Popular Articles Looks like you have JavaScript disabled. Use this link to access the no JavaScript friendly site.Buying shares on the NZX – Sharesies vs ASB Securities and Direct BrokingThere’s a new kid on the block. Previously ASB Securities and Direct Broking were the cheapest brokers to buy and sell shares on the New Zealand sharemarket (NZX). We now have Sharesies, a popular Fund Platform with over 50,000 users, offering this service. How does it stack up against the traditional share brokers? This article is a comparison between Sharesies, ASB Securities, and Direct Broking across criteria such as fees, user experience, ownership of shares, and other features. Because the Sharesies share trading feature is in beta, aspects of this comparison are likely to change as their functionality is gradually improved. 1. Minimum investment Sharesies The minimum investment amount with Sharesies remains at a super-low $1. Sharesies offers fractional share investing, so even if a share costs more than the amount of money you want to invest, you can still buy a fraction of that share. Investing $1 in Spark got me 0.2522 shares in the company ASB Securities and Direct Broking Investors using ASB Securities or Direct Broking must buy enough shares to meet NZX minimum holding requirements. This requirement is currently $1,000. Winner: Sharesies 2. Brokerage Fees Brokers charge brokerage fees on every trade i.e. whenever you buy or sell shares. The brokerage fees for each service are: Sharesies0.5% for trades up to $3,000Plus 0.1% for amounts above $3,000 ASB Securities$15 for trades up to $1,000$30 for trades between $1,000 and $10,0000.3% for trades over $10,000Direct Broking$29.90 for trades up to $15,000Plus 0.2% for amounts above $15,000 The table below shows the brokerage fee that would apply to different dollar amounts invested (ASB Securities and Direct Broking show n/a for $100 invested because this falls below the minimum investment amount). The result is that Sharesies is significantly cheaper, especially for smaller investment amounts. The only thing to watch out for when brokerage is so cheap, is that it could facilitate “taking a punt” or “dabbling” in various companies, while high brokerage fees encourages investors to thoroughly evaluate a company before investing. Winner: Sharesies 3. Total cost of ownership With Sharesies, brokerage is not the only fee you’ll pay. Sharesies will charge you a monthly/annual account fee, while ASB Securities and Direct Broking don’t. Sharesies account fee Therefore we need to factor the account fee into the total cost of owning your shares. The total cost of owning your shares includes: Brokerage fees to buy the sharesAccount fees to hold the sharesBrokerage fees to sell the shares The table below compares the total cost of ownership over 10 years (given shares are a long-term investment), of shares bought through each broker, for various portfolio sizes, and various number of companies in the portfolio: Most of the time buying shares through ASB Securities or Direct Broking will give you the lowest cost of ownership (e.g. a $10,000 portfolio spread evenly across 3 different shares has a total cost of ownership of $396 on Sharesies and $180 on Direct Broking). Direct Broking is like buying a more expensive car upfront, and never having to pay anything to maintain it, while Sharesies is like buying a cheap car, but having to pay for maintenance regularly. However, Sharesies does work out cheaper overall when you’re investing in smaller parcels of shares. Just be careful that with small investment amounts, their account fee makes up a horribly large percentage of your portfolio. Winner: ASB Securities and Direct Broking 4. User experience Sharesies In typical Sharesies fashion, they have provided a fantastic user experience for buying shares. The user interface is uncluttered, and easy to navigate. There is still room for improvement though, and I would say the following are the current weak points of the interface: You can’t search for companies. You must scroll through a long list of over 100 companies to find the one you want. I’m sure this is an oversight that will be fixed soon.You can sort the companies list by “Highest annual dividends” and “Highest annual returns”. This is very concerning – given Sharesies’ target market is beginner investors, this feature could encourage investing based simply on the biggest dividends and biggest returns. This is absolutely NOT a good investment strategy. Past performance is not an indicator of future performance, and the very highest paying dividend companies are almost always “Dividend Traps“.Sharesies displays each company’s gross dividend yield, but their data for this is often totally inaccurate.You can’t see fundamental company statistics such as market capitalisation, P/E ratio, and Net Tangible Assets, nor can you see any important company announcements. However this data is publicly available on the NZX website.There is no watchlist where you can place companies you want to keep an eye on. This feature is standard in other brokers. It’s not the best idea to offer beginner investors the ability to sort by highest returns and dividends ASB Securities and Direct Broking These interfaces are dated, cluttered, and unfriendly compared to Sharesies. I’ll let the screenshots do the talking. Direct Broking’s interface. Not too bad, but not the best. ASB Securities’ interface. Needs improvement. Winner: Sharesies 5. Ownership of shares Sharesies When you buy shares through Sharesies, you do not get direct ownership of them. Instead they are owned by a “Sharesies Nominee” which is essentially a custodian holding the shares on your behalf. This has a number of implications: You can only sell your shares via Sharesies, so you’re locked into using their platform and paying their account fees.You can’t participate in Dividend Reinvestment Plans (DRPs). DRPs are where some companies allow you to reinvest your dividends into buying more shares, with no brokerage costs, and usually at a discounted price. DRPs are a great way to grow and compound your investment. With Sharesies, your dividends are always paid into your wallet.It is unclear how Sharesies will handle “corporate actions” on your shares. There is no guarantee you’ll get the full benefits of being a shareholder like being able to vote on important company issues, or participating in rights offers. “You acknowledge that we don’t have to forward to you, or take any action on, reports, notices, proxy forms, or other communications we receive about Investments in your Portfolio.” Sharesies Terms and Conditions ASB Securities and Direct Broking Shares bought through ASB Securities and Direct Broking are held under your CSN (Common Shareholder Number). This allows you to buy and sell your shares through any share broker. This also means that your shares are held directly in your name on a company’s share registry. Having direct ownership gives you the full benefits of being able to participate in DRPs, corporate actions, and Annual General Meetings. Winner: ASB Securities and Direct Broking 6. Trading features Sharesies’ basic, but elegant interface becomes a disadvantage here as it is missing features you’d expect to find with a traditional broker. These features are: Live market prices and depth The share prices are shown on Sharesies are delayed by at least 20 minutes. Because share prices can be volatile, the delay can be problematic as the price of a share could surge, but not be reflected in the price you see on Sharesies. Meanwhile, ASB Securities and Direct Broking show live prices (as long as you have traded with them in the last 90 days), as well as market depth which is a list of buy and sell orders for a particular share. Limit orders When you buy shares through Sharesies, you place a market order, which means the price you buy your shares at depends on the current selling price. Using the above Spark depth chart as an example, a market order will get you shares at a price of $3.95 per share. This is a slight premium over the current $3.925 share price. ASB Securities and Direct Broking allow you to place limit orders. This allows you to specify a maximum price you’re willing to pay for the shares, providing you with more control and certainty. Placing a limit order for Spark at $3.93 per share Advanced Features Sharesies also do not offer: Trigger orders – an instruction to place an order to buy or sell a share if it reaches a certain priceMargin lending – the ability to borrow money to trade shares in order to leverage your investment (similar to a mortgage) Winner: ASB Securities and Direct Broking Conclusion If you are serious about investing in shares for the long-term, and have a decent amount of money to do so, stick with a traditional broker. Although the upfront brokerage costs will be more expensive, the total cost of ownership will be lower. You will directly own the shares under your name, won’t be locked in to Sharesies for holding and selling the shares, and can fully participate in any DRPs, rights issues, and voting. Don’t write off Sharesies as an option for investing in shares though. They offer low-cost brokerage and ultra-low minimum investment amounts, meaning it’s perfect if you want to invest small amounts to learn and/or slowly build up a portfolio (particularly if you are already paying for a Sharesies account to invest in their Funds). However, those with small portfolios may want to consider sticking to investing in funds, due to their convenience and instant diversification benefits. See my comparison between investing in funds vs individual companies to help you decide. If you’re keen to start building your investment portfolio with Sharesies, you can sign up with this link, and I’ll get $5 in my own Sharesies account. A great way to show your support for this site! Found this article helpful? Please share, and Follow or Subscribe to keep up with the latest news and posts! More articles The best bank accounts and credit cards for managing your everyday finances28 July 2019 What happened to Property Crowdfunding in New Zealand?18 July 2019 3 tips to get the most out of KiwiSaver19 June 2019 Disclaimer The content of this article is based on my personal opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with a qualified financial advisor before making any investment decisions.... Read more...What’s the difference between InvestNow, Sharesies, Simplicity, Hatch, and more?InvestNow, Sharesies, Simplicty, Vanguard, SuperLife, Smartshares, and Hatch. Whether you’ve been investing for a while, or you’re new, you’ve probably heard of these popular New Zealand investment services. They are all fantastic options for Kiwis wanting to invest, but it is often difficult and confusing for investors to decide which one to sign up for and use. On the surface, they all have one thing in common – they all provide you with access to funds to invest in. But if you dig deeper, they are actually all quite different things, offering unique services and working in different ways: InvestNow and Sharesies are what I call Fund PlatformsSimplicity, Vanguard, and SuperLife are Fund ManagersSmartshares is an Exchange Traded Fund (ETF) issuer. Vanguard also issues ETFs, but sadly not in the NZ marketHatch is what I call a Brokers (or Broker-like service). Sharesies is also a broker Below I’ll be explaining what each of these services do and offer, as well as giving a brief mention of the fees, minimum investment amount, and who they’re suitable for. Update (15 July 2019) – Sharesies is now included in the brokers section, as they have released the ability to buy and sell shares listed on the NZX. Fund Platforms Fund Platforms are services that offer you access to a variety of different funds to invest in, sometimes described as a “Fund Supermarket”. They do not manage your funds – instead they act as a “middleman” between investors and Fund Managers. Fund Platforms are a good option for everyone – both beginners and experts – as they allow you to invest in lots of different funds in one place. They have low minimum investment amounts, making investing very accessible to ordinary people. Fund Platforms also provide investors with good online portals, allowing you to buy, sell, and view your investments at anytime and anywhere. InvestNow Minimum investment$50Fees$0 InvestNow offers over 100 funds on its platform, from 20 fund managers/issuers including AMP, Smartshares, and Vanguard. They don’t charge any fees, making it a frequently recommended choice for investors (they make money by charging Fund Managers to list their funds on the platform). However, InvestNow’s interface isn’t the most user-friendly – while that should be fine for knowledgable investors, beginners might find it overwhelming. Sharesies Minimum investment$1FeesBased on the size of your portfolio:$0 for under $50$1.5/month between $50 and $3,000$3/month for over $3,000OR $30 per year The trendy Sharesies platform offers around 30 funds – comprising mainly of Smartshares ETFs and a few socially responsible funds. Their ultra low minimum investment amount opens up the opportunity to start investing for almost anyone. Sharesies is known for having a simple, beginner-friendly user interface, however, this nice online portal doesn’t become cheap – they charge investors a monthly account fee if your account value is over $50. If you’re keen to start building your investment portfolio with Sharesies, you can sign up with this link, and I’ll get $5 in my own Sharesies account. A great way to show your support for this site! Fund Managers Fund Managers are the people who actually provide and manage the funds you invest in, taking your money and putting it into assets like shares and bonds. For doing so, they charge investors a management fee which is a small percentage of the amount you have invested. Some Fund Managers also charge a fixed monthly or yearly administration fee. There are heaps of Fund Managers out there, and they tend to require a few thousand dollars as a minimum investment if you invest in a fund directly through them. However, a lot of managers offer their funds on platforms like InvestNow and Sharesies, where the minimum investment amount is lower. Most New Zealand Fund Managers also offer KiwiSaver funds, but I won’t cover these here. Simplicity Minimum investment$5,000Fees0.1% – 0.31%Plus $30 per year Simplicity is an attractive choice among investors because of their super low fees. Simplicity has five different fund options (Conservative, Balanced, Growth, NZ Share, NZ Bond). However, the minimum investment is high at $5,000, and their funds aren’t available on InvestNow or Sharesies, making Simplicity a much less accessible investment option. Also be careful of their $30 annual fee – with $5,000 invested, that $30 fee equates to 0.6% which is quite high compared to other investment options. Vanguard Minimum investment$500,000 directly via Vanguardor $50 via InvestNowFees0.20% unhedged0.26% NZD hedged Vanguard currently has two global share funds (Vanguard International Shares Select Exclusions Index Fund – NZD Hedged/Unhedged) accessible in the New Zealand market, and they are investor favourites, again due to their very low management fee. Don’t be scared off by the $500,000 minimum investment amount because thanks to InvestNow, you can invest with only $50. Just be aware that these are Australian domiciled funds, so are considered Foreign Investment Funds. This may introduce additional tax implications to you. Overseas, Vanguard has a much more comprehensive offering, with over $5 trillion under management across a huge range of funds and ETFs. SuperLife Minimum investment$1Fees0.44% – 0.63%Plus $12 per year SuperLife offers 44 funds, investing almost entirely into Smartshares ETFs (e.g. the NZ Top 50 Fund invests exclusively in the Smartshares NZ Top 50 ETF). Even more confusing, is that sometimes SuperLife’s fund management fee differs from its Smartshares ETF equivalent e.g: The SuperLife Australian Mid Cap Fund has a management fee of 0.49%, while the Smartshares Australian Mid Cap ETF charges 0.75%The SuperLife US 500 Fund charges 0.44%, while the Smartshares US 500 ETF charges only 0.34%. Because SuperLife’s online portal is relatively poor, and their offering mirrors Smartshares so closely, it is probably easier to stick with buying the equivalent Smartshares ETF from InvestNow or Sharesies. That is unless: The fund offered on SuperLife has cheaper management fees than the Smartshares ETF equivalent AND you are investing enough money to make the management fee savings cover the $12 annual fee e.g. you need to invest over $4,616 in the SuperLife Aussie Mid Cap Fund for it to work out cheaper than investing in the Smartshares ETF equivalent.The Smartshares ETF you want is not offered on InvestNow or Sharesies e.g. the US Small Cap ETF. Other fund managers Your bank – New Zealand’s big banks all offer their own funds, but they tend to charge high management fees.AMP – Offer popular, low-fee index funds (Global Shares Index, Global Fixed Interest Index, NZ Shares Index, Australasian Property Index) accessible through InvestNow.Kernel – A new fund manager offering three funds that invest in the New Zealand sharemarket. Kernel‘s fees are competitive but a little more expensive than alternatives like Simplicity and AMP.Heaps more – Devon, PIE Funds, Milford, and Pathfinder are examples of Fund Managers offering funds on InvestNow. ETF Issuers ETF Issuers are pretty similar to Fund Managers. ETF stands for Exchange Traded Fund, and they work the same as normal funds, apart from the key difference being that ETFs are listed and tradable on an exchange (i.e. a sharemarket). This difference less important these days, because with Fund Platforms like InvestNow and Sharesies, you no longer have to go through the sharemarket to access ETFs. However, buying and selling ETFs on the sharemarket is much more prevalent in countries like Australia where brokerage fees are cheaper, and the ETF selection is much greater. Smartshares Minimum investment$500FeesBetween 0.3% – 0.75% management fee$30 one-off fee, if buying directly from Smartshares Smartshares is the dominant ETF issuer in NZ with over 30 ETFs, and are owned by the operator of NZ’s sharemarket, NZX. Interestingly, their non-Australasian ETFs simply invest in Vanguard and Blackrock ETFs, so they are really ETFs within an ETF! You can buy Smartshares ETFs from the NZ sharemarket through a broker, or directly from Smartshares (note – ETFs bought directly from Smartshares must be sold via a broker). In addition, a large collection of Smartshares ETFs can be found on InvestNow and Sharesies – which is probably the easier way to invest in these ETFs due to their lower fees and superior online portals. Other ETF Issuers Unfortunately these ETF issuers don’t offer anything in the New Zealand market. But that’s where brokers come in (see below section). Blackrock – the world’s largest ETF issuer under the iShares brandVanguard – the world’s 2nd largest ETF issuerBetashares – an Australian ETF issuer Brokers Brokers allow you to buy and sell shares in individual companies on the sharemarket. Because ETFs are listed on the sharemarket, you can also buy and sell ETFs through brokers. They charge brokerage fees whenever you make a trade (buy or sell something). Brokers are probably more suited to more experienced investors, as the large number of share and ETF offerings might be overwhelming for beginners, particularly if investing in the United States market. Plus investing in individual companies requires research to ensure you’re getting into a sound investment. Hatch Minimum investment$1Fees50bps on NZD-USD currency exchange$3 per trade of fractional shares$8+ per trade of whole sharesFull details on Hatch fees here Hatch is a service that allows you to buy and sell shares and ETFs from the United States sharemarkets. This gives you access to the dirt cheap Vanguard and Blackrock ETFs, as well as individual companies like Apple, Facebook, Netflix, and Tesla. However, you must change your NZD to USD before buying anything through Hatch, and to do this they’ll charge you a 50bps fee on the exchange rate. When withdrawing your investment you’ll need to change the USD back to NZD, costing you another 50bps on the exchange rate. Another thing to be aware of is that Hatch is not a true broker, as they do not allow you to trade directly on the sharemarket. Instead, trades are done through DriveWealth, a platform which holds your shares and ETFs on your behalf. Sharesies Minimum investment$1FeesAccount fee based on the size of your portfolio:$0 for under $50$1.5/month between $50 and $3,000$3/month for over $3,000OR $30 per yearPlus a