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Falling in love with volatility

We recently came across an article by investment heavyweights, Vanguard, that raised some interesting points around market volatility. The article demonstrates ways that we can learn to love market swings, and that volatility might not actually be as bad as we think. Whilst the article refers to American investment options (401k, Roth, IRA), the values remain the same – set financial goals, keep track of those goals, learn from your mistakes, switch off the media buzz and lastly, talk it through with your trusted adviser. Read more... If you have any questions or if you want to have a chat with us about your future planning, please get in touch. We are here to help.

Investing in Bonds 101

Almost everyone in New Zealand will have heard of bonds, and indeed most New Zealanders are likely to hold an investment in bonds either in private investment portfolios or through their KiwiSaver retirement plans. Bonds are considered one of the four major asset classes along with shares, property and cash, yet are the least understood investment sector. So what are bonds? Bonds are basically IOUs issued by governments, companies, banks and even international institutions, such as the International Monetary Fund. The investor becomes the creditor while the borrower becomes the debtor. There is a principle component which is repaid at maturity but the investor also receives interest payments, called coupons. Bonds have an intimate relationship with interest rates in that when interest rates fall, bond prices increase and vice versa. The overall return on a bond, referred to as the ‘yield’, is essentially a function of current interest rates plus an extra return for bearing the risk, with bond holders of riskier companies generally expecting to receive a higher return. Government backed bonds generally have lower yields than corporate bonds as it is very unlikely that a Government will default on the repayment of capital at maturity. Bond investing involves a number of risks therefore it is important to weigh up the advantages and disadvantages which may include interest rate risks, default risk, inflation risk, liquidity risk and early encashment risk. To manage such risks, many investors choose to invest in bonds though a professionally managed fund. Professional fund managers will buy and sell suitable bonds in order to produce returns that meet the objectives of that particular fund. They will often have access to bonds which are not available to the general investing public or will spot differences in market pricing and act on those differences in order to produce returns for their investors. When a new bond is issued, a Product Disclosure Statement (PDS) must be produced. Recent new laws now require a PDS to be in clear language so that investors can make informed decisions, and must include essential information such as what the financial product is, information about the organisation offering the product, key terms and key risks affecting the investment. Credit ratings services such as Moodys, Fitch or Standard & Poors may give ratings to bond issues, which helps identify the quality of a particular bond. For investors looking for further guidance, The Financial Markets Authority website contains information on this and many other investment topics; If in doubt, seek the advice of an Authorised Financial Adviser who is qualified and experienced in this area of financial advice. The views in this article are of a general nature only and should not be considered personalized advice. A disclosure statement is available and free of charge.

Investment Risk and Returns

Like my Grandfather used to say, “The higher the return, the higher the risk”. However many investors tend to focus on finding the investment with the highest return rather than appropriately weighing up risks. So what is risk?. For investors, risk is the chance that an investment’s actual return will be different than expected. It could include the loss of some or all capital, a lower than expected rate of return, or a lower than expected income. Conversely, it could also include a higher than expected return, although most investors see this as ‘skilled’ investment selection. "In the investment world, the rear-view mirror is always clearer than the windshield." According to Modern Portfolio Theory, a strategy that carefully chooses different investments that work together in order to achieve a stated outcome, returns are relative to the amount of risk you are willing to take. Investors that are, in the short term, willing and able to accept variance in annual returns as well as variance in capital are able to gain higher returns in the long run. So why doesn’t everyone just invest in investments with the highest volatility and therefore the highest return? The first reason is that not all investors can emotionally withstand higher volatility, to see capital move up or down by 10% can be quite distressing for some investors, especially retirees who rely on investment income to provide for living expenses. The second reason is practicality. For example, if the funds have been earmarked for a house purchase, security of capital is far more important than achieving a higher potential return. There are a number of strategies investors can employ to reduce investment risk. One of the most common methods is Diversification. This means spreading investment capital across a range of investments as well as different asset classes including shares, property and interest type investments. My Grandfather referred to this as “not putting all your eggs in one basket”. There are many resources available online which investors can utilise to help make investment decisions. The Government funded is a good place to start and includes a handy nine question quiz which helps determine how much volatility can be tolerated. The website also recommends researching, comparing and contrasting everything, which reminds me of one last piece of my Grandfathers advice; “If it’s too good to be true ...”. The views in this article are of a general nature only and should not be considered personalized advice. A disclosure statement is available and free of charge.

