By David Boyle, Mint Asset Management
We hear a lot about the importance of diversity. Whether at the Golden Globes or in the boardroom, it seems more important than ever to make sure that everyone is represented.
There’s one place that diversity really counts and that’s when it comes to investing. The old saying “don’t put all your eggs in one basket” is good advice when it comes to creating a fund portfolio. Diversified funds help spread risk and are therefore an important part of many New Zealander’s investment strategies.
It’s a topic worth exploring further, and in this interesting article by David Boyle of Mint Asset Management you can discover some interesting facts about why diversified funds are so important particularly as more of us in New Zealand are living a lot longer.
“Everyone knows the proverb “don’t put all your eggs into one basket”. My mother’s interpretation, when growing up through the depression and war years, was don’t put all your savings into one bank.
The advice could have saved many New Zealander’s losing their shirts, in the 1987 Share Market Crash while they were taken (in many cases willingly) to attend share market clubs and drinking wine, getting tips on the next best bet.
More recently, investors were hurt by thinking diversification was spreading their savings amongst different finance companies, driven primarily by falling interest rates in banks.
The return seemed better however, as we all know, the risks were far higher than the return offered.
Hence the establishment of the Financial Markets Authority (FMA) back on the 1st of May 2011. Their vision is “to promote and facilitate the development of fair, efficient and transparent financial markets”. In other words they are the Sherriff of the Financial Services Industry and doing a pretty good job in my book.
It now seems that outside business, residential property and KiwiSaver, those who have built up savings for retirement are most likely to just leave it in the bank. Going by the Reserve Bank of New Zealand’s website as at September 2018 Household Deposits amounted to some $174bn. For many they see it the safest place in town. But it can’t protect you from one of the biggest and unseen robbers of wealth, which attacks investor’s future buying power, namely inflation.
So what’s the problem? If we look outside the topic of investments just for a moment, and take a more holistic view, the real problem facing New Zealanders is longevity and understanding what impact this has on our financial future. Going back to another old saying mum talked about was there life expectancy was three score and ten in other words 70 years of age. In data from the OECD website it says 80 for men and 81.7 years for woman.
That’s means on average you get another 11 years or 4,015 days to do what you want.
On the face of it, living longer is a great thing. We all want to enjoy more time in retirement, right?
However, the challenge is to make sure our savings (or income) live as long as we do.
Compounding the issue is access to personalised advice, especially for those who need it most, and it appears to be far less available than it has been in the past.
There are a number of reasons for this: increased cost of delivery, the falling number of advisers, lack of new advisers entering the industry, and would be investors reluctant to pay a fee when they are not fully convinced of the value of advice, which have all contributed to where we are today.
My fear is this growing group of New Zealand investors which I am calling the “Missing Middle”. You might even know one of them. They have paid off their house or are close to, have been putting some money away into KiwiSaver, and have been building a little nest egg in the bank along the way.
My fear is that for the smaller investor (250k and below), who have worked hard to get ahead and can see retirement just around the bend has under-estimated their length of life after 65, and could be in for a rude shock. So, whether we like it not we do need to take on a little more risk that will allow over time a greater return depending on your personal circumstances.
That’s why the evolution of diversified funds that offer flexibility, quality investment management, linked to appropriate levels of risk and return, combined with the access get advice, that offers excellent online reporting can be a great foundation for New Zealanders who need it the most.
Mint, by way of example, has a Diversified Income Fund and with the launch of its Diversified Growth Fund (10th of December) advisers and investors can simply dial up or down the risk depending on their personal circumstances, while also providing income to supplement their retirement lifestyle. Diversified funds are a great solution to that age-old proverb and, while not suitable for all, they do provide a cost-effective way to spread your eggs out, especially for those New Zealanders who don’t require all the complexities of a bespoke approach.