brokerage fee of:0.5% for orders up to $3,000+0.1% for amounts above $3,000 It’s Sharesies again. In addition to being a Fund Platform, they provide a brokerage service for shares listed on the NZX, New Zealand’s sharemarket. Brokerage is cheap (compared to other NZX options), and they offer fractional shares, which means you can invest with any amount (compared to a minimum of ~$1,000 through other channels). However, unlike traditional brokers, any shares bought off Sharesies are not held directly in your name – instead they are held by a custodian on your behalf. See my full comparison between Sharesies and ASB Securities/Direct Broking here. If you’re keen to start building your investment portfolio with Sharesies, you can sign up with this link, and I’ll get $5 in my own Sharesies account. A great way to show your support for this site! Other Brokers Direct Broking, ASB Securities – Brokers for shares and ETFs on the NZ and Aussie sharemarket.Stake – Identical service to Hatch, for Australians. Stake is planning to launch in New Zealand soon. Conclusion New Zealanders are spoilt for choice these days when it comes to investing options. So what kind of service should you use? Fund Platforms: Suitable for everyone, as they provide easy online access to many funds at a low minimum investment amount. A great way to build a “set and forget” investment portfolio.Fund Managers: Suitable if you have a large amount to invest and want to invest in a specific fund.ETF Issuers: Suitable for everyone, but it’s often easier to buy ETFs from a Fund Platform, as they offer better user interfaces and lower fees.Brokers: Suitable for intermediate or expert investors who want to invest in a specific company, or an ETF from overseas. Fantastic for hands-on investors. The complex world of investment services Further reading: How to choose which fund to invest in on InvestNow and SharesiesBuilding an investment portfolio – Simplicity vs InvestNowShopping for ETFs – Sharesies vs Hatch Found this article helpful? Please share, and Follow or Subscribe to keep up with the latest news and posts! More articles Dealing with Dividends – 5 things to know about them3 September 2019 How to choose which fund to invest in on InvestNow and Sharesies17 June 2019 4 things to know about investing in Equity Crowdfunding8 July 2019 Disclaimer The content of this article is based on my personal opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with a qualified financial advisor before making any investment decisions.... Read more...How to choose which fund to invest in on InvestNow and SharesiesWith an offering of over 100 funds, choosing which funds to invest in with InvestNow can be a daunting task – especially because InvestNow is aimed at self-directed investors and does not offer investment advice to prospective investors. Sharesies has fewer funds to choose from (approximately 30), but that’s still a lot of choice. Sharesies also offers the ability to invest in individual companies, but that’s a topic for another article. So here’s a beginner’s guide to choosing which fund to invest in on these platforms with three simple steps: Determine your investment objectives and timeframeDetermine your asset allocationChoose your fund(s) Update (5 August 2019) – Updated the article to include information on Sharesies 1. Determine your investment objectives and timeframe Think about why you want to invest, and more importantly, how long you are willing to invest for. Use the below table as a guide to determine whether you’re a short, medium, or long term investor: Investment timeframeYears to investShort-term0-5 yearsMedium-term5-10 yearsLong-term10+ years Examples A short-term investor could be someone saving for a house that they expect to buy in a couple years timeA medium-term investor could be someone who’s a few years away from retirementA long-term investors could be a younger person saving for retirement, or someone wanting to grow their wealth over the long-term 2. Determine your asset allocation Your investment timeframe from above will be used to inform your asset allocation – whether you should be putting your money in cash, bonds or shares. The table below provides a suggested asset allocation for each timeframe: Investment timeframeSuggested asset allocationShort-termInvest mostly in cashMedium-termA mix of bonds and sharesLong-termInvest mostly in shares Why the above asset allocations? Short-term – You’ll get relatively low returns with cash, but its’ value tends to be very stable. Therefore there’s a low risk you’ll lose money in the short-term Medium-term – You can expect bonds to make more money than cash over the medium-term, while being more stable than shares Long-term – Shares tend to go up and down like a roller-coaster, but over the long-term have the potential to grow much more than cash and bonds These are guidelines rather than rules The above are not set rules, but are guidelines only. For example, there’s nothing stopping you from investing in shares if you’re a short-term investor. You’d just be exposing yourself to more risk – there’s not much worse than seeing a big chunk of your house deposit wiped out with a share market crash, just as you’re about to buy a house 🙁 Conversely, there’s nothing stopping you from investing more in cash or bonds if you’re a long-term investor, especially if you’re risk adverse and don’t want to see your investment value fluctuate too much. You’d just miss out on potentially higher investment returns when you go for a safer asset allocation. Also remember you can invest in more than one fund in InvestNow and Sharesies. You could allocate some money to cash for short-term investing (e.g. for a house deposit), and some to shares for long-term investment (e.g. for retirement). Lastly, everyone’s situation is unique, so you may want to consult with a professional financial adviser to help determine the most suitable asset allocation for you. 3. Choose your fund(s) Now you can choose which fund(s) to invest in based on your desired asset allocation. I’ve suggested some of the best funds on InvestNow and Sharesies for each asset class (cash, bonds and shares) below. First, a brief note on actively managed vs passively managed funds. Actively managed funds have a fund manager who decides what the fund should invest in. Passively managed funds simply invest in a market index (e.g. top 50 NZ shares, or top 500 US shares). I’m recommending passively managed funds in this article because I think they’re more suitable for beginners. Firstly, the fund management fees for passively managed funds are lower because there is no fund manager actively involved in deciding what the fund should invest in. Secondly, most actively managed funds tend to perform worse than passively managed funds over the long-term. A. Cash funds There is not much choice here on InvestNow. Only actively managed cash funds are available. The fund management fees are in brackets. AMP Capital NZ Cash Fund (0.27%)Nikko AM NZ Cash Fund (0.35%) On Sharesies, there’s only one to choose from: NZ Cash Fund (0.33%) These funds invest primarily in bank deposits. I think a better alternative is to just deposit money with your bank directly (in term deposits or notice savers) instead of investing in these funds – you’ll save on fees that way. Check out my guide to bank savings products here. B. Bond funds There are a couple of passively managed bond funds available, the cheapest one being: Smartshares Global Aggregate Bond ETF (0.30%) – invests in almost 4,000 bond issues from around the world Sharesies also offers a relatively cheap New Zealand specific bond fund: NZ Bond Fund (0.33%) – Invests in New Zealand government and corporate bonds C. Share funds You’re spoilt for choice when it comes to passively managed share funds. I have split them into four categories: Global funds Invests in shares from a very wide range of countries. They are the best funds to start your portfolio with, and for most people all you need to invest in, as they provide a huge amount of diversification. AMP Capital All Country Global Shares Index Fund (0.38%) – Invests in over 2,800 of the world’s largest companies in both developed countries and emerging markets (China, India, Brazil etc.)Smartshares Global Equities ESG (0.54%) – Invests in over 1,500 of the largest companies in developed countries, excluding those involved in thermal coal, controversial weapons, tobacco, and other controversial industries. Country/Region specific funds Invests in shares from a specific country or region(s). They aren’t essential in your portfolio if you’re buying global funds, but you can use them to get extra exposure to a particular region. Smartshares NZ Top 50 ETF (0.50%) – Invests in the 50 largest companies in the NZ marketSmartshares US 500 ETF (0.34%) – Invests in the 500 largest companies in the US marketSmartshares Emerging Markets Equities ESG (0.59%) – Invests in the largest companies in emerging markets (e.g. China, South Korea, India, Brazil), excluding companies involved in contentious activities like tobacco, nuclear power, weapons. Characteristic specific funds Only invests in companies with certain characteristics e.g. based on company size or high dividend yield. Again, they aren’t essential in your portfolio, but you can use them if you want to achieve a very specific investment objective such as obtaining dividend income. Smartshares NZ Dividend ETF (0.54%) – Invests in the 25 highest dividend yielding companies from the Top 50 NZ FundSmartshares US Large Growth ETF (0.51%) – Invests in large US companies that are expected to grow faster than average, but typically pay small dividends Sector specific funds Invests in shares from a specific industry. They offer low diversification, so use these funds to complement your portfolio, rather than make up a core part of it. AMP Capital Australasian Property Index Fund (0.42%) (InvestNow only) – Invests in property funds listed in the NZ and Aussie markets. An alternative fund available on Sharesies is the NZ Property Fund (0.54%).Smartshares Healthcare Innovation ETF (0.75%) – Invests in companies innovating in medical treatment and technology.Smartshares Automation and Robotics ETF (0.75%) – Invests in companies associated with the development of automatic and robotic technology. Note the above isn’t a complete list of all passively managed funds available on InvestNow and Sharesies. For example, InvestNow also offers the popular Vanguard International Shares Select Exclusions Index Funds (0.20%-0.26%), but you should be aware of the tax implications of these funds as they are “Australian Unit Trusts”. You can see a complete list of funds offered by InvestNow here. If you’re keen to start building your investment portfolio with Sharesies, you can sign up with this link, and I’ll get $5 in my own Sharesies account. A great way to show your support for this site! Once you’ve selected your fund(s), it’s time to get investing. If you’re not sure how much money you need to start investing, check out my post here. Found this article helpful? Please share, and Follow or Subscribe to keep up with the latest news and posts! More articles Disclaimer The content of this article is based on my personal opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with a qualified financial advisor before making any investment decisions.... Read more...New to investing? Start with Investing 101 Latest Articles Looks like you have JavaScript disabled. Use this link to access the no JavaScript friendly site.Shopping for ETFs – Sharesies vs Hatch16 September 2019Sharesies and Hatch are New Zealand’s friendly faces of investing, and are both fantastic services that have brought ETF investing much closer to everyday Kiwis. ETFs (Exchange Traded Funds) are incredibly popular options to have in your investment portfolio, giving investors instant diversification in a wide rage of companies, with low fees, and ease of buying and selling. As a quick overview: Sharesies is a service that allows you to buy ETFs listed on the New Zealand market.Hatch is a service that allows you to buy ETFs listed on the United States markets. In this article, I want to uncover the pros and cons of creating an ETF portfolio with each service. Is it better to buy local ETFs with Sharesies or go shopping for overseas ETFs with Hatch? 1. What’s on offer? Sharesies Sharesies is a Wellington based, pineapple loving company, with around 60,000 investors. They offer 32 ETFs on their platform, all of which are issued by Smartshares and include: Australasian share ETFs – e.g. NZ Top 50, Australian Top 20, NZ DividendInternational share ETFs – e.g. US 500, Emerging Markets, EuropeSector specific ETFs – e.g. Australian Resources, Automation & RoboticsCash and fixed interest ETFs – e.g. NZ Bond, NZ Cash, Global Bond All ETFs on Sharesies are NZ domiciled – i.e. based in NZ, listed on the NZ sharemarket, and traded using NZ Dollars. Sharesies also offers the ability to buy and sell individual companies listed on the NZX, as well as some funds offered by managers such as AMP and Pathfinder. However, these products won’t be covered in this article. Hatch Hatch is another Wellington based service owned by KiwiWealth, and they’ve recently reached over 10,000 investors. Hatch gives Kiwis easy access to the United States sharemarket, and with this access comes the opportunity to invest in 754 different US domiciled ETFs!!! Some of the ETF issuers are (click each one to go to their websites): iShares – Issued by BlackRock, they are the world’s largest ETF issuer, with over 200 of their ETFs available on HatchVanguard – The world’s 2nd largest ETF issuer, but perhaps the most famous, Vanguard offer over 60 ETFs on HatchSPDR – Issued by State Street Global Advisors, they are the 3rd largest issuer of ETFS, with over 50 available on HatchGlobal X – They are not a big ETF issuer, but they offer more niche, thematic ETFs such as those investing in Robotics and AI, and Internet of Things Not all US ETFs are available on Hatch. In total there are over 1,500 ETFs trading in the US, so if you’re after a smaller ETF you might be out of luck. Although 754 ETFs is already plenty of choice, and you are bound to find something on Hatch that meets your investment needs. Hatch also allows you to invest in individual companies on the US sharemarket, but this won’t be covered in this article. Minimum investment One of Sharesies’ best features is that there’s no minimum investment amount – you could make an investment of one cent if you wanted to! Hatch also has no minimum investment amount, but given their brokerage fees start from $3 USD, you probably wouldn’t want to make an investment of one cent… Both services are able to achieve such a low minimum investment amount by offering fractional shares. This means even if you only have $50 to invest, but a share in the ETF you want to buy costs $100, you can still buy 0.5 shares of that ETF. 2. Building an ETF portfolio Before we compare fees, I want to build an example ETF portfolio on both Sharesies and Hatch, so that you can see what a portfolio on each platform might look like. I’ll be basing this example portfolio off the 3-Fund Portfolio concept I first introduced in the article Building an investment portfolio – Simplicity vs InvestNow. The concept is about building a very simple, but still diversified investment portfolio that typically contains three asset classes: International sharesBondsDomestic shares Sharesies Our Sharesies 3-Fund ETF portfolio will be made up of three Smartshares ETFs, with exposure to global shares, global bonds, and local NZ shares: ETFWeightingSmartshares Total World ETF60%Smartshares Global Aggregate Bond ETF20%Smartshares NZ Top 50 ETF20% Hatch Two Vanguard ETFs will make up 80% of our Hatch 3-Fund ETF portfolio – The Total World Stock ETF, and Total World Bond ETF. Interestingly Total World Stock is the ETF that Smartshares invests in to make up 100% of their Total World ETF! The iShares MSCI NZ ETF will make up the remaining 20% of our Hatch portfolio. It is a bit strange to buy a New Zealand ETF from a foreign market (it would be like going to the States to by a Kiwi steak and cheese pie), but we’ll roll with it for the sake of this comparison. ETFWeightingVanguard Total World Stock ETF60%Vanguard Total World Bond ETF20%iShares MSCI New Zealand ETF20% We will be using our Sharesies 3-Fund ETF portfolio, and our Hatch 3-Fund ETF portfolio as a basis for our fee comparison below. 3. Fees Sharesies and Hatch have very different fee structures: Sharesies Account fee – Sharesies charges an ongoing account fee based on the value of your portfolio, starting from $1.50 per month when you have a balance of over $50: This is a little expensive in my opinion, particularly for smaller balances. For example, a $1,000 portfolio would attract account fees of $18 per year, which equates to 1.8%! Fund management fees – Smartshares ETFs charge a fund management fee of between 0.30% and 0.75%. For the ETFs in our Sharesies 3-Fund portfolio, their management fees are: Smartshares Total World ETF – 0.56%Smartshares Global Aggregate Bond ETF – 0.30%Smartshares NZ Top 50 ETF – 0.50% This gives us a weighted average fee for our Sharesies 3-Fund ETF portfolio of 0.50%. Full details on Sharesies’ fees can be found on their Help Centre. Hatch Foreign exchange (FX) fees – To invest using Hatch, you must first deposit New Zealand dollars and convert it to US dollars. A 50 basis points (bps) fee is applied to this conversion which is calculated with the equation: Exchange Rate – (Exchange Rate * 0.005) For example, if the NZD-USD exchange rate is 0.638, Hatch will change your NZD to USD at a rate of 0.6348. Brokerage – Hatch charges brokerage fees each time you buy or sell an ETF on their platform: $3 USD to buy/sell a fraction of one share$0.02 USD per share to buy/sell one or more full shares, with a minimum charge of $8 USD The implication of this is that you need to invest large amounts at a time (ideally several hundred dollars) to make the brokerage worthwhile. Fund management fees – The management fees for the ETFs in our Hatch 3-Fund portfolio are: Vanguard Total World Stock ETF – 0.09% (so cheap!)Vanguard Total World Bond ETF – 0.09% (so cheap!)iShares MSCI New Zealand ETF – 0.47% The US domiciled Vanguard ETFs are incredibly cheap compared to the Smartshares equivalents! Not so much for the iShares NZ ETF, given this is a more niche fund. However, the weighted average fee for our Hatch 3-Fund ETF portfolio is still a very low 0.17%. Tax related fees – When you make your first deposit, Hatch charges a one-off $1.50 USD fee to complete your US tax forms. They subsequently charge $0.50 USD each year to complete your US tax return. Account inactivity fee – There is no ongoing account fee for Hatch. But if you don’t make any trades for 12 months, account inactivity fees kick in, starting with a one-off $12 USD fee, and then $1 USD per month of inactivity. Full details on Hatch’s fees can be found on their site. What’s up with the big difference in management fees? Do you ever feel that shopping in New Zealand is expensive compared with shopping overseas? It’s a downside of living in NZ – with high shipping costs, tax, and low volumes making locally sold goods more expensive. We can alternatively look to buy things from overseas sources, but once you factor in shipping costs, currency conversion, and shipping times, it might not be much better than buying locally. Sadly it’s the same story for our locally domiciled ETFs. Their higher fees reflect the cost of “importing” the ETF, such as brokerage and FX. Lower volume also plays a part – more money invested is better as a fund’s costs can be split among more investors. Again, we can look at buying cheaper overseas domiciled ETFs as an alternative, but have to factor in the additional fees. 4. Fee Comparison So how would the fees of Sharesies and Hatch apply to our 3-Fund ETF portfolios we created in section 2 of this article? Which one is cheaper? Unfortunately it’s hard to say, as it depends on a lot of variables such as how many years you’ll be investing, how many regular contributions you make, and the amount of money you invest. Fortunately I’ve built a spreadsheet to calculate the fees based on these variables. It takes into account any account fees, fund management fees, brokerage, tax fees, and foreign exchange fees. It can also factor in regular contributions to your portfolio. It’s a VERY rough calculation (in particular it doesn’t factor in any capital growth or dividends), but should give you a ballpark idea of the level of fees you can expect with each service, under different scenarios. Let’s run through some scenarios and see which service comes out