.
Claire, for me the take home from this seminar was this:
Do something. Act. Be motivated. Be inspired. Gather momentum.
I met a bloke two weeks ago, mid 50’s, who told me how fed up he was with work and how he can’t wait to retire, go on holidays, get a boat etc etc. But as we chatted he revealed how much debt he had. He was thinking that upon retirement the clouds would part like they do at the start of The Simpsons and this nirvana of retirement would open up to him. Uumm, newsflash sir, unless you plan for it it ain’t gonna happen.
Failure to plan = Plan to fail
If you wander your way up to retirement age without putting plans in place then you might get a nasty shock when you get there and find the coffers empty. Martin Hawes used an analogy I often use myself:
Lick that slimy toad! He actually said eat it, but that’s too gross for me. Whether you do it right now or sit it on the shelf for a week, you are still going to have to lick that toad, so get it over with now and do yourself a favour of not worry about it all week!
Make that phone call to the bank on Monday that you mentioned and increase your mortgage repayments if that is something you had been thinking of doing and can afford to do. Just do it. If the bank only lets you increase your payments so much before penalising you (what’s with that!?) then any spare cash you have, put that aside somewhere else (I suggest another bank) where it can earn some interest and at the next available opportunity slap that on the mortgage too. Keep making small decisions and changes that will get you to your investment goal, whatever that may be.
I know I get a huge kick out of hearing about personal finance and having a conversation with those who are interested and YES I agree I’m a bit weird like that! But I hope you did go home thinking about your future and the future of your whanau. Oh and I know you sometimes listen to this on the school run with the kids in the car so… Hi KIDS, have a great day at school!!!
Oh, and readers I have to tell you, harking back to my “do it for the free sandwiches” blog, the spread at this event was the best I have seen yet! With wine!
* I totally stole that title so credit where credit is due to the Summer KiwiSaver Scheme
PS. I was not paid to mention them by the way. My blog is about MY investment journey and I got a big kick out of attending the seminar. That’s payment enough thanks.