Time in the markets - not market timing

"Market corrections are not uncommon and should not be unnerving. However, when investors see the value of their investments dwindling, their aversion to losses can compel them to sell. And once they have sold, they stay out of the market." Capital Group have produced a guide that demonstrates the importance of long-term investing and that time in the markets is key element to surviving a market downturn. Investors who leave the market at the wrong time may risk losing out on price appreciation. Read the full guide here Credit: Capital Group The views and opinions expressed in this article are of the author and are not necessarily those of First Capital Financial Services. The information in this article is of a general nature only and should not be considered personalised advice. A disclosure statement is available and free of charge.

Updates to your KiwiSaver

From 1 April 2019, the New Zealand Government have introduced changes to KiwiSaver which offer greater flexibility to tailor your KiwiSaver account to suit your needs. Here’s what you need to know and how this can work for you: From 1 April 2019 New rates Two new contribution rates have been added for members, 6% and 10%. Members now have five contribution options to choose from - 3%, 4%, 6%, 8% & 10%. How can it work for you: Time to review your current contribution rate? Are you stuck on the default 3% and never considered other options? Have your circumstances changed? Wanting to save more for your first home? Could you be saving that little bit extra for retirement? Consider your contribution rate and make it work for you and your goals. Contribution ‘Holiday’ Let’s face it, it’s not a holiday so why call it one. The contributions Holiday will now be known as Savings Suspension. The Contributions Holiday allowed members to temporarily suspend contributions to their KiwiSaver account for a specific period of time. Under the Savings Suspension, members can still elect to suspend contributions as required, but going forward this will be limited to a maximum period of one year, before you need to renew it. How can it work for you: Essentially this is just a name change but we need to change the way we think of it too. We need to think of this as a suspension of our savings, rather than a relaxing holiday. By introducing a maximum suspension period, this also ensures that members are reviewing KiwiSaver accounts regularly and making the most of their saving years. Government Contribution Until now the annual contribution made by the Government has been known as the ‘Member Tax Credit (MTC)’. This will now be known as the ‘Government Contribution’. How can it work for you: The change of name does not impact your KiwiSaver account. If you are eligible to receive the Government Contribution, then this will continue as normal. Make sure you are making the most of the KiwiSaver benefits by checking your current contribution amount to ensure you are eligible to receive the annual Government Contribution of up to $521.43 per year. What’s coming up? From 1 July 2019 Opening the doors… From 1 July, KiwiSaver will be open to all ages – people 65 and over will now be eligible to join KiwiSaver. Now’s your chance to enroll in your desired KiwiSaver scheme. This can be included as part of your overall retirement planning or just a back up for a rainy day. …and throwing away the key Current KiwiSaver rules state that a member who enrolls in KiwiSaver between the ages of 60 to 64 (inclusive) are locked in to their KiwiSaver scheme for five years. From 1 July, new members will no longer be locked in to the scheme and able to withdraw their KiwiSaver funds at age 65. From 1 April 2020 KiwiSaver members who are impacted by the 5-year lock in period (i.e. a member who enrolled before 1 July 2019, and aged between 60 and 64 inclusive when they enrolled) can elect to opt out of the lock in period any time after they reach the age of eligibility for NZ Super. Remember, if you choose to opt out you will no longer be eligible for compulsory employer contributions or the government contribution. Please consider this when making your decision. For further information on KiwiSaver and how these changes may affect you, head to the KiwiSaver website, or get in touch with an adviser from First Capital to discuss.

What happened to your KiwiSaver in March?

Everything is a bit up and down at the moment, including investment markets and therefore KiwiSaver balances. Of course, the value of your KiwiSaver investments (and your KiwiSaver balance) goes up and down all the time, but the impact of Covid-19 has seen more movement than usual. At the start of the month, markets dropped as investors all over the world tried to sell ‘riskier’ higher return investments, like shares, to turn their investments into cash in case they needed money quickly. Then, towards the end of the month, as governments moved to put measures in place to support people and businesses through the crisis (like the New Zealand government’s wage subsidy), markets improved a bit and shares started recovering some of their value. Still, global share returns fell 12.8% in March, much higher than the previous two months (January fell by 0.3% while February fell by 8.1%). The New Zealand share market followed closely. So, you can see why, for most of us, KiwiSaver balances have dropped. You’d need a crystal ball to know exactly what’s coming next, but it’s safe to say that we can expect the ups and downs to continue for a while. Even after we get back to ‘normal’, the current challenges will have lingering impacts on markets. However, if you’re in the right fund or funds to suit your long-term goals and stick to your plan, you’re in a good position to come through this in a strong position. It’s always important to keep a long-term view in mind when you’re thinking about investments and your KiwiSaver. It’s the first time most of us will have seen our balances go down like this, because we’ve had so many years of strong market returns. The downs, just like the ups, are a natural part of investing. Things like this have happened before and they will happen again. If you can afford to continue to make regular contributions to your KiwiSaver, you’re actually now buying investments at a cheaper price than they were a month or so ago, so when markets start going up again your balance will recover faster. If you’re not contributing right now, that’s ok too – just stick to your plan and don’t make any hasty decisions about changing funds. It can be tempting at times like this, but you could be worse off in the long-run. For most of us, we don’t need our KiwiSaver for another 20, 30, or 40 years, so there’s plenty of time for markets to recover and ‘future you’ will be thankful you waited it out. The important thing is to check you are in the right fund, and if you are, hang in there. The views in this article are of a general nature only and should not be considered personalised advice. A disclosure statement is available and free of charge.