cheaper for each one: A. Alice from Auckland Alice has $10,000 to invest for 5 years in our 3-fund ETF portfolios. She plans on adding $1,000 to her portfolio once every year. Here’s the fees she’d pay with each service: Sharesies – $460Hatch – $517 Sharesies is a little cheaper for Alice. Given her short investment timeframe of 5 years, the brokerage and FX costs of Hatch have negated the cheaper fund management fees that come with the US ETFs. B. Bruce from Blenheim Bruce is identical to Alice, but has an investment timeframe of 10 years instead of 5. His fees are: Sharesies – $1,044Hatch – $900 Now Hatch is cheaper, as Bruce has more time for the lower fund management fees of the US ETFs to offset Hatch’s brokerage and FX costs. C. Cathy from Christchurch Cathy is like Bruce and wants to invest in the same 3-Fund portfolio for 10 years, starting with $10,000. However, she’s a much more diligent saver and wants to add a regular $1000 a month to her portfolio. Her fees are: Sharesies – $3,772Hatch – $6,994 Sharesies is much cheaper for Cathy! With Hatch, the brokerage fees incurred from making regular contributions would really hurt her. D. Dorothy from Dunedin Dorothy is identical to Cathy, however, she invests $3,000 every three months (instead of $1,000 every month). Her fees are: Sharesies – $3,772Hatch – $4,023 Hatch’s fees are lower for Dorothy than for Cathy, thanks to her less frequent contributions lowering brokerage costs. However, Sharesies is still cheaper for her. E. Elizabeth from Edgecumbe Elizabeth is relatively well-off and contributes $6,000 every three months into our 3-Fund ETF portfolio over 10 years. Her fees are: Sharesies – $6,748Hatch – $6,231 Now Hatch is cheaper for for Elizabeth. Given she’s investing a larger amount, the cheaper management fees really start to kick in and offset Hatch’s brokerage costs. Want to do your own fee comparison between Sharesies and Hatch? You can take a copy of the spreadsheet I used to do the calculations here (must have a Google account to copy it) 5. Other considerations Fees aren’t the only thing that matters. There are many other pros and cons to consider when deciding between Sharesies and Hatch. Sharesies User Experience – Both platforms are easy to use and have great mobile friendly interfaces. However, I’d say Hatch requires a lot more effort to use – you’re dealing directly with the US market so have to convert your currency to USD, perform trades in USD, and track everything in USD. With Sharesies you only have to deal with NZD. Once you’ve logged in and made a deposit into the platform, it takes just 7 mouse clicks and 2 keyboard inputs to go from your investor dashboard to having an ETF bought and in your portfolio. It certainly takes a lot less thinking and effort. Automated investing – If 7 clicks to make an investment is still too much for you, you can automate your investing on Sharesies by setting up Auto-invest. This allows you to automatically invest $5 or more into the funds you want on a regular basis. Automated investing is coming to Hatch soon. Tax – Generally you don’t have to do anything regarding tax when investing in Smartshares ETFs on Sharesies (check Sharesies’ tax documentation here). But with Hatch, your investment is considered as an overseas investment – you will need to pay tax on any dividends earned, and if you have over $50,000 invested overseas you need to apply the FIF tax rules (check Hatch’s tax article here). It is not that hard to fulfil these tax requirements, but obviously not as convenient as going down the Sharesies + Smartshares route. Hatch More choice – Hatch offers over 750 ETFs versus Sharesies’ 32 ETFs. It’s like being a kid in a candy shop – the choices and possibilities for building your investment portfolio seem endless. Here’s a few examples of some cool and interesting ETFs on Hatch: ThemeETFsTech specificInvesco Solar Energy ETFGlobal X Lithium & Battery Tech ETFSector specificiShares US Insurance ETFGuggenheim China Technology ETFValues relatedSPDR Gender Diversity Index ETFImpact Shares Minority Empowerment ETFPrecious metalsiShares Gold Trust iShares Silver Trust ETFCountry specificiShares Taiwan ETFiShares Italy ETF You can get behind gender diversity by investing in the SPDR Gender Diversity ETF But is more choice better? It’s often harder to make a decision when you have overwhelming choice, compared to when options are scarce. Plus do you really need the niche ETFs that you can get on Hatch, when something like the Smartshares Total World ETF (investing in over 8,000 companies) provides sufficient diversification for most people? Eeny, meeny, miny, moe, which ETF should I choose to invest in gold??? Competing services Sharesies and Hatch are the most popular, but are not the only services to offer ETFs to Kiwis. So I want to round out the article by giving a couple of competing services a quick mention. InvestNow InvestNow is pretty similar to Sharesies, being a platform that lets you invest in a selection of Smartshares ETFs, and heaps more funds from other providers. It’s my platform of choice, as they don’t charge any account fees, but their downside is the higher minimum investment amount of $50, and inferior user interface. Stake Stake is the Australian equivalent of Hatch, also allowing you to buy shares and ETFs on the US market. Their major advantage is that they charge zero brokerage fees! The downside is that Kiwi investors face an onerous process to deposit and withdraw funds with Stake (unless you have an Aussie bank account): To deposit money – you must make a manual international money transfer from NZD to Stake’s USD account using a service like TransferWise. Stake charges a $20 USD fee for each deposit made this way.To withdraw money – you must first use Stake to exchange your USD to Australian Dollars (incurring Stake’s FX fee). Then you need to get Stake to arrange an international money transfer to have that AUD converted to NZD and paid to your NZ bank account. Conclusion Sharesies and Hatch have dramatically lowered the barriers to investing in ETFs. So when creating an investment portfolio with ETFs, should you shop locally with Sharesies, or go look overseas with Hatch? Sharesies gives you ultimate flexibility in being able to invest whatever amount of money, however often you want, without being hurt by brokerage fees. You could make an investment of ten cents everyday if you wanted to. I would say Sharesies better suits a wider audience – it’s perfect for beginners or people wanting to gradually build up a portfolio by regularly investing their spare change. Hatch’s HUGE selection of ETFs and their low management fees make you think “WOW”. But to make the most of this you need to invest a lot of money, less frequently, and for a long period of time – in order to offset the brokerage and FX costs. I feel like Hatch would be better for more experienced investors who have larger amounts to invest, and who would embrace the extra choice rather than be overwhelmed by it. I personally don’t use either, but my choice between the two would be Sharesies – it’s simple and offers sufficient ETFs for my investment needs. I have tried investing in the US market before, but found myself disliking the effort required to convert currency, and track everything in USD. However, I would still consider using Hatch if I wanted to invest in individual US companies. If you’re keen to start building your investment portfolio with Sharesies, you can sign up with this link, and I’ll get $5 in my own Sharesies account. A great way to show your support for this site! Found this article helpful? Please share, and Follow or Subscribe to keep up with the latest news and posts! More articles How to choose which fund to invest in on InvestNow and Sharesies17 June 2019 5 things to know about investing in Peer to Peer Lending24 June 2019 Building an investment portfolio – Simplicity vs InvestNow19 August 2019 Disclaimer The content of this article is based on my personal opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with a qualified financial advisor before making any investment decisions.... Read more...Peer to Peer Lending review – Lending Crowd9 September 2019Lending Crowd lives in the shadow of bigger, more well known Peer to Peer Lending platforms like Harmoney, but do they deserve more attention? Lending Crowd is a simple platform that promises to connect investors to a crowd of high-quality, creditworthy borrowers, without involvement of the big banks. With that comes the opportunity for investors to earn returns far higher than what the banks are offering with savings accounts and term deposits. Based in Newmarket, Lending Crowd launched in late 2015, and is owned by finance company Finance Direct. I’ve been an investor on the platform since May 2017, and in this article I’ll be reviewing the Lending Crowd platform and its returns, risks, fees, and features. Is it better than investing in Harmoney? This is the second article in my Peer to Peer Lending review series:Article 1 – Harmoney reviewArticle 2 – Lending Crowd review (this article)Article 3 – Squirrel review (coming soon) 1. Getting Started As an investor on the Lending Crowd platform, you can choose to lend your money in either 3 or 5 year loan terms across four different risk grades (A1, A2, B1, B2), and to both Personal and Business borrowers. This is very interesting because it’s uncommon for everyday people to be able to invest in business lending! Lending Crowd’s minimum investment amount is $50, which happens to be the size of a single loan note on the platform (each loan is split up into $50 notes for investors to invest in). Lending Crowd allows borrowers to borrow between $2,000 and $200,000. The process for investing in loans is similar to Harmoney’s. You start by logging in to the platform where you’ll be presented with a list of loans available to invest in, along with each loan’s term, interest rate, risk grade, fee, and whether it’s a business or personal loan. You can view the details of each loan to see details like a borrower’s income, age, employment, and residential status. If you want to invest in that loan, you then buy notes in that loan until all the notes are sold out. The minimum investment in a loan is one note ($50), but you can buy multiple notes in a loan if you wish. My experience – What did I invest in? My strategy was to invest in loans with risk grades between A2 – B2. I felt that A1 grade loans offered an interest rate that was too low (see below for the rates), as you can get a similar interest rate on the Squirrel P2P Lending platform at a lower risk. I actively invested in Lending Crowd between June 2017 and May 2019. Currently I’m not actively investing on the platform for a variety of reasons, which I’ll cover below. 2. Potential Returns Interest Lending Crowd gives investors the opportunity to earn interest at rates between 6.69% and 18.45%. This is lower than Harmoney (6.99% – 29.99%), but higher than Squirrel (6% – 8.5%). With Lending Crowd you’re rewarded with a higher interest rate for investing in the longer 5 year term, unlike Harmoney which pays the same rate for both 3 and 5 year terms. Lending Crowd interest rates The above are Lending Crowd’s new rates that just came into effect on 2 September – if you’re interested, I’ve put a comparison between the old and new rates at the bottom of this article. Lending Crowd are the first lenders to drop their personal loan interest rates following the big OCR cut in August 2019. While the rate cut means lower returns for investors, it’s hoped that lower rates will make Lending Crowd more attractive to borrowers. It is certainly a challenge for P2P Lending platforms to balance out the interests of investors and borrowers, and I’d say Lending Crowd’s rates are still very attractive to investors. Lending Crowd uses a statistic called Net Average Return (NAR) to measure an investor’s overall pre-tax returns on the platform, taking into account interest earned, fees, and any loan write-offs. The platform’s average NAR as at June 2018 was 11.95%, but they have not provided an average NAR since then. I’ve asked Lending Crowd for up-to-date figures and will update this article once I get a response. My experience – What returns did I get? My current NAR on Lending Crowd is 12.68% which I’m really happy with. It’s not as much as I could have earned with Harmoney, but I feel I am exposed to less risk with Lending Crowd – read on for more detail. 3. Risk Overdue payments The first risk you face when investing in P2P Lending is overdue payments, where borrowers don’t make their loan repayments on time. They are annoying because you get paid late, and overdue payments are at risk of turning into write offs. On Ledning Crowd a loan can be overdue for up to 90 days, before the loan gets placed “In Collection”: In the unfortunate circumstance that a loan exceeds 90 days overdue the loan will be placed ‘in collection’ and the borrower will be informed that the full balance on the loan is due immediately. Security repossession and sale procedures will also commence. Write offs The main risk of Peer to Peer Lending is that the borrower doesn’t pay you back at all. On Lending Crowd, loans that have been “In Collection” for 180 days (or after collection procedures, such as repossession and sale of the loan’s security, are complete) get written off. A loan can stay ‘in collection’ up to 180 days, and at some point during or at the end of that period, when collection procedures are deemed complete or exhausted, the loan will be ‘written off’. When a loan is written of, you may lose the money you invested in that loan. Lending Crowd uses fractionalisation as the primary strategy to mitigate the impact of loan write offs, as each loan is split into $50 notes. This means that investors only need to expose $50 of their money to each loan, and can diversify their lending portfolio across a large number of loans. Lending Crowd has a couple of other strategies to mitigate risk, that in my opinion makes them safer than Harmoney: High Quality borrowers – Lending Crowd only accepts high-quality A and B grade borrowers, and do not lend to the likes of Harmoney’s risky E and F grades. They only approve around 17% of borrower applications they receive.Secured loans – All loans on the Lending Crowd platform are secured by the borrower’s vehicle, property or both. This gives more protection to the lender – for example, a car used as security on a loan can be repossessed and sold to recover money still owing on a written off loan. The security used on Lending Crowd’s loans So how do these features translate into results? The real test will be how the loan book performs over the long-term and through a recession, but below are the platform’s write off rates so far – they are very low, with no write offs at all in the A1 and A2 grades! Lending Crowd platform write off rates Early Repayments Early loan repayments can also be troublesome. Although investors are not penalised when a borrower pays back their loan early, it results in rework in having to reinvest your money into new loans. My experience – Did the risk occur for me? Overdue payments – Out of 274 loans I’m currently invested in, only four are overdue by 10 days or more. My overdue payments have always been low, and I’m not sure if that’s because the quality of borrowers is high, or because Lending Crowd are great at chasing up late payments. Either way, I am very very impressed. Write offs – Loan write offs have been uncommon for me. I’ve had 5 so far, with another two loans currently “In Collection”. Fortunately Lending Crowd has managed to recover some of the outstanding money from my written off loans, so the overall impact of write offs on my portfolio is very tolerable. If a write off occurs to your loan you get an email informing you of the details, such as how much was written off, and how much was recovered (minus any “collection costs” involved in recovering the money). Write off notification email Early repayments – There is no easy way to measure early repayments, but I can say they are pretty high. I get a steady stream of borrowers paying back their loans early, which I have to reinvest or withdraw from the platform. 4. Platform Fees Lending Crowd takes a cut of the interest you earn with a fee they call Interest Flex. The amount of Interest Flex you pay depends on the origin of the loan. 10% of interest earned for non-referred loans e.g. loans that people applied for directly through the Lending Crowd website.25% of interest earned for referred loans e.g. loans that were referred to Lending Crowd through their partners such as a car dealer. Referred loans were introduced late in 2018 as a way for Lending Crowd to acquire more borrowers. This has been successful so far, resulting in a 45% increase in loan listings. The fee for referred loans are higher as Lending Crowd pays commission to the referring partner. Each loan listing shows a “Flex adjusted rate” which shows the impact of the Interest Flex fee on the loan’s interest rate: My experience – Fees I thought Harmoney’s 20% fee was expensive enough! I think Lending Crowd’s 25% fee for referred loans is way too much – referred loans give no extra benefit or return to investors (apart from having more loans available to invest in) over non-referred loans that charge a lower 10% fee. I think the 10% fee for non-referred loans is VERY good though. As a result I avoided referred loans and only invested in the non-referred ones. Given about half of Lending Crowd’s loans are referred, this really limited the number of loans I was willing to invest in. 5. Platform Features Lending Crowd is the most basic out of the Peer to Peer Lending platforms I’ve used: Auto-lend: Lending Crowd has no auto-lend functionality – all loan investments must be placed manually instead. Developing an auto-lend feature doesn’t seem to be a priority for them either: We understand investors thinking: “Why doesn’t Lending Crowd develop software to offer automated investing or create rules around maximum investments?”. The reality is, investing lots of money by developing these services will not solve the real problem – that we simply need more quality, secured loans on the platform to meet the insatiable investor demand. Lending Crowd Investor Update, November 2018 Loan Notifications – Lending Crowd’s workaround for the lack of auto-loan is to send out email notifications whenever a new loan becomes available for investment. Investors can then log in to buy notes in that loan if they wish. You have to be fast to get in before all the loan notes are sold out – first in, first served! Loan notification email There are a couple of limitations to these notifications: No filters – You get email notifications for ALL loans listed on the platform. There is no way to filter out notifications for types of loans you’re not interested in, such as referred loans or particular risk grades.Email notifications are “shuffled” – The notifications are sent out to investors in random order. Sometimes you will get the notification immediately after a loan is listed, other times you will receive it 10 minutes or more after the listing. This is intended to make it more fair for investors (as not everyone can respond to the notifications immediately), but just means your ability to invest in a loan before it’s sold out comes down to luck. Getting your money out early – Like Harmoney there is no secondary market where you can sell your loan investments to get your money out early. You have to wait for borrowers to make repayments over the term of their loan. Reporting – The reporting provided on the platform is a basic list of the loans you’ve invested in. My experience – Platform features Lending Crowd may seem light on features, but I think this is actually a strength of the platform. What’s there works well – the site is simple, snappy, free of bloat, and is both mobile and desktop friendly. In regards to the lack of auto-invest, in the past I didn’t mind it as I was able to quickly respond to email notifications most of the time. But right now I’d prefer a more passive investment and not to have notifications disrupting me throughout the day. This makes me hesitant in recommending Lending Crowd to others, as not everyone has the time or opportunity to quickly respond to new loan listings. I did have major issues with the “shuffling” of loan notifications though. It was frustrating to receive a loan notification email and log in to the platform, only to see no loan to invest in, as the loan had already been sold out by the time I received the email! For me this is a poor user experience, and I also don’t like how this made your ability to invest in loans come down to luck. 6. Other Talking Points Loan availability Low loan availability is a common issue among New Zealand P2P Lending platforms and Lending Crowd is no exception. You can expect a steady trickle of loans to be listed, but will still take some time to build up a diversified lending portfolio. Together with the fact that I avoided referred loans meant that I had barely any choice of loans to invest in, and is the main reason I stopped investing in the platform. Institutional Investors Unlike Harmoney where ~80% of loans are funded by institutional investors, Lending Crowd’s loans are 92% funded by retail investors. This is great as it doesn’t mean the likes of banks and finance companies taking the already low amount of loans on offer. Lending Crowd seem to genuinely care about the interests of retail investors, and this is what P2P Lending should be about – providing a platform that benefits everyday people, instead of just banks and finance companies. Platform reliability I’ve found the Lending Crowd platform to be very reliable so far, and haven’t come across any glitches at all. The only issue is that they sometimes perform maintenance on the site during business hours. I think it’s quite unusual to perform maintenance during the day – time is money and I hope they don’t put off prospective customers by having the site down during business hours. Future Expansion At present Lending Crowd only offers secured lending, but has indicated that they’re looking to expand into the unsecured loans space, with the backing of a new institutional lender: Moving forward, we feel the obvious next step is to explore expansion into the unsecured lending space. This may mean that we’re willing to start conversations with another cornerstone financial institution to participate in these loans.Lending Crowd Press Release, September 2019 I’m not sure I’d like this, as one of Lending Crowd’s strongest selling points for investors is that all their loans are secured – which provides a lot more assurance (to me at least) compared to the unsecured loans of Harmoney. But I will reserve any further judgement until the final product is released. Conclusion I really like the Lending Crowd platform and think it does deserve a little more recognition. It’s simple, the borrowers are high-quality, overdue payments and write offs have been low so far. Is it better than Harmoney? It absolutely is in my opinion – and I would say that based purely on the fact that Lending Crowd has better quality borrowers, and only does secured loans. Most importantly this has resulted in my returns being great so far, with a 12.68% NAR. There are a few things that hold the platform back. The low loan volume, the high 25% fee for referred loans, and annoying loan listing email notifications are all reasons that led me to stop investing. But it mainly comes down to time – there are other more passive, and less time-consuming investment opportunities for me to pursue right now. If circumstances change, I would definitely consider investing in Lending Crowd again (and that just might happen with the OCR heading down towards 0%). So who do I think Lending Crowd is right for? If you want the potentially high returns from P2P Lending with more security than Harmoney, and are prepared to put in a bit of time and effort, then Lending Crowd is the way to go. If you want a more “set and forget” type of investment, then I would look at other options. Pros All loans are secured and borrowers are high-quality. Feels a lot safer than HarmoneyVery low fee (10%) for non-referred loansOutstanding management of loans resulting in low number of overdue payments and write-offs, and great overall returnsPlatform is reliable and free of bloat despite a lack of features Cons Very high fee (25%) for referred loansLow loan availabilityNo auto-lend functionality, requiring time, effort, and dealing with loan notification emails to get your money invested into loansNo secondary market to get your money out early Not quite ready to become an investor, and need a personal loan to consolidate your debts? Apply for a Lending Crowd loan though this link and you’ll get a bonus $50 to invest in the Lending Crowd platform when you drawdown your loan. Old vs new rates For those interested, here are Lending Crowd’s old interest rates compared to their new rates that came into effect on 2 September 2019: Found this article helpful? Please share, and Follow or Subscribe to keep up with the latest news and posts! More articles Disclaimer The content of this article is based on my personal opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with a qualified financial advisor before making any investment decisions.... Read more...Dealing with Dividends – 5 things to know about them3 September 2019Dividends – everyone loves them, and they are a crucial aspect of investing as they are one of the two ways you can make money from shares (the other being capital gains). They give investors a regular return on their investment, and have recently become even more important as an alternative income source to declining term deposit returns. However, dividends are often misunderstood and misused, particularly by beginner investors. In this article, I’ll be covering the specifics of dividends, such as when they’re paid, how much money you could make from them, and lastly, I’ll be looking at New Zealand’s biggest dividend trap, Sky TV. 1. What are dividends? Dividends are a way for companies to regularly pay a share of their profits out to shareholders. Paying dividends can make companies more attractive to investors, as it allows shareholders to receive a regular passive income stream (who doesn’t like receiving a payment into their bank or Sharesies account!?), and can also demonstrate that a company is profitable and financially strong. A higher dividend doesn’t necessarily make a company better – when a company pays out dividends, this results in less money left in the company to invest in further growth. A company with relatively low growth opportunities (like Contact Energy) might pay most of their profits out to shareholders in dividends, as they have less need to retain that money in the business. While a company with more growth opportunities might pay a small dividend, and retain most of their profits in the company in order to fund that growth. No dividends? Many companies (e.g. A2 Milk, Amazon, Facebook) don’t pay a dividend at all – These are often high-growth companies, where you’ll hopefully benefit from higher share price appreciation to make money from investing in these companies. Although, such companies may also become dividend paying companies in the future. Another reason a company might not be paying dividends is not a good one. A company’s profits might be declining to the point that they no longer have the capacity to continue paying dividends. Special dividends From time to time companies can pay a special dividend. These are often used to distribute excess capital to shareholders (e.g. surplus cash that isn’t needed by the company to fund further growth). Special dividends are usually one-off in nature, and shouldn’t be factored in when assessing a company’s level of dividend payments. 2. When do I get paid dividends? Most dividend paying companies in NZ pay a dividend twice a year, in the form of an “interim” and a “final” dividend. They are not always paid in equal instalments – for example, the final dividend is often bigger than the interim dividend. A small number of companies pay them quarterly. Quarterly dividends won’t necessarily give you more money than six-monthly dividends, because quarterly dividend payment amounts are smaller – it’s like slicing a sandwich into four pieces instead of two. Below are the critical dates that shareholders need to know for each dividend payment: Cum-Dividend (CD) – A company will declare they are making a dividend payment (and the amount of the dividend), typically as part of the announcement of their financial results. When a dividend is declared, the share becomes Cum-Dividend (has a dividend attached to it). Investors holding or buying the shares when it’s CD will receive the upcoming dividend payment, as long as they hold them until the Ex-Dividend date.Ex-Dividend (XD) date – This acts as a cut-off date where the shares no longer have any dividends attached to it. Investors buying shares on or after this date won’t receive the upcoming dividend payment, as they won’t make it onto the company’s share register on time for the Record Date (as it takes 2 days for trades to settle). Investors who sell their shares on this date will still receive the upcoming dividend, as they’ll still be on the share register on the Record Date. On the XD date, the share price of the company immediately goes down by the dividend amount to reflect the fact that the shares are no longer entitled to the upcoming dividend payment.Record Date – Immediately following the Ex-Dividend date is the Record Date. The upcoming dividend will be paid to all the shareholders that are on a company’s share register on the Record Date.Payment Date – This is the day dividends are paid out to those who held the shares on the Record Date. Woo! Hope that makes sense. If it’s a bit confusing, the basic rules you need to know are: If you bought shares before its Ex-Dividend date: You’ll receive the upcoming dividend on the Payment DateIf you bought shares on or after its Ex-Dividend date: No dividend. You’ll have to wait for the next dividend payment You can find key dividend dates for each company on the NZX website. As an example, this is Air New Zelaland’s upcoming September dividend payment: If you bought your shares through Sharesies, you’ll get an email notification on a share’s Ex-Dividend date, as well as on the dividend Payment Date. Sharesies email notification on a share’s Ex-Dividend date 3. How much money will I earn from dividends? Dividend Yield A company’s dividend yield is an estimate of the amount of dividends you might earn from owning shares in that company – For example, a share that’s at a price of $10, with a dividend yield of 5%, means you might get a dividend of 50 cents per share each year. A company’s dividend yield can be found on the NZX’s website. Dividend yield on the NZX website Dividend yields provide a quick way to assess a company’s dividend payments, but are often very misleading: They are “backwards looking” (calculated based on dividends that the company paid in the past year). There is no guarantee that a company will continue to pay the same level of dividends into the future. Companies can just as easily reduce or cancel their dividend, as they can increase it.Dividend yields on the NZX website (and most other sources) also factor in special dividends (which are usually just paid as a one-off).Dividend yields ignore tax treatment of the dividends. Things like tax rate, residency, and “imputation credits” attached to the dividend have a big effect on the final amount of dividend you’ll get. Calculating a dividend payment on your own Because dividend yields can often be unreliable, you can do your own calculations to estimate the amount of dividends you could potentially get. Don’t want to do the math yourself? Copy this Google Sheet, or use a portfolio tracking tool like Sharesight to automatically do the calculations for you, and skip to the next section. You’ll need a few numbers: Number of shares you ownDividend Amount – the number of cents being paid per shareImputation – this is a tax credit that many companies attach used to their dividends to reduce the tax you have to pay on them (to mitigate double taxation). The level of imputation can vary greatly from one dividend payment to another. Dividend Amount and Imputation for each NZX company is available at the following URL. Replace <ticker code> with the company’s ticker code e.g. AIR for Air New Zealand. Or search the NZX website to find the company you’re looking for.https://www.nzx.com/instruments/<ticker symbol>/dividends Let’s perform some calculations using Air New Zealand’s (AIR) September 2019 final dividend payment as an example (pictured below). Let’s assume we have 1000 shares in AIR. Calculate the Gross Dividend: Multiply the Number of shares with Amount. Example: 1000 x $0.11 = $110Calculate Imputation Credit: Number of shares x Imputation. Example: 1000 x $0.04278 = $42.78Calculate Tax (Dividends always have tax deducted at 33%): (Gross Dividend + Imputation Credit) x 33%. Example: ($110 + $42.78) x 33% = $50.42Calculate Net dividend (the amount you’ll be paid): Gross Dividend + Imputation Credit – Tax. Example: $152.78 – $50.42 = $102.36 With our 1,000 Air New Zealand shares, we will receive $102.36 in the September 2019 final dividend payment. Given their March 2019 interim dividend was the same amount, the annual dividend we get from AIR is $204.72. If we had bought the 1,000 AIR shares at $2.85, that would give us a net dividend yield of 7.18% (assuming Air NZ maintained the same level of dividends into the future). Your individual tax circumstances such as tax rate and tax residency may alter the amount of dividends you’ll be paid, and the amount of tax you are liable for. Check with a tax professional for guidance on your specific circumstances. Fortunately you don’t have to perform all these calculations yourself – you can make a copy of this Google spreadsheet which will do all the math for you. Alternatively you can use an investment tracking tool like Sharesight, which automatically calculates and tracks dividends for you. Listed PIEs Some companies in New Zealand are structured as PIEs. Some examples of PIEs are many of the Real Estate Investment Trusts (REITs) such as Kiwi Property Group, and Precinct Properties, as well as the Smartshares ETFs. Dividends from PIEs are taxed differently. They are considered excluded income and usually do not have to be declared in your tax returns. All you need to do is multiply the number of shares you own by the dividend amount. Below is the upcoming dividend payment for Precinct Properties (PCT): Assuming we had 1,000 shares in PCT, we’d get $15 (1,000 x $0.015) in the upcoming dividend payment. Your individual tax circumstances such as tax rate and tax residency may alter the amount of dividends you’ll be paid, and the amount of tax you are liable for. Check with a tax professional for guidance on your specific circumstances. 4. What is a Dividend Reinvestment Plan? Dividend Reinvestment Plans (commonly known as DRPs or DRIPs) are where a company offers shareholders the opportunity to reinvest their dividend payments into buying more shares in the company, as opposed to receiving a cash payment. Only some companies offer DRPs – current examples being Heartland Bank, Summerset, and Vital Healthcare Property. Companies that offer DRPs aim to create a win-win situation for the shareholder and company: Shareholders get the chance to accumulate more shares in the company without paying brokerage costs. This allows investors to take advantage of compounding returns. In addition, shares bought through a DRP are often discounted (for example, a 2% discount for the most recent Heartland Bank dividend). Companies get to keep capital inside the business, while at the same time keeping shareholders who want cash dividend payments happy. How to join a DRP DRPs are not yet available for investors buying shares through Sharesies. Shareholders who want to participate in the DRP must opt-in via the company’s share registry. In New Zealand, this will either be Computershare or Link Market Services – they’ll send new shareholders a letter with instructions on how to do so. DRP documents I received in the mail after buying Summerset shares There are two levels of participation in DRPs. You can opt for Full Participation where all of your dividends are reinvested, or Partial Participation where only a certain percentage of your dividends (specified by you) are reinvested, with the balance being paid in cash. 5. What is a dividend trap? Dividend traps are companies that lure in investors by having a very high dividend yield, but the dividend payments are unsustainable. These companies typically have declining profitability, resulting in the person who invested for the high yield facing declining share prices and a reduction or cancellation of their dividend payments. New Zealand’s biggest dividend trap A local example of a big dividend trap right now is Sky TV. At the time of writing, the NZX website is showing Sky as having a HUGE 18% dividend yield. And if you’re a Sharesies user, when you sort companies by “Highest Annual Dividends” you’ll get Sky sitting at the top of the list – dangerously tempting for novice investors. However, this 18% yield is totally misleading – Sky have suspended their most recent dividend payment! So in reality, the company is currently yielding is 0% – they aren’t paying any dividends at all right now! Sky is on the top of the list when you sort companies by highest annual dividends on Sharesies How can this happen? Sky TV has been constantly losing subscribers over the last few years for many reasons, including the emergence of streaming services like Netflix. Remember, dividend yields are backwards looking, so they are calculated on past dividends when the company was more profitable and had a higher share price. Given Sky’s falling subscriber numbers and profitability, their past dividends cannot be sustained – anyone who bought Sky shares based on dividend yield alone have been trapped with further share price declines and dividend cuts. Sky’s declining share price over the last 5 years What to look for in addition to dividend yields As we have seen with Sky, looking at the dividend yield alone when choosing a company to invest in is not a great idea. Instead, these are a few factors that can help you assess whether a company’s dividend might be sustainable into the future: Price History – Have the company’s profits and share price taken a sharp dive recently? This could be a strong indicator of a dividend trap.Dividend History – Does the company have a solid track record of steadily increasing dividend payments over the years?Dividend Payout Ratio – What percentage of the company’s profits are being paid out as dividends? A lower payout ratio gives the company capacity to increase dividends, while a high payout ratio might not be sustainable.Future prospects – Is there anything happening to the company in the future which could suggest an increase to dividends? e.g. increasing profitability and lower need for capital expenditure. Or is there anything that could happen to force it to cut their dividend?Other factors – Look at a company’s debt levels and dividend yield compared to other companies in the same industry. Found this article helpful? Please share, and Follow or Subscribe to keep up with the latest news and posts! More articles 4 things to know about investing in Equity Crowdfunding8 July 2019 The best bank accounts and credit cards for managing your everyday finances28 July 2019 Buying shares on the NZX – Sharesies vs ASB Securities and Direct Broking16 July 2019 Disclaimer The content of this article is based on my personal opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with a qualified financial advisor before making any investment decisions.... Read more...What I’ve been investing in – August 201930 August 2019What I’ve been investing in is a monthly series covering what investments I’ve made during the month, and any investing related news that I’ve found interesting. In August 2019 New Zealand secured the Bledisloe Cup for the 17th year straight, massive protests continued in Hong Kong, and trade wars and OCR cuts have dominated the economic news. It has been a relatively quiet one for me in terms of my own investment portfolio, but I have a lot of news below that’s well worth reading about! The below is not financial advice, nor a recommendation to invest in the following. Please do your own research before making any investment decisions. What I’ve been investing in Heartland Bank I first bought shares in Heartland Bank late last year. They’ve been growing steadily (particularly in the reverse mortgages space) and have even just announced an increased dividend, so I decided to buy more shares in the bank. Probably not the worst idea considering declining interest rates – as some have said, it’s better to own the bank, than to lend money to the bank. Squirrel Money I’m continuing to increase my Peer to Peer Lending portfolio with Squirrel. I don’t think I will be adding much more money from now on, as loan demand has dried up a little, while investor supply has increased following the OCR cut. InvestNow Global sharemarkets have been volatile this month largely thanks to trade wars, Trump