What's in a (adviser) name?

Can choosing the right name make all the difference? It’s a Saturday sports day and you’re on the field running at full speed when it happens. Your left calf blows out and you go down like a sack of spuds with a torn Achilles. Once the initial agony subsides you come to the realisation that you’re going to need to visit a professional to have an assessment done. Most people automatically know that such an injury would require you to visit a doctor instead of the nurse. So what about when it comes to your financial health? The problem is that in the financial world most people can’t tell the difference between a doctor and a nurse, let alone the product prescribed to them. If I was to ask you whether you would rather see a Registered Financial Adviser (RFA) or an Authorised Financial Adviser (AFA) which would you choose? Understandably most people wouldn’t know and would probably choose the Registered Financial Adviser perhaps because their builder or electrician is registered. While RFAs need to be on a register and have a dispute resolution scheme, there are not many further requirements. AFAs however have to pass exams in finance, complete continuing professional development and abide by a Code of Professional Conduct. Although an RFA isn’t allowed to mislead you, similar to your butcher can’t sell you mince and call it steak, an AFA is legally required to consider your overall situation, provide you with the most suitable financial product and put your interests before their own. They would have to work out what cut of meat was the best for you, how much you can afford and how you are going to ration it. Switching back to the sports injury analogy, what if I asked you what type of doctor you would rather see, a General Practicioner or a Specialist? A lot of Kiwis rely on investment advice from accountants and family or friends who work in financial institutions to make their decisions. With investing you need specialists who understand portfolio construction, asset allocation and credit ratings to help you make the best decisions. Thankfully the government has at last reviewed the legislation and in the near future all advisers will have to meet minimum educational and ethical standards as well as a number of other requirements. In the meantime, a lot can be discovered by simply asking your adviser three simple questions: what do those letters next to your name mean how many different company’s products do you provide and, how you are compensated? The views in this article are of a general nature only and should not be considered personalized advice. A disclosure statement is available and free of charge.

What's your investing style?

With share markets at all-time highs it’s a question of, how long can this go on for? When will a crash occur? When will prices drop? When should I invest - when the market crashes and stocks are cheap? The ability to time the market can be a tricky exercise. It requires expertise and waiting for the opportune moment, but in most cases can lead to poor investment decisions or missing beneficial investment time altogether. This strategy is often known as a losing strategy as there is no guarantee that you will ever ‘time’ the market right. So, what method should we use? There are two investing methods to explore: Lump-sum investing and dollar-cost averaging. Lump sum investing is an all-in approach of investing one lump sum into the market. History shows that the market climbs more often than it falls and with this theory, lump sum investing provides instant exposure and should increase over time. Dollar cost averaging is the little and often approach. This method means that the investor invests the same amount of money at a set frequency, weekly, fortnightly, monthly etc. If you think of how a KiwiSaver account is operated and where contributions are generally made on a regular basis - this is the same method. If the market has a downturn, this method means that more shares can be purchased at a lower cost. This method can also introduce investor discipline and prevents the investor from attempting to time the market because you're buying all the time. As an example, two investors decide to invest $10,000 each in one company. The first invests as a lump-sum in one go, the other invests the same amount in five monthly amounts of $2,000. In the five months, the share prices fluctuate – here’s what would happen to the investment: In this example, person B ends up ahead. By investing a fixed dollar amount in the fund every month, Person B bought more shares when the price was low, less shares when the price was high, and ended up with more shares after five months, at a lower cost per share. Which method is the best option for you? Whether you prefer to time the market, invest in lump sums or spend little and often, the method most appropriate largely depends on your investment timeframe, your goals or objectives and if you are looking to maximise returns or reduce risk. Investing in lump sums can be ideal for shorter timeframes and may maximise returns however, can come at a higher risk. Dollar cost averaging offers a disciplined approach while reducing the risk of investing at market peaks. Every investor is different and what suits one may not suit others, so what is your style, all-in, or little and often? Or perhaps you are prepared to apply both methods and make the most of every situation. The views in this article are of a general nature only and should not be considered personalised advice. A disclosure statement is available and free of charge.