Tweets, and recession fears. I saw this as an opportunity to invest more while index funds are “on sale”, and have done so by contributing to my core holding on InvestNow, the AMP All Country Global Shares Index Fund. Punakaiki Fund Punakaiki Fund is a company I bought in an Equity Crowdfunding campaign on Snowball Effect back in late 2016. Punakaiki invests in a portfolio of relatively young, high-growth companies, mainly in the software space – I like this as there are not many opportunities to invest in tech in NZ! Punakaiki holds share trading windows every 3 months, in which existing shareholders can trade Punakaiki shares with each other. The shares usually trade at a discount during these trading windows, so I bought a small amount at a discounted price of $19 per share (compared to their valuation of around $22.42). Angel Food I invested a small amount of money in another Equity Crowdfunding campaign this month, Angel Food. They are a fast growing producer of vegan cheese, and supply well known outlets like Hell Pizza and Z (for their vegan pepper mushroom pie). Given veganism and demand for meat and dairy alternatives is rapidly on the rise, I’m confident that Angel Food will continue to grow. Fortunately I don’t have to give up meat to become an investor in this rising trend! Investing news Reserve Bank slashes the OCR On Wednesday 7 August, The Reserve Bank of NZ slashed the Official Cash Rate (OCR) from 1.5% down to a record low of 1%. It was widely expected to be reduced by 0.25% to 1.25%, but no one saw such a big cut coming. This was immediately followed by a spike in NZ share prices, and a sharp fall in the NZD. Bank deposit rates have dropped as a consequence of the rate cut. Here’s a selection of bank savings products and their rate changes from 6 to 12 August: 6 August12 AugustChangeHeartland Direct Call account2.15%1.90%-0.25%Westpac 32 day Notice Saver2.40%2.00%-0.40%Kiwibank 90 day Notice Saver3.10%2.70%-0.40%ANZ 1 year Term deposit3.00%2.85%-0.15% Check out my most recent article for my insights on what you can do about declining term deposit interest rates. Kernel Kernel is a new fund manager that launched this month, with an initial offering of three low cost index funds investing in the NZ sharemarket: NZ 20 – Invests in the 20 largest companies on the NZXNZ Level 9 – Invests in 37 mid-small size companies listed on the NZXNZ Commercial Property – Invests in the 8 Real Estate Investment Trusts (REITs) listed on the NZX Kernel’s fund management fees are 0.39% + a $3 per month account fee (but you can get a 0.10% fee rebate when investing over $25,000). My first impressions are that there are cheaper options available (like Simplicity and InvestNow), and that their three initial funds don’t really offer anything unique over what’s already out there. I will be keeping an eye on this new fund manager, and you can expect to see a review/comparison article soon! Napier Port IPO Napier Port is the latest company to be listed on the NZ sharemarket! They raised $234m in an IPO by issuing new shares at a price of $2.60 a piece. Being a key piece of infrastructure for Hawkes Bay, they plan to use the money to repay debt, and to be able to fund the construction of a new wharf. The shares have been in high demand, immediately shooting up 12% to $2.91 on the commencement of trading, and have since risen further to over $3.10. Money King NZ news I’ve added a couple of very interesting initiatives to the site this month: Shielded Site Shielded Site is an initiative from Women’s Refuge NZ that allows victims of abuse to seek help, without it appearing in their browsing history. I’ve added the Shielded button to the bottom of all pages on Money King NZ. Anyone can add the Shielded button to their site, and several major New Zealand websites like Trade Me, The Warehouse, and Countdown have already done so – find out more at shielded.co.nz Brave Verified Creator Brave is an increasingly popular web browser that automatically blocks ads and trackers. But if you want, you can opt-in to see ads and be rewarded with cryptocurrency tokens, which you can then use to tip your favourite websites or withdraw. This month I’ve become a Brave Verified Creator, which allows users of Brave to reward this site with tips. Download Brave through this link and you’ll also be supporting Money King NZ. Give it a go – I think you’ll be surprised at the insane amount of ads and trackers that are out there on the web. I’ve blocked over 112,000 ads during just a few months of use. Most popular article this month: Simplicity vs JUNO vs BNZ – Battle of the low cost KiwiSaver funds Thanks for all your support! Found this article helpful? Please share, and Follow or Subscribe to keep up with the latest news and posts! More articles Disclaimer The content of this article is based on my personal opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with a qualified financial advisor before making any investment decisions.... Read more...Term deposit rates suck! What you can do – with 5 term deposit tips26 August 2019Late last year I opened a 9 month term deposit with an interest rate of 3.50%. Time has flown by, and now as that term deposit is approaching maturity, I’m facing the prospect of having to reinvest it at a drastically lower rate of around 2.80%. These low rates suck! Interest rates are plummeting everywhere, and with them, the incomes of term deposit holders. Given New Zealanders collectively have $170 billion invested in term deposits, the effect of this will be widely felt. In this article, I’ll briefly look at why rates are falling, alternative investment options, as well as some tips for squeezing extra dollars out of term deposits. Why are rates dropping? The Reserve Bank of NZ has been reducing New Zealand’s Official Cash Rate (OCR). The OCR is essentially a lever that can be used to help push the economy in a certain direction: Reduce the OCR to help boost the economyRaise the OCR to cool down the economy (to prevent severe inflation) The Reserve Bank has been cutting rates over their concern about slowing economic growth both domestically, and globally. Five years ago, the OCR was at 3.50%, and it has been on a downward slope since then. There was a big rate cut this month (August 2019) from 1.50% to 1.00% and the downward slope isn’t over yet, with short-term forecasts suggesting a further OCR cut may be on the cards later this year. You can see a full history of the rate here. The OCR influences the economy by influencing interest rates. Rate cuts hope to stimulate the economy by encouraging people to spend and invest more by decreasing cost of lending (like mortgage interest rates, to give homeowners more spending money), and decrease bank deposit and savings rates (making spending and investing more attractive). I won’t get into too much detail about how this works – you can watch the video below to learn more: Lower rates hurt My current $10,000 9-month term deposit at 3.50% gives me an after-tax income of $189. At today’s rate of 2.80%, I’d only get $151.20. Looking back 5 years, rates of well over 4% were common. At 4.20%, my $10,000 deposit would have earned me $226.80. Incomes from term deposits are quickly approaching half of what they used to be a few years ago. Considering $170 billion is in term deposits, and many people like retirees are using them for their income, rate cuts definitely hurt a lot of people, and will make much of the country rethink the use of term deposits in their investment or savings portfolios. So what can you do about the shrinking interest rates? Fun fact: term deposit rates in early 2008 were over 8%! You can see some data on historical interest rates back to 1964 here Option 1 – Invest in riskier assets Bank Deposits are among the least risky places to put your money. The first option to deal with low interest rates is to invest in riskier assets that have potential to deliver higher returns. 1. Bonds and Peer to Peer Lending Two types of investments that pay regular interest, just like term deposits, are Bonds and Peer to Peer Lending. At the time of writing, Infratil are offering 7 year bonds at a rate of 3.35% – not too much higher than ANZ’s 5 year deposit rate of 3.10%, but you do get the benefit of being able to sell/cash-up your investment at any time. Rates from Peer to Peer Lending start at 6%, but can easily reach 10%. Of course, both bonds and Peer to Peer Lending expose you to a lot more risk – mainly to default risk, where the borrower/bond issuer may get into financial trouble and is unable to pay back your money. 2. Shares Dividends from high dividend yielding shares can be used to replace interest income from term deposits. These are examples (not recommendations) of New Zealand companies that pay a regular, high dividend, and at the time I wrote this (20 August) their gross dividend yields are: Genesis Energy – 6.87%Heartland Bank – 7.62%Air New Zealand – 11.11%Spark NZ – 7.99%Argosy Property – 5.37% However, shares carry even more risk than bonds and peer to peer lending. Companies can lower or cancel their dividend payments, and/or their share prices can fall. The following two are examples of companies that paid decent dividends three years ago, but are now in a sorry state: Sky TV – share price was $4.86, now $1.22. Dividend currently suspended.Fletcher Building – share price was $10, now $4.87. Dividend was completely suspended during 2018. 3. Other There’s many other investment options, and a few examples are: Funds that invest in high dividend paying companies, for example, the Smartshares New Zealand Dividend ETF. This fund currently has a gross yield of 4.90% and is available on InvestNow or Sharesies.Funds that don’t have a dividend focus, but still have a decent dividend yield, for example, the Smartshares NZ Top 50 ETF. This currently has a gross yield of 3.72%.Property – mortgage rates have also gone down thanks to the OCR cut. If you already have a mortgage, you could use your term deposit money to pay it off, offset it, or stick in a revolving credit account (but this may come with its own unique risks). Limitations Investing in riskier assets is definitely not for everyone. Not everyone can afford to or wants to take on more risk. Those investing for the short-term (like those about to buy a house), are best to stick with bank deposits, unless they don’t mind having their house deposit exposed to potential drops of the share or bond markets. Then there are those who are risk adverse. My parents are good examples of this – they got hurt by the 1987 market crash and won’t go anywhere near shares these days. They have left a lot of money on the table by not investing in shares, but at least they sleep better at night, knowing their money isn’t at (high) risk. Also as interest rates fall, buying assets like bonds and shares for their higher yields becomes less effective. Since demand for these assets increase when interest rates fall, their prices increase, reducing their yields. For example, 3.5 years ago the yield on BNZ090 bonds were 5.25%, and has since gone down to 2.50%. Same with Goodman Property Trust – 2.5 years ago it had a dividend yield of 5.6%, now it’s down to 3.7%. Finding quality, high-income producing assets becomes harder and harder as interest rates fall. Option 2 – Stick with term deposits Some people have no choice but to take this option – as mentioned above, many are not in a position to take on more risk. Unfortunately they’ll have to suck it up and accept the lower rates. However, there are a few things you can make sure you’re doing to get the most out of term deposits. Let’s start with an initial term deposit and see how each tip affects the amount of interest we could earn: Initial term deposit – Our initial term deposit will be $10,000 invested for 1 year at 2.75% with ASB. We have a tax rate of 33%. This gives us an after-tax interest income of $184.25 at the end of the 1 year term. 1. Make it a PIE Most banks offer a PIE version of their term deposits (often known as a Term PIE). Term PIEs work the same as term deposits, but have different tax treatment where your interest income is taxed at your Prescribed Investor Rate (PIR). PIRs are capped at 28%, meaning those on 30% or 33% tax rates will benefit from investing in a PIE. Term deposit 1 – With a Term PIE, our deposit will be taxed at 28% instead of 33%. This increases our after-tax interest income to $198, which is $13.75 more than the initial term deposit, and is equivalent to having an interest rate of 2.96%. 2. Compound your interest By default, banks pay you any interest you earn from a term deposit at maturity (at the end of the term). But these days it’s common for banks to offer options to have your interest paid out more frequently (e.g. every 3 months). Further to this, they often offer the option for you to compound (re-invest) the interest into the same term deposit, so that you can earn interest on your interest. Term deposit 2 – By compounding our interest quarterly, our interest income increases to $199.42, which is $1.42 higher than Term Deposit 1. We have now increased our interest income by $15.17 over our initial term deposit. An extra $1.42! I know this tip is hardly worth it – the compounding effect is stronger with higher interest rates. But at least it’s better than letting the bank keep that money. 3. Shop around for better rates Special rates aren’t as common as they used to be, but still worth looking out for. For example, ASB are offering a 7 month term at 3.00% – their highest term deposit rate on offer. However, this comes at a risk as you are forced to reinvest your money earlier (at 7 months vs 1 year), at potentially a much lower rate. It’s also worth looking for better rates at other banks. For your convenience, here’s the links to the term deposit rate pages of our major banks, as well as to interest.co.nz, which has a rate comparison page: ANZ | ASB | BNZ | Kiwibank | Westpac | Interest.co.nz Term deposit 3 – The highest 1 year rate out of the major banks is ANZ at 2.85% (compared to ASB’s 2.75%). This would give us an after-tax return of $206.79, which is $7.37 more than Term Deposit 2 with ASB. We’ve now increased our interest income by $22.54 over our initial term deposit. If you can’t be bothered signing up to a new bank to get the better rate, then asking your existing bank to match the rate is worth a shot. 4. Invest in a riskier bank Smaller banks like Heartland Bank often offer higher interest rates than the main banks. However, these banks have lower credit ratings, so come with higher risk. From Liz Koh’s opinion piece on Stuff.co.nz: Our main banks – ANZ, ASB, BNZ and Westpac have an AA- rating. That’s a probability of default of around one in 300 over five years. By comparison, Co-operative Bank, Heartland Bank and SBS Bank have a rating of BBB which reflects a one in 30 chance of default in five years. In addition, if you’ve had a look at Interest.co.nz‘s rate comparison page you may have also seen credit unions and finance companies on the list. Risk increases exponentially as you get to lower credit ratings, and a finance company with a BB rating has a 1 in 10 chance of default! Given the track record of finance companies in NZ (67 collapses between 2006 and 2012), I’d personally avoid these finance companies. Term deposit 4 – With Heartland Bank we can get an interest rate of 3.05% for a 1 year term deposit. This would give us an after tax return of $221.41, which is $14.62 more than Term Deposit 3 with ANZ. With all the tips combined, we have increased our interest income by $37.16 over our initial term deposit. 5. Stagger maturity dates This tip is a little different so I won’t compare it to the above examples. Its purpose is to address the one of the big downsides of term deposits, which is having your money locked up for a period of time. You can always invest in deposits for shorter terms, or in a saving account, but these come with lower rates – for example, the 3 month rate at Heartland is 2.6%, while their 1 year rate is 3.05% (however, this is less of an issue these days, as the gap between shorter term and longer term rates has fallen dramatically). A potential solution for this is to stagger your maturity dates. For example, Instead of investing $100,000 in one term deposit, you could create four $25,000 term deposits: A deposit maturing in 3 months time (at 2.60%), then reinvested for one year (at 3.05%) A deposit maturing in 6 months (at 3.00%), then reinvested for one yearA deposit maturing in 9 months (at 3.00%), then reinvested for one yearA deposit maturing in 1 year (at 3.05%). This allows you to invest in longer term (and hopefully higher rate) deposits, while having the ability to access $25,000 of your money every 3 months. Longer terms also allow you to lock in your rate for longer, which is ideal in an environment where rates are predicted to fall even further! By staggering the maturity dates like we have above, after one year we’d earn interest income of $2,173.88. In comparison, investing the whole $100,000 into rolling 3 month term deposits, would only earn $1,753.41 in interest. Limitations Unfortunately, these tips won’t dramatically increase your returns. Everyone is in the same low interest rate boat, and there just isn’t any easy way to hack yourself out of this boat. At least New Zealand’s term deposit rates are higher than in many other countries. The below is a comparison of rates for a $10,000 1 year term deposit between the big 4 New Zealand and Australian banks (as at 22 August): New ZealandRateRateAustraliaANZ2.85%1.70%ANZASB2.75%1.50%CBABNZ2.80%1.75%NABWestpac2.75%1.55%WestpacNZ Average2.79%1.63%AU Average Conclusion Falling term deposit rates present a challenge for many savers and investors. Term deposit holders are forced to take on more risk to maintain former levels of income, and those that can’t afford the extra risk are stuck in a difficult position. There are tips you can follow to squeeze more dollars out of term deposits, but they won’t fix the fundamental issue of low rates. However, I also see this situation as an opportunity to learn, gain more investing skills and knowledge, and get out of our comfort zones – declining term deposit rates was what motivated me to invest in assets like shares, bonds, and peer to peer lending in the first place. As for my 9 month 3.50% term deposit, I’m not planning to reinvest it for another term. I’m fortunate to be in a position where I can take on more risk and have been doing so, as you may have seen in my What I’ve been investing in series. Found this article helpful? Please share, and Follow or Subscribe to keep up with the latest news and posts! More articles Buying shares on the NZX – Sharesies vs ASB Securities and Direct Broking16 July 2019 Dealing with Dividends – 5 things to know about them3 September 2019 Which NZ bank savings product is right for you?21 June 2019 Disclaimer The content of this article is based on my personal opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with a qualified financial advisor before making any investment decisions.... Read more...Building an investment portfolio – Simplicity vs InvestNow19 August 2019Building an investment portfolio is something many of us want to do to grow our wealth, and these days there are many options New Zealanders can use to do so. In this article I’m going to take a closer look at Simplicity and InvestNow – both very popular services we can use to invest, but are actually work quite differently. As a quick recap: Simplicity – a Fund Manager. They manage the fund you invest in, taking your money and investing it into assets like shares and bonds.InvestNow – a Fund Platform. A service that offers you a variety of different funds to invest in, like a “fund supermarket”. Here I want to look at building an investment portfolio using both Simplicity and InvestNow, and in doing so, uncover the pros and cons of each service as well as their fees. On mobile? Some tables in this article may be easier to read if you turn your phone sideways 🙂 Portfolio Objectives Before I begin the comparison, here’s the objectives for the portfolio we want to build: Simple – Keep things easy by building a basic investment portfolio using funds that contain bonds and shares. No picking shares in individual companies or buying things like cryptocurrency here.Diversified – To reduce the risk of investing. We want a portfolio that covers a wide area geographically (to spread our risk across different countries), as well as different asset classes.Low Cost – To maximise our returns, the portfolio should have low fees. 1. What’s on offer? Simplicity Simplicity is a fund manager who offer three “Diversified” funds. These funds contain a mix of asset classes like bonds and shares: Growth Fund – contains mostly shares, higher risk, and best for longer term investingBalanced Fund – contains similar levels of shares and bonds, medium risk, and best for medium-long term investingConservative Fund – contains mostly bonds, lower risk, and best for medium-shorter term investing Simplicity also offer NZ Share and NZ Bond funds, but I won’t be looking at these in this article. The are not diversified enough, only investing in our small NZ market, and you can already get enough exposure to NZ shares and bonds through Simplicity’s Diversified funds. Simplicity are best known for their popular KiwiSaver scheme! Check out my comparison between Simplicity, JUNO, and BNZ KiwiSaver schemes here. InvestNow InvestNow is a fund platform that offers over 100 funds. Most of them contain a single asset class – either cash, bonds, shares, property, or even commodities. There are several diversified funds offered on the platform, but they are on the expensive side when it comes to fees. Therefore to build an investment portfolio on InvestNow, it’s best to take a DIY (do-it-yourself) approach. Firstly, by picking the funds we want to invest in, and secondly, determining the weighting of each fund – the percentage of our money we want to allocate to each fund. Fun fact: InvestNow were able to offer Simplicity’s funds on their platform for a very short period of time due to a “mix-up”. Simplicity quickly had their funds removed from the platform after this was discovered. A shame for all Kiwi investors. 2. Portfolio comparison Time to take a deeper look at what assets could make up our portfolio when using Simplicity and InvestNow. Simplicity Simplicity’s Diversified funds target investing in the following asset classes, with only each asset’s weighting differing between the three funds: GrowthBalancedConservativeCash2%2%2%NZ Bonds7.5%16.5%36%Global Bonds12.5%25.5%40%NZ Shares~21.5%~15.5%~7%Australian Shares~8%~5.5%~2.5%Global shares48.5%35%12.5% These funds contain shares and bonds from NZ and Australia, as well as all around the world, so are diverse enough for us to achieve our objective of a simple, diversified, and cheap investment portfolio with just one fund! Easy as! InvestNow With over 100 funds on the platform, investors on InvestNow have to decide for themselves which ones to invest in. There are a many approaches we could take to select funds for a portfolio, and I want to explore two of them: Replica Portfolio The first approach I want to explore is to build an InvestNow portfolio that replicates Simplicity’s Diversified funds (this will also allow us to make a fairer comparison between the two services). We just have to pick funds in InvestNow that align with each asset class that Simplicity invests in: Cash – This can be ignored as it only makes up 2% in each fund – the cash used for liquidity purposes (allowing people to withdraw money from the fund), rather than investment purposes.NZ Bonds – Sadly there’s no cheap, standout NZ Bond Fund on InvestNow. I will just go for the cheapest one available, the AMP NZ Fixed Interest Fund. Global Bonds – I’ll use the Smartshares Global Aggregate Bond ETF to get our global bond exposure.NZ Shares – I’ll use the AMP NZ Shares Index Fund to get our NZ share exposure.Australian Shares – This asset class is hard to replicate on InvestNow. Simplicity invests in the top 300 companies on the Aussie market. The closest fund on InvestNow is the Smartshares Australian Top 20 ETF, which makes up around 50% of the Aussie sharemarket, but still misses out on a big chunk of the market. An alternative would be to go for the Australian Mid Cap ETF which invests in the 51st to 100th largest companies. Global shares – I considered using InvestNow’s cheap Vanguard International Shares Index funds to get our global shares exposure, but it’s a Foreign Investment Fund, and taxed differently. I want to remove tax as a variable in this comparison, so will go for the AMP All Country Global Shares Index Fund in this replica portfolio. The result is what I will call our Replica Growth, Balanced, and Conservative portfolios: ReplicaGrowthReplicaBalancedReplicaConservativeAMP NZ Fixed Interest10%15%35%Smartshares Global Bond10%30%40%AMP NZ Shares Index20%20%10%Smartshares Aus Top 2010%0%0%AMP Global Shares Index50%35%15% I have rounded out the weightings to be at least 10% (to make it easier to work around InvestNow’s minimum investment amount of $50). I have left out Australian shares for Balanced and Conservative Replicas as their weightings fall under 10% (and we won’t be missing out on much, given Aussie makes up only 1-2% of the global market). That was a bit of work to create the Replica portfolios! It took five InvestNow funds just to replicate one Simplicity fund! 3-Fund Portfolio The second portfolio building approach I want to look at is the 3-Fund Portfolio, and is much simpler. The 3-Fund portfolio is a popular investing strategy, with the idea of keeping your portfolio minimalistic and easy to maintain, while still being very diversified. The three asset classes that typically make up a 3-Fund Portfolio are Bonds, Domestic Shares, and International Shares. We can build the following 3-Fund portfolio, with weightings that approximately follow our above growth funds: Bonds – Smartshares Global Bond20%NZ shares – AMP NZ Shares Index20%Global shares – AMP Global Shares Index60% There are many possible variations to the above. You could increase your weighting towards bonds for a more conservative portfolio, drop bonds altogether for 2-Fund Portfolio, or make it a 4-fund portfolio by adding a property fund. The main requirement is to keep it simple. 3. Fee comparison Fees apply to both Simplicity and InvestNow. I’ve done some math to see which one works out cheaper. Simplicity Simplicity charges the following for all their Diversified funds: $30 annual Membership Fee0.31% Fund Management Fee If you hold more than one investment fund with Simplicity, the Membership Fee is only charged once. InvestNow InvestNow does not charge a membership or account fee, but there are still fund management fees that vary between each fund. Below are the management fees for the funds contained in our Replica and 3-Fund portfolios. AMP NZ Fixed Interest – 0.57%Smartshares Global Bond – 0.30%AMP Global Shares Index – 0.38%AMP NZ Shares Index – 0.33%Smartshares Aus Top 20 – 0.60%AMP Global Shares Index – 0.38% Let’s look at the overall fees that would apply under each of the portfolios we built, and see how they compare to Simplicity: Replica Portfolio For our Replica Growth portfolio, the weighted average fee is 0.40%. This means Simplicity’s Fund Management Fee is cheaper by 0.09% – However, when accounting for Simplicity’s $30 Membership Fee, our InvestNow Replica Growth portfolio actually works out cheaper than Simplicity’s funds until you reach a balance of $32,258 (as you need a large balance to offset the $30). For the Replica Balanced portfolio, the weighted average fee is 0.37% and cheaper than Simplicity until a balance of $46,511, while the Replica Conservative portfolio has a weighted average fee of 0.41%, making it cheaper than Simplicity until $30,151. In summary: InvestNow PortfolioWeighted avg. feeCheaper than Simplicity untilReplica Growth0.40%$32,258Replica Balanced0.37%$46,511Replica Conservative0.41%$30,151 As a variation, If we ignore the tax implications, and go for the Vanguard International Shares Index Fund, instead of the AMP Global Shares Index for our global shares exposure, our Replica Growth portfolio would be even cheaper with a weighted average fee of 0.31%. You would need a balance of over $1 million for Simplicity to work out cheaper than InvestNow! 3-Fund Portfolio Our 3-Fund portfolio has a weighted average fee of 0.35%, making it cheaper than investing in Simplicity until you reach a balance of $68,182. Fee comparison table Below are the annual fees for investing in Simplicity vs our InvestNow Replica Growth and 3-Fund Portfolios, for various amounts invested. Simplicity is relatively expensive at low balances, but it does become cheaper as your balance grows: $5,000$10,000$25,000$50,000SimplicityDiversified$460.92%$610.61%$1080.43%$1850.37%InvestNowReplica Growth$200.40%$400.40%$1010.40%$2020.40%InvestNow3-Fund$180.35%$350.35%$890.35%$1770.35% Do you want to do your own comparison between Simplicity and your personal InvestNow portfolio? You can take a copy of the spreadsheet I used to do the calculations here (must have a Google account to copy it) 4. Other considerations There are many other pros and cons to consider when deciding between Simplicity and InvestNow. Simplicity Less work – Building a portfolio with Simplicity is a lot easier and requires less work. We can achieve a diversified investment portfolio with just one fund, as opposed to 3-5 with InvestNow.Rebalancing – Over time our funds in InvestNow will grow at different rates, and we have to perform rebalancing to get them back to our target weightings. E.g. If the AMP Global Shares Index grows to 60% of our Replica Growth portfolio, we need to sell some units (or buy units in other funds) to get its weighting back to our 50% target. Simplicity’s funds automatically perform this rebalancing for us.Responsible Investing – Simplicity has a stricter Responsible Investing Policy. For example, while the AMP All Country Shares Index excludes tobacco related companies, Simplicity also excludes fossil fuels, gambling, alcohol, and adult entertainment related companies and more.Kids – Simplicity waives the $30 Membership for under 18s – for kids, this makes their funds work out cheaper than our InvestNow Replica and 3-Fund portfolios. InvestNow Minimum Investment – Simplicity requires a $5,000 minimum to invest in their funds. With InvestNow you only need $50 per fund to get started.Regular Investment Plans – You can use InvestNow’s Regular Investment Plan feature to make it significantly easier to set up a portfolio containing multiple funds. You just need to set how much money you want to invest on a regular basis, set the weighting of each fund you want to invest in, deposit money, and InvestNow will do the rest. Spreads – Some funds on InvestNow charge a spread when you buy or sell a fund. This is effectively a one-off a fee that varies by fund (but typically around 0.1%) to cover the transaction costs relating to buying and selling. Simplicity’s funds do not charge spreads – instead the transaction costs are borne by investors already invested in the fund, so having no spreads does not automatically make Simplicity cheaper.Tax – Although we’ve tried to minimise tax differences by avoiding the Vanguard fund, there is still a minor tax difference with the Smartshares ETFs that we used in our InvestNow portfolios. These are listed PIEs, so are always taxed at 28% – those on lower tax rates must claim back any additional tax paid. More info on this Reddit post.Specialised Funds – InvestNow offers funds that invest in areas that Simplicity’s funds don’t have much exposure to – such as Healthcare, Robotics & AI, Emerging Markets, and Property.DIY Weightings – You can adjust which asset classes you want to invest in and their weightings yourself, giving you ultimate control over your portfolio. With Simplicity you are stuck with their prescribed asset classes and weightings. Here’s an example of a more aggressive 3-Fund Portfolio I’ve created, which contains property instead of bonds. It has a fee of 0.37%, making it cheaper than Simplicity until a balance of $46,875: Do you want to do your own comparison between Simplicity and your personal InvestNow portfolio? You can take a copy of the spreadsheet I used to do the calculations here (must have a Google account to copy it) Conclusion When it comes to building an investment portfolio, I don’t feel there’s a clear winner between Simplicity and InvestNow. With both services we are able to achieve our objectives of a simple, diversified, low fee portfolio very well. I guess this is similar to the “hire a pro vs DIY” debate? Simplicity, the “hire a pro” option is more expensive at lower balances, but allows you to achieve a diversified investment portfolio by just putting your money into one fund. But I think Simplicity’s weakest point is the $5,000 minimum investment. Overall, they are best if having a hands-off portfolio is important you, or if you have larger balances (of at least $30,000). InvestNow, the “DIY” option is cheaper at smaller balances, but requires more work and thought from the investor to figure out what and how much of each fund to invest in. InvestNow’s strengths are the low minimum investment of $50, and the flexibility to build a portfolio just how you want. They are best if having more control, being able to invest lower amounts, and minimising fees (particularly at lower balances) is important to you. I personally use InvestNow to build my investment portfolio. I don’t have enough money invested for Simplicity to work out cheaper for me, and don’t like Simplicity’s heavy weighting towards NZ and Australia in their funds – I already have enough exposure to these countries through my other investments. Using InvestNow means I can build and control my portfolio exactly how I want it 🙂 Would you like to see me do a head-to-head comparison between any other investment services? Get in touch here, or via Facebook or Twitter. Found this article helpful? Please share, and Follow or Subscribe to keep up with the latest news and posts! More articles 9 ways to invest in New Zealand1 July 2019 What happened to Property Crowdfunding in New Zealand?18 July 2019 3 tips to get the most out of KiwiSaver19 June 2019 Disclaimer The content of this article is based on my personal opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with a qualified financial advisor before making any investment decisions.... Read more...Simplicity vs JUNO vs BNZ – Battle of the low cost KiwiSaver funds12 August 2019KiwiSaver has been around since 2007, but Simplicity shook things up in 2016, when they launched new KiwiSaver funds with dramatically lower fees than most other funds out there. They had good reason to shake things up, with the average Growth fund charging fees of around 1.4%, and over a lifetime of investing in KiwiSaver, these high fees can impact your retirement savings by hundreds of thousands of dollars. Since 2016 we’ve had the launch of more low cost KiwiSaver providers – JUNO who launched in August 2018, and BNZ who revamped their KiwiSaver scheme to become a low fee one in May 2019. In this article I’ll be comparing the Simplicity, JUNO, and BNZ schemes. What are the pros and cons of each scheme? Are they really as cheap as they advertise, and if so, are they really worth it? I will also compare against the Milford KiwiSaver scheme as a “benchmark” provider – Milford aren’t a low cost provider, but have been the top performing fund manager over the last 5 years. Do they offer anything that the low cost providers don’t? This comparison is based on data from each provider’s Quarterly Fund Update documents for the quarter ending 30 June 2019. Quarterly Fund Updates are legally required to be published by providers, and contain details on a fund’s fees, performance, and what they’re investing in. 1. What’s on offer All three low cost KiwSaver providers, as well as Milford, our benchmark provider, offer Conservative, Balanced, and Growth funds, which we’ll be comparing throughout this article. Simplicity Simplicity started up in 2016 and call themselves a low-cost, ethical KiwiSaver provider. They use a passive investing strategy and are a not-for-profit provider, with an aim to leave their members with more profit and money for retirement. Members$ Under ManagementConservative1,233$46,140,682Balanced3,897$131,793,640Growth16,983$509,813,377 Simplicity also offers the Guaranteed Income Fund for members over 60 – this works as an annuity/insurance plan (charging a 1.3% fee as an insurance premium, for a total fee of 1.61%), giving a guaranteed income to the member for the rest of their life (once they qualify for withdrawing their KiwiSaver), even if the money in their fund runs out. JUNO JUNO is a relatively new KiwSaver scheme, launching in August 2018. The scheme is managed by PIE funds, a boutique investment manager who’ve been around since 2007. Unlike Simplicity, they use an active investing strategy, where a fund manager actively makes decisions about where to invest the scheme’s money, with the aim to outperform the market. Members$ Under ManagementConservative106$2,515,510Balanced330$7,432,429Growth1,879$42,138,246 BNZ It’s not often you associate big banks with low fees. BNZ used to offer a typical high-fee (and problematic) KiwiSaver scheme. However, BNZ completely revamped their scheme in May 2019, adopting a passive investing strategy and dropping their fees to be among the lowest in New Zealand. Members$ Under ManagementConservative67,152$683,531,633Balanced28,053$398,563,260Growth37,293$490,890,844 BNZ also offer Cash, Moderate, and First Home Buyer funds. Milford Our benchmark provider, Milford, has been a KiwiSaver provider since 2010, with their massively popular Growth Fund at $1.36 billion in size. They use an active investing strategy, and are far from being the cheapest provider, but their funds have been the best performing KiwiSaver funds over the last 5 years. Members$ Under ManagementConservative2,708$98,273,773Balanced7,544$309,806,848Growth25,294$1,360,794,725 Milford also offers an Aggressive KiwiSaver fund, which they have just launched this month. 2. Fees All KiwiSaver providers charge fees, which are typically made up of: a Variable Management Fee (which may include performance fees), charged as a percentage of your balancea Fixed Membership Fee, charged monthly or annually as a fixed dollar amount Having low fees are the main selling point of our low-cost providers, and they aren’t afraid to show off this fact on their sites. They aim to significantly undercut traditional providers like Milford, potentially saving an investor hundreds of thousand of dollars over a lifetime of investing. The below table shows the fees charged by Simplicity, JUNO, BNZ, and Milford: Variable feeFixed feeSimplicity0.31%$30 per yearJUNOn/a (0%)Tiered fee based on balance:Under $5,000: Free$5,000-$24,999: $5/month$25,000-$49,999: $15/month$50,000-$99,999: $25/month$100,000-$1m: $50/monthOver $1m: $100/month per $1mBNZConservative: 0.50%Balanced & Growth: 0.58%n/a ($0)MilfordConservative: 0.95%Balanced: 1.29%Growth: 1.06%$36 per year We can convert this into the below table which shows the percentage fee, for different amounts invested in each provider’s Growth fund: $2,500$5,000$10,000$20,000$40,000Simplicity1.51%0.91%0.61%0.46%0.39%JUNO0.00%1.20%0.60%0.30%0.45%BNZ0.58%0.58%0.58%0.58%0.58%Milford2.50%1.78%1.42%1.24%1.15% Simplicity are widely regarded as the cheapest provider, but that isn’t true if you have a smaller balance – the 1.51% fee at $2,500 is quite high. Although, Simplicity’s fee trends down as your balance grows largerJUNO‘s fee (as a %) jumps up and down as you move between fee tiers, although remains consistently cheap. JUNO’s best feature is zero fees for balances under $5,000BNZ‘s fee stays at a consistently low 0.58% for all balancesMilford are significantly more expensive than our low-cost funds across all balances We can also work out what provider is cheapest for each precise amount invested. BNZ is the cheapest provider for only between $5,000 and $10,345, while Simplicity doesn’t become the cheapest until you reach a balance of $25,000. JUNO is the cheapest for various different balances, but are clear winners for balances under $5,000 or over $183,872: BalanceCheapest ProviderUnder $5,000JUNO$5,000 – $10,345BNZ$10,346 – $24,999JUNO$25,000 – $48,387Simplicity$48,388 – $49,999JUNO$50,000 – $87,097Simplicity$87,098 – $99,999JUNO$100,000 – $183,871Simplicity$183,872 or moreJUNO *An earlier version of this table (published on social media) incorrectly had Simplicity as the cheapest between $10,346 and $24,999. This has been corrected above. 3. What the funds are invested in For each type of fund, we would expect to see them invested in the following assets (their investment mix): Conservative: Mostly bonds and cash to reduce volatility and preserve capital over the short-medium termBalanced: Roughly evenly split between bonds and sharesGrowth: Mostly shares to achieve high growth over the long-term Each fund has an actual investment mix (what asset classes they’re actually invested in) and a target investment mix (what the fund manager intends the funds to be invested in). Below are each fund’s actual investment mix as at 30 June 2019, with their target investment mix in brackets: Conservative Funds CashBondsSharesSimplicity4.28% (2%)74.04% (76%)21.68% (22%)JUNO*92.03% (65%)1.48% (10%)6.42% (25%)BNZ38.69% (35%)42.06% (45%)19.25% (20%)Milford^6.72% (6%)79.25% (76%)13.16% (18%) *0.07% other; ^0.86% other Balanced Funds CashBondsSharesSimplicity3.34% (2%)41.08% (42%)55.58% (56%)JUNO*70.95% (20%)5.40% (20%)23.39% (60%)BNZ7.09% (5%)42.71% (45%)50.20% (50%)Milford^9.45% (8%)32.96% (31%)56.99% (61%) *0.26% other; ^0.60% other Growth Funds CashBondsSharesSimplicity3.23% (2%)19.49% (20%)77.28% (78%)JUNO*52.01% (20%)0.00% (0%)47.47% (80%)BNZ7.43% (5%)23.09% (25%)69.48% (70%)Milford^7.77% (6%)20.11% (14%)71.15% (80%) *0.52% other; ^0.97% other Simplicity – They are spot on with their actual asset allocations being very close to their targets. It’s what you get from passive investing – they have a plan, and they stick to it (as opposed to trying to time the market), removing the need for an expensive team of fund managers making decisions on where and when to invest. JUNO – You’ll notice a common theme among JUNO funds – they’re holding bucketloads of cash. This is because share prices are at historic highs, and the global economic outlook is uncertain, so they’re trying to time the market by saving cash to buy shares when prices drop. This demonstrates their active investing strategy – although this doesn’t guarantee better performance and adds risk – they’ll look like geniuses if sharemarkets plummet sometime soon, but they’ll look like fools if the markets continue to rise, causing JUNO’s performance to suffer from an underexposure to shares. BNZ – BNZ have the least aggressive funds, for example, the Growth fund targets only 70% invested in shares, compared to approximately 80% for other providers. This feels too conservative to me, given people enrolled in Growth funds can potentially have decades to go before retirement, and will likely result in this fund performing worse than our other Growth funds. Milford – Milford’s target asset mixes aren’t too much different from Simplicity’s. Although they have demonstrated some flexibility with their active investing strategy, holding slightly more bonds than their target in the growth fund, as share valuations are high, making it hard to find value in the sharemarket. Responsible Investing KiwiSaver providers have come under fire in recent years for investing in controversial industries such as those dealing with firearms, tobacco, fossil fuels, and nuclear weapons. As a result, many providers now have Responsible Investment Policies, excluding certain types of companies from their portfolios. Simplicity, JUNO, BNZ, and Milford all have Responsible Investment Policies which exclude companies dealing with controversial weapons, tobacco, and cannabis. Simplicity and JUNO take their exclusions further, banning gambling and adult entertainment companies from their portfolios. JUNO’s KiwiSaver scheme exclusions But Simplicity has the most exclusions of them all, banning companies involved with alcohol and fossil fuels in addition to the above. Alcohol sure does have the potential to cause harm in our society, but my personal opinion is that excluding alcohol companies is taking it a step too far. What’s next? Banning fast food operators and soda manufacturers for causing obesity? Where do you draw the line between ethical and non-ethical companies? 4. Performance Performance, how much a fund returned, is not the best criteria to look at when comparing funds – past performance doesn’t guarantee future results. It’s still a handy metric to look at (particularly at long-term returns), as we can spot any consistent under-performers, or any consistent outperformers. Unfortunately, we don’t have enough long-term data to make any meaningful performance comparisons. Only BNZ and Milford schemes have been around for over 5 years, and only Milford’s Growth Fund has been around for 10 years (returning 13.2%/year over that time). Below is the limited performance data we do have. Returns are after fees and before tax *JUNO’s returns are for the year between August 2019 and July 2019, and are after tax, but before fees (they have not been running long enough to release their standardised 1 year performance data). Conservative Funds Past year’s returnsAvg. return over 5 yearsSimplicity8.03%n/aJUNO*2.61%n/aBNZ4.92%5.46%Milford6.90%7.82% Balanced Funds Past year’s returnsAvg. return over 5 yearsSimplicity8.63%n/aJUNO*5.37%n/aBNZ6.74%8.00%Milford7.76%10.25% Growth Funds Past year’s returnsAvg. return over 5 yearsSimplicity9.21%n/aJUNO*11.79%n/aBNZ7.20%9.24%Milford7.89%11.75% Simplicity‘s funds have had the best performance in the past year. But a one-year timeframe is too short to make any meaningful conclusions. Going forward, Simplicity will deliver an market average performance each year, since they use a passive strategy – the idea behind this being that it’s very hard for an active fund manager to beat this average year after year. We only have BNZ and Milford to compare over a 5-year period, and BNZ has been lagging behind Milford by quite a bit (over 2% per year!). Although most of this is under BNZ’s old high-fee fund model. Can they turn around this under-performance with their revamped scheme? JUNO‘s performance so far is interesting. It was abysmal for their Conservative and Balanced funds – not surprising given they’re mostly invested in cash. Their Growth fund has performed very well though. Another interesting fact is that JUNO’s manager, PIE funds, has achieved returns of 16.6%/year since December 2007 with their flagship Growth Fund. It would be impressive if they could achieve similar results with JUNO’s KiwiSaver funds. 5. Additional features Here are additional features of each provider that you may want to consider when deciding on one, although none of them appear to be anything major. Simplicity The $30 annual membership fee is waived for under 18s. You’ll still be charged the 0.31% fund management fee15% of Simplicity’s fund management fees go to charity JUNO All fees are waived for under 18s, although there are probably very few under 18s who would pay the fee (for having a balance of $5,000 or more) anywayYou get a free digital subscription to the JUNO Investing magazine (worth $15.80 per year) BNZ If you’re a Flybuys member, you can covert your points into KiwiSaver contributions towards your BNZ KiwiSaver fund at a rate of 108 points for a $20 contributionBNZ has a physical presence through their store/branch network Milford Milford issues monthly reports on their funds, including commentary on the funds’ performance, and what companies they’ve been investing inMilford are the winners of Consumer NZ’s People Choice Award for KiwiSaver customer satisfaction in 2018 and 2019. This award covers “factors such as investment performance, client service and client communications” Limitations There are a couple of limitations to picking Simplicity, JUNO, and BNZ KiwiSaver funds based purely on their low fees: Low fees don’t guarantee outperformance Having low fees don’t guarantee outperformance. The most important measure is a fund’s returns after fees – it’s better to have a fund that charges 1% and consistently returns 10% per year, than a fund that charges 0.5% but only returns 8% per year. Although, it’s rare (but still possible) to find such a fund that can consistently outperform the market. Low cost providers don’t offer aggressive funds (yet) The Growth funds offered by these low cost providers may not be aggressive enough for many investors. For example, Simplicity allocates 22% of the fund to cash and bonds. Those with a higher risk tolerance and a long investment timeframe may prefer their KiwiSaver fund to be 90-100% invested in shares to maximise their long-term potential returns. None of our low cost providers offer an “Aggressive” fund yet. The best alternative provider would have to be SuperLife, which allows you to choose precisely what asset classes to invest in, from 38 different options. You could allocate your KiwiSaver to 100% global shares, or 100% Emerging Markets shares, or any combination you like. Their fees are slightly higher with a $30 annual membership fee, and fund management fees ranging from 0.49-0.73%. Conclusion JUNO is a fantastic option to start your KiwiSaver off with. Having no fees for balances under $5,000 and under 18s is an incredible deal. The scheme is managed by a fantastic fund manager, PIE Funds, however we’re yet to see whether PIE’s great track record will translate into their future performance, and into the KiwiSaver space. BNZ‘s KiwiSaver scheme has struggled in the past, but they are heading in the right direction with their new low cost model. They are even cheaper than Simplicity at low balances. Apart from that, I don’t see anything major that differentiates BNZ from the other providers. The thing I like least about their funds is that their allocation to shares is lower than other providers, which will probably negatively impact returns over the long-term. Looking at Simplicity, I can see why they’re so popular. With their passive investing strategy, they stick to their target asset allocations, so you know exactly what you’re investing in, and there’s no messing around with trying to time the market. Simplicity’s fees are cheap, but they aren’t exactly as cheap as people suggest they are for low balances (compared to JUNO and BNZ), only becoming the cheapest provider after you reach $25,000. Our benchmark provider Milford, has fees significantly higher than the above providers. Apart from their great performance so far, they offer nothing special to differentiate themselves from others. Milford will have to work hard to continue their great performance into the future, to justify their high fees. As for me, I’m with Milford’s Growth fund, and have been for a few years now after switching from Westpac’s scheme. I am tempted to do so, but right now I’m in no rush to switch to a low cost provider, as I’ve been happy with Milford’s performance and communications – but I’ll be keeping Simplicity and JUNO in mind if my thoughts change. Found this article helpful? Please share, and Follow or Subscribe to keep up with the latest news and posts! More articles How to buy Bitcoin in New Zealand16 June 2019 Which NZ bank savings product is right for you?21 June 2019 Shopping for ETFs – Sharesies vs Hatch16 September 2019 Disclaimer The content of this article is based on my personal opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with a qualified financial advisor before making any investment decisions.... Read more...Peer to Peer Lending review – Harmoney4 August 2019Harmoney is New Zealand’s first and largest Peer to Peer (P2P) Lending platform launching back in September 2014. They’ve since facilitated the lending of over $1.2 billion across over 60,000 loans, significantly more than any other P2P Lending platform in NZ. Harmoney was my very first investment (outside of bank deposits), connecting me and over 8,000 other investors directly to people borrowing money, giving us the opportunity to earn “the lion’s share” of interest. Following on from my article 5 things to know about investing in Peer to Peer Lending, I’ll be reviewing the Harmoney platform. What are their returns, risks, fees, and features like? Is it worth investing on this platform? This is the first article in my Peer to Peer Lending review series:Article 1 – Harmoney review (this article)Article 2 – Lending Crowd reviewArticle 3 – Squirrel review (coming soon) Disclosure: I actively invested in Harmoney between February 2015 and June 2016. Since then I’ve only been on the platform to withdraw funds as my loans get repaid and check how things are going. While all factual information I’ve reported should be accurate, my subjective thoughts and experiences on the platform may differ from someone who has more recently been active on the platform. 1. Getting Started Why invest through Harmoney? Harmoney allows borrowers to borrow between $3,000 and $70,000. Each loan is split up into $25 lots called “notes”, and then listed on the marketplace for lenders to invest in. As a lender, all you need to get started with Harmoney is to invest in one note, making the minimum investment amount a very accessible $25. Your money can be invested in either 3 or 5 year loan terms, across 30 different risk grades between A1 and F5 (more on that below). There’s no way to withdraw your money early, apart from the monthly loan repayments you’ll get from borrowers over the term, so make sure the terms suit you before investing. Once you’ve signed up for an account, and deposited money, the process for investing in loans is pretty simple. You start by going into the Marketplace where you’ll be presented with a list of loans available to invest in, along with each loan’s term, interest rate, and risk grade. Loan listing on the Harmoney Marketplace If you expand each loan, Harmoney allows you to see basic borrower details like their income, age range, employment, and the infamous borrower comments. I quite liked reading the borrower comments and looking at borrower details, as it allows you to know exactly what you’re investing in, and filter out borrower types that you don’t like. My experience – What did I invest in? My strategy was to invest in risk grades between A4 – E5. I thought grades A1-A3 offered an interest rate that was too low, while F grades were too risky. I also stuck exclusively with 3 year loans as I was just trying out P2P Lending and didn’t want my money locked in for the longer 5 year period. Overall I started with an initial $500 investment in the platform, and built that up to just over $4,000. 2. Potential Returns Interest Harmoney gives you the potential to earn Interest of between 6.99% and 29.99% on each loan. This compares favourably with other P2P Lending platforms, Lending Crowd (6.89% – 18.96%) and Squirrel (6% – 8.5%). Investors receive interest every month as part of a borrower’s loan repayments (each repayment also consists of principal repayments), which you can then withdraw or reinvest into more loans. You’re the one lending the money, and taking the risk, so you’re the one who should get the returnsHarmoney Investing in higher risk grades gives you a higher potential return. Having such as wide spread of risk grades gives investors a lot of control over what returns they want to chase, and the risk they want to be exposed to. Harmoney’s interest rates for each risk grade Harmoney uses a statistic called Realised Annual Return (RAR) to measure your returns (before tax). RAR takes interest earned and subtracts fees and any loan defaults. At time of writing, the average RAR on the platform for retail investors is 12.32%, and has reduced slightly over time as Harmoney’s fees have increased, and interest rates charged to investors have dropped (in the past they were up to 40%!). Graph showing RAR over time Payment Protect There is a second source of returns you can make through Harmoney and that is Payment Protect. This is essentially a type of insurance that borrowers pay for, that allows them to skip repayments in the case of death or terminal illness (for “Partial cover”), as well as disability and redundancy (if they take on “Complete cover”). Harmoney says about 30% of loans have Payment Protect attached to them. The below table shows how much a borrower has to pay on top of their loan to get Payment Protect. Lenders will only earn part of the Payment Protect income though, thanks to a complicated waiver and fee system (more on that later). However, Harmoney suggests loans with Payment Protect attached can return an additional 1% on average, compared to loans without Payment Protect. Payment Protect fees for borrowers My experience – What returns did I get? I achieved a RAR of 13.47% – Much better than putting money in the bank, and I enjoyed getting interest payments every month as I could reinvest that into more loans to compound my investment. I did not invest in loans with Payment Protect as I found it was too complicated for something that would only get you an extra 1% return. As many people say, never invest in something you don’t fully understand. 3. Risk Charge-offs The key risk when lending money through Harmoney is that the borrower doesn’t pay you back (“defaulting” on the loan). When this happens, your loan is “charged-off”, and you lose any money invested in that loan which hasn’t already been repaid. You’re the one lending the money, and taking the risk, so you’re the one who pays when s#!t hits the fanMoney King NZ Harmoney estimates their loans will default at a rate starting at 0.05% per annum for A1 grade loans, increasing to 9.50% for the riskiest F5 grade loans. All loans on Harmoney are unsecured. Harmoney is yet to go through an economic recession, so it is not yet known how the platform will perform when times get tough and unemployment increases. Estimated default rates Harmoney uses fractionalisation to mitigate the impact of loan charge-offs, as each loan is split into $25 notes. This means that investors only need to expose $25 of their money to each loan, and can spread their money across a diverse range of loans. If one loan is charged-off, the investor will only lose the notes they’ve invested into that loan, rather than all of their money. Arrears Arrears are when a borrower misses or does not make their loan repayments on time, but are have not yet defaulted. The impact on investors is that they receive their money later than expected, and arrears often turn into defaults/charge-offs. Loans in higher risk grades are more likely to be in arrears than lower risk grades (as shown in the graph below). You can read more about Harmoney’s process for handling arrears on this page. Arrears as a proportion of loans in each risk grade Harmoney sometimes offers borrowers who are in arrears to enter an “Unforeseen Hardship” payment plan, where they can pay off the loan with smaller repayments over a longer period of time. Below you can see one of my loans which was supposed to be repaid on 3 May 2019 – instead it still has $19.10 outstanding, with the borrower making very small repayments (their last repayment was $0.35 on 24 July 2019). This loan was supposed to be paid off by 3/5/19, but it still has $19 outstanding This arrangement is better than having a loan charged-off completely, but it would be better for this to be more transparent to the lender – there is nothing on the UI to state that the borrower is on a payment plan. Payment Protect Waivers if a loan you’ve invested in has Payment Protect, and the borrower suffers a “Waiver event” (see table below), they can skip their repayments to you for the duration of the waiver (meaning you completely lose any principal and interest you would have received during that time). Personally I don’t like the idea of investing in Payment Protect loans as it adds another layer of risk for little return – you essentially act as an insurer and take the loss if something goes wrong. The events that each Payment Protect plan covers My experience – Did the risk occur for me? I haven’t had the best experience with charge-offs, even having a loan in the very lowest risk grade (A1) charged-off 🙁 . Overall I have had $345.48 charged-off. Out of $1155.41 in interest earned, that equates to 30% of my income lost to charge-offs. Although this high percentage can be partially explained by the fact that I stopped investing in June 2016, resulting in my interest earned gradually decreasing, while my charge-offs increased as time went on. As for arrears, I still have three loans outstanding (on payment plans), even though they should have all been paid off by June 2019. Fortunately it’s only a small amount of money outstanding, but it does prevent me from closing my account for good. 4. Platform Fees Harmoney has a tiered fee structure charging between 15 and 20% of the interest you earn, depending on how much money you have invested with them. This fee structure started in June 2016. Harmoney’s fee structure Prior to June 2016, Harmoney had a different fee structure where lenders paid a service fee of 1.25% on all principal and interest repaid to them. This fee structure was much cheaper and equated to between 5-6% of interest earned. However, it attracted complaints as the fee was charged even in cases where borrowers repaid their principal early (which meant lenders paid a fee just to have their principal repaid). Another fee you’ll pay if you invest in Payment Protect loans are Payment protect fees. This is a 20% commission of the Payment Protect income, plus another 15% annual management fee. The table below (and this link) shows the calculation of a lender’s potential income and fees for a loan with Payment Protect. It is way too complicated for me, and would benefit from some simplification. Does working out Payment Protect returns and fees really have to be this complicated? My experience – Fees I decided to stop investing with Harmoney in June 2016 when they raised their fees to the current level of 20%. Even though the returns I was getting were great, I felt that giving Harmoney a 20% share of my returns was way too much, given that I was undertaking all the risk. Perhaps at a higher tier the fee (which drops to 15-17.5%) would feel more fair. But it is a lot of money you need to invest ($10,000+) to get to those tiers. 5. Platform Features Harmoney’s platform is one of the most feature-rich: Auto-Lend – allows you to automatically invest in loans based on criteria set by you (such as risk grade, age band, residential status). Means you don’t have to be hands-on in picking and placing orders in loansDirect debit – automatically takes funds from your bank account, so good for making regular investmentsAuto-withdraw – allows you to automatically withdraw any excess cash you have on the platform to your bank account every week Reports – see a filterable list of every loan you’ve invested in, its status, how much interest you’ve earned, and how much is left to be repaidPlatform Statistics – a page that gives you heaps of statistics about the platform such as borrower demographics, amount lent, and average returns. Well worth a look, and adds a lot of transparency to the platform Report showing my active loans A major feature missing from Harmoney is a secondary market, where you can sell your loan investments to get your money out early. You will have to wait for borrowers to gradually pay your loans back before you’re able to withdraw your money from the platform. My experience – Platform features While they are handy, I didn’t use any of the special features of the site like Auto-Lend. You had to hold a large amount of cash in your account for Auto-Lend to work – this is because the Auto-Lend function gives priority to lenders holding a high proportion of cash. I preferred to manually invest to keep my idle cash balances to a minimum, and I didn’t mind doing so by logging into the platform a couple of times a day. This also gave me the benefit of knowing exactly what kinds of loans I was investing in. 6. Other Talking Points Loan availability At times there can be very few loans for lenders to invest in. Loan availability is made worse by the fact that Institutional investors (like Heartland and TSB Banks) are taking up around 80% of all loans, leaving only crumbs for retail investors (individuals). This also means that Harmoney isn’t a genuine P2P Lending platform, as most of the lending is coming from institutions, rather than “peers” or individuals. Retail vs Institutional funding of loans over time Rewrites Another thing that makes loan availability even worse is rewrites. Rewrites occur when a borrower wants to increase the amount they’re borrowing. To facilitate this, the original loan is repaid in full to its original lenders, and the new “rewritten loan” is placed onto the Marketplace for new lenders to invest in. I think this causes totally unnecessary churn and that only the additional amount being borrowed should be placed onto the Marketplace for new lenders. It’s made worse by the fact that Harmoney actively encourages borrowers to rewrite their loans. Fraud Sometimes I see loans listed on the marketplace that seem unrealistic, or maybe even fraudulent. Some examples are: A borrower with a whopping $20k monthly income, borrowing $25k to see the dentist.A borrower with a $1,600 monthly income, with monthly loan repayments of $900 (56% of their income).Pictured below, a couple with a $1,200 monthly income, with monthly loan repayments of $1,000! How can they afford rent and food after repaying their loan!? Does this loan seem genuine to you? This gives me the impression that Harmoney is letting non-genuine loans onto the platform, or that they aren’t doing the best job of verifying borrower details, such as their income. In fact, Harmoney did face an issue with fraud where people used stolen IDs to apply for loans. Because lenders take on all the risk in P2P Lending, it was ultimately them (rather than Harmoney) who were the victims of the fraud, losing all of their investment in these dodgy loans. But it must be noted that fraud is a risk that could be encountered on any P2P Lending platform, not just Harmoney. Glitches I’ve occasionally encountered bugs on the platform. For example, eagle-eyed readers of this article may have spotted that the next payment on one of my loans is due on 31 December 3000!! Another time my withdrawal went to the wrong bank account (although they quickly addressed that). Conclusion I liked Harmoney during my time investing on the platform. It’s easy to understand and use, and I achieved satisfactory returns. While I tolerated the glitches and high defaults, the fee increase to 20% was the final straw leading me to quit – I wasn’t prepared to give away a fifth of my income to a platform with so many issues, and when I was the one taking on all the risk. Although, I would probably have stayed with Harmoney a lot longer if the fee was more reasonable. I’m glad that I started with Harmoney, and had a decent experience with it overall, because it led to to continue with P2P Lending via Lending Crowd and Squirrel. I’d be confident that I could still achieve better returns than bank deposits if I restarted investing in Harmoney today. But it’s just not for me given the high 20% fee I’d face, and the many cons of the platform. I still think Harmoney could be suitable two groups of people – those new to P2P Lending wanting to give it a go (with it’s low minimum investment and user-friendly platform), and those investing over $50k, qualifying for the lower 15% fee. Pros Potential to achieve much higher returns than bank deposits or even other P2P Lending platformsUseful features like Auto-Lend allows you to be a hands-off investorLow minimum investment amount of $25Easy to use and understand Cons High feesNot true P2P Lending – mostly funded by institutional lenders resulting in low loan availability for retail investorsSometimes feels unsafe – high rate of charge-offs, platform glitches, fraudulent looking loansNo secondary market to get your money out earlyPayment Protect is too complicated and risky for such small returns Found this article helpful? Please share, and Follow or Subscribe to keep up with the latest news and posts! More articles Disclaimer The content of this article is based on my personal opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with a qualified financial advisor before making any investment decisions.... Read more...What I’ve been investing in – July 201931 July 2019What I’ve been investing in is a monthly series covering what investments I’ve made during the month, and any investing related news that I’ve found interesting. This month has been another busy one, with a few big investments made. The below is not financial advice, nor a recommendation to invest in the following. Please do your own research before making any investment decisions. What I’ve been investing in Arvida Group Arvida is another retirement village operator I own shares in. Like Infratil did last month, Arvida raised capital to acquire three new retirement villages in Tauranga and Queenstown. To help facilitate this, Arvida offered existing shareholders the opportunity to buy 1 new share for every 5.7 shares held, at a discounted price of $1.15 (with the current price being around $1.37). As you may already know, I’m a fan of investing in the retirement sector due to our ageing population, so I took up all of the shares offered to me. National Storage National Storage is an Australian Real Estate Investment Trust (REIT), that owns and rents out self storage units in Australia and New Zealand. You may recognise them as the sponsors of one of the best rugby teams in the world, The Hurricanes. National Storage is another company I own shares in, that raised capital this month to fund the acquisition of new storage facilities. To do this, they offered existing shareholders the chance to buy between AUD$2,500 and $15,000 of new shares in the company. I invested $2,500 because self storage is quite a unique type of real estate to invest in – people are always buying stuff, and people are always moving houses, so I think there will always be a demand for storage, even if an economic downturn were to hit. In addition, National Storage pays a reliable dividend in an environment of declining interest rates. Squirrel Money Like last month, I’m continuing to add to my Peer to Peer Lending portfolio with Squirrel. Behemoth Brewing Behemoth Brewing have just completed an Equity Crowdfunding campaign, raising just over $2 million to go towards new brewing facilities and a brewpub. I dedicate 5% of my investment portfolio to more speculative investments like this, so decided to put the minimum investment of $1,000 into this company. Behemoth makes tasty beer, and the funds will hopefully allow them to scale up the business. To learn more about Equity Crowdfunding, check out my article 4 things to know about Equity Crowdfunding. KiwiSaver In addition to the normal monthly contributions from my salary and employer, I received the annual $521.43 Government Contribution into my KiwiSaver account this month. If you’re a KiwiSaver member, I hope you did too! Check out my 3 KiwiSaver tips if you want to learn more. Smaller investments Topped up my InvestNow portfolio with an investment in my core holding, the AMP All Country Global Shares Index FundBought NZ$250 worth of Bitcoin after the price fell to around US$9,500 Investing news Sharesies and the NZX Two weeks ago Sharesies released a public beta allowing users to buy and sell shares in individual companies listed on the NZ sharemarket (NZX). The slick user experience, and cheap brokerage (0.5% at most) is sure to make investing in individual companies explode in popularity here. Check out my review Sharesies vs ASB Securities and Direct Broking. CommSec Pocket launches It’s been a little quiet in New Zealand this month, so here’s an interesting service that’s come out across the ditch. CommSec Pocket, launched by Commonwealth Bank, allows users to buy and sell seven different Exchange Traded Funds (ETFs) for only $2 for each trade up to $1,000 in value. The ETFs are: Aussie Top 200 (IOZ)Aussie Dividends (SYI)Global 100 (IOO)Emerging Markets (IEM)Health Wise (IXJ)Tech Savvy (NDQ)Sustainability Leaders (ETHI) Similar services in Australia are expensive, starting at $9.95 per trade – there’s no Fund Platforms there like InvestNow or Sharesies, so CommSec Pocket is sure to be a hit over there. Money King NZ news The Money King NZ site got some new features this month including: An updated and expanded Resources sectionA form to contact Money King NZSubscribe to get new articles in your inbox every week Most popular article this month: What’s the difference between InvestNow, Sharesies, Simplicity, Hatch, and more? Thanks for all your support! Found this article helpful? Please share, and Follow or Subscribe to keep up with the latest news and posts! More articles Disclaimer The content of this article is based on my personal opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with a qualified financial advisor before making any investment decisions.... Read more...The best bank accounts and credit cards for managing your everyday finances28 July 2019Being an investor isn’t just about signing up to InvestNow/Sharesies/etc. and picking the right fund to invest in. We investors need the support of good products and services to help manage our everyday finances. This could include: Transaction accounts to receive money and make paymentsSavings accounts to keep spare cash and emergency fundsCredit cards to pay for our expensesServices to transfer money to/from overseas In this article, I’ll share my thoughts on what the best bank accounts, credit cards, and services are for managing our everyday finances in New Zealand. As a bonus I’ll also share what I think is the best Children’s bank account in NZ, and the best Australian bank account. Best Transaction Accounts Good transaction accounts are critical as they’re used to receive money from your salary/wages, dividends, and more. They’re also used to pay your money out to bills, expenses, and to distribute your money into investment platforms. For me, pretty much all of my money moves through my transaction account at some point. What I’m looking for in a transaction account: No account feesNo transaction fees or limits, so you can move money in and out freelyAbility to make direct credit payments to any NZ bank account Ability to link your account to an EFTPOS card so you can spend your money in stores ANZ, ASB, Kiwibank, and Westpac Transaction accounts Chances are the bank you’re already with offers a free transaction account. These are: ANZ Go accountASB StreamlineKiwibank Free UpWestpac Everyday You will usually need to pay fees for extras such as having a debit card (although EFTPOS cards are free), paper statements, and manual transactions (those done at a physical branch). BNZ is the only major bank to not feature here as they charge a $5 monthly fee on their YouMoney account. Heartland YouChoose Heartland YouChoose is an interesting product, combining a transaction account, savings account, and overdraft facility all into one. They pay a solid 2% interest rate on positive balances, while giving you the ability to make withdrawals at anytime via EFTPOS or Direct Credit. The YouChoose account gives you huge flexibility without any account or transaction fees, but it could be inconvenient to move all your transactional banking over from your existing bank. Best Savings Accounts Money we’re not immediately using or investing (such as emergency funds) should be kept in a savings account. This ensures your money is earning interest for you, rather than remaining idle. The interest from savings accounts won’t make you rich, and may not even beat the rate of inflation, but it’s better than earning nothing, or risking your emergency funds in volatile investments like shares. What I’m looking for in a savings account: High interest rate compared to similar accountsMoney is accessible without any charges or penalties Just one thing to keep in mind for the below savings accounts is that the rates for them are not fixed, and are likely to fall as wider interest rates drop. Heartland Direct Call account The Heartland Direct Call Account allows you to make free and unlimited withdrawals to a nominated transaction account, and doesn’t have any minimum deposit requirements. It currently offers a rate of 1.90%, which is much higher than any other account offering the same level of access to your money. The main catch is that it takes one business day for you to receive your withdrawn funds (e.g. if you make a withdrawal after 7pm on Friday, you’ll have to wait until Tuesday to receive your funds). In addition, you can only withdraw money out to one account that you’ve linked to it (this can be any account at another NZ bank) – you can’t make withdrawals directly to other accounts. Kiwibank 90 day Notice Saver The Kiwibank 90 day Notice Saver offers one of the highest interest rates you’ll find at a major NZ bank, currently at 2.70%. It has a minimum deposit amount of $2,000 and is a PIE fund so tax on any interest earned is capped at 28%. While it is not suitable for holding funds you might need quickly, due to the 90 day notice required to make a withdrawal, a strategy for managing your emergency fund might be to: put 3 months worth of expenses in the Heartland Direct Call accountput your remaining emergency funds in the Kiwibank Notice Saver account.If emergency strikes, you can withdraw funds from Heartland immediately, and start the 90 day notice period so you’ll have more funds available to you in 90 days time. Alternatively Rabobank offers a 60 day Notice Saver at 2.75%, and Westpac offers a 32-day Notice Saver at 2.00% (also a PIE fund). These two accounts have no minimum deposit requirements. Best Credit Cards Many would argue against using credit cards because they encourage excessive spending and accrual of debt. My opinion is that credit cards can help us when used in the right way, as their use can come with benefits such as rewards points. Their use does require discipline! – to not overspend, and to pay off the balance in full every month to prevent interest being charged – so may not be suitable for everyone. What I’m looking for in a credit card: No account feeBenefits for using the card, such as rewards points American Express Airports Card The American Express Airports Card has no account fee and awards 1 Airpoints Dollar for every $100 spent – a rewards rate that is incredibly rare for a fee-free card. The main drawback is that American Express isn’t widely accepted, but you’ll be fine using it with major retailers. Also, almost all EFTPOS terminals (except for at Countdown supermarkets) don’t allow you to use contactless payments (i.e. payWave) with an American Express card, so you must use Chip and PIN. ASB Visa Light ASB Visa Light has no account fee, and offers a “Smart Purchase” feature instead of rewards. Currently, the Smart Purchase feature gives you 6 months interest free on purchases over $1,000. The interest free period can be used to your advantage by: Spreading the cost of a large purchase over 6 monthsEarning 6 months worth of interest on your money, before the card has to be repaid in fullUsing it to complement the Kiwibank 90 day Notice Saver. For example, if you need to make a large purchase, do so using the Visa Light card, and start the 90 day notice period so that your funds are ready in time for you to repay the card’s balance. The Smart Purchase feature is really designed by ASB to encourage people to spend more and rack up debt, so do use it with care. Those who don’t have the discipline to do so may best avoid the card, while those that do can benefit from the above advantages. Best Services TransferWise Being a diverse nation, many of us in New Zealand have family connections or investments overseas, and need to transfer NZD to/from foreign currencies. I recommend TransferWise as one of the cheapest and fastest money transfer services out there. They also offer a multi-currency Debit Card which is handy for overseas travel. I did a very quick comparison of four money transfer services to exchange $1,000 NZD into four different currencies, and TransferWise came out on top for all of them. Below are the amounts I’d end up with by using each service (comparison done 26 July 2019): AUDGBPUSDHKDTransferWise952.17530.70659.305,157Western Union951.35530.18644.765,144ANZ943.10525.30653.205,103PayPal914.39510.31642.184,992 Special Offer: Sign up to TransferWise using this link and you’ll get a fee-free transfer of up to £500. Bonus: Best Children’s Bank Account Co-Operative Bank Youth accounts Children need bank accounts too, particularly if they want to learn about money and good savings habits. Co-Operative Bank’s Youth accounts have no account or transaction fees, and allows parents to gradually add online banking and EFTPOS access to the account, when their child is ready for them. Although, the real outstanding feature of Co-Op Bank’s Youth accounts is the massive 4% interest rate paid to balances under $4,000. For those 18 or over, Co-Op Bank also offers a similar product to tertiary students. Bonus: Best Australian Bank Account NAB Classic Banking account 3 out of 4 of Australia’s major banks (ANZ, Commonwealth Bank, Westpac) charge a $5 monthly fee on their accounts, unless you make a deposit of $2,000 or more every month. NAB is the exception to this with their Classic Banking account. This account has no account fees and no deposit requirements, and a debit card is included for free. Do you have any other favourite bank accounts, credit cards or services? Let me know on Facebook or Twitter! Found this article helpful? Please share, and Follow or Subscribe to keep up with the latest news and posts! More articles Dealing with Dividends – 5 things to know about them3 September 2019 Term deposit rates suck! What you can do – with 5 term deposit tips26 August 2019 Building an investment portfolio – Simplicity vs InvestNow19 August 2019 Disclaimer The content of this article is based on my personal opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with a qualified financial advisor before making any investment decisions.... Read more...Older Articles… Investing ArticlesArticles about the various ways to investResourcesUseful services, websites, spreadsheetsAboutAbout Money King NZ
