Ask Money King NZ (Summer 2023) – Is buying a house a bad investment!?

If you were to invest in one index fund for the rest of your life, what would it be? Do I need anything else apart from KiwiSaver and an investment fund? What’s the best way to invest $100k? These were some of the questions we answered in our 8th Ask Money King NZ Q&A held with our Instagram followers.

The answers in this article have been provided without any knowledge or consideration of the personal circumstances of the person who asked the question. This content should not be taken as financial advice.

In case you missed it – Our previous Q&A article:
Ask Money King NZ (Spring 2023) – Why we switched to Kernel’s Global ESG Fund

1. If you were to invest in one index fund for the rest of your life, what would it be?

We’re big fans of a one fund portfolio 🤩. Whilst we’d prefer to invest in a low cost diversified high growth fund (like Kernel’s High Growth Fund or Simplicity’s High Growth Fund), these technically aren’t index funds, but rather a collection of multiple index funds.

So if we really had to choose a single index fund to hold until we died, we’d go for the Foundation Series Total World Fund. It tracks the FTSE Global All Cap Index with a whopping 9,000+ holdings. This includes US, Europe, Asia Pacific, and Emerging markets shares, with investments across a wide range of industry sectors. You can’t really get more diversified than this index, which essentially has the entire world’s sharemarkets covered. The fund does charge a transaction fee of 0.50% when you buy or sell units, but these are one-off fees and given we’re holding the fund for a lifetime, they’ll be offset by the fund’s ultra-low management fee of 0.07%.

But this is just our personal preference (not a recommendation to invest), and it doesn’t mean the Total World fund is the best index fund. There is no definitive best, and different people will likely have their own favourites.

Further Reading:
What do NZX 50, S&P 500, and Total World index funds actually invest in?

2. If you were to choose 2-3 index funds to invest in, what would you choose?

It seems you’re all very keen to get index fund recommendations from us 😂. Just to be clear the law doesn’t allow us to give financial advice or recommendations on specific products, so this is just our personal opinion rather than advice on what to invest in.

If we had to invest in 2-3 index funds we’d just choose the types of funds contained within a diversified high growth fund (like Kernel’s High Growth Fund or Simplicity’s High Growth Fund). Remember these diversified funds are essentially just a collection of multiple index funds, which typically includes a NZ shares fund, a global shares fund, plus maybe some standalone allocations to property and infrastructure. If we were more risk adverse or had a shorter investment timeframe, then we’d try to replicate a Growth/Balanced/Conservative fund which also has an allocation to bonds.

We’d base our index fund picks on the above diversified funds because there’s no need to reinvent the wheel with our own portfolio structure, and fund managers have good reason for having each component in their funds:

  • NZ shares funds provide exposure to our local sharemarket which has significant tax advantages. Examples of NZ shares index funds are Kernel NZ 50 ESG Tilted, Simplicity NZ Share, Harbour NZ Index Shares.
  • Global shares allow you to diversify your portfolio beyond New Zealand. Examples of global shares index funds are Kernel Global ESG, Simplicity Global Share, Foundation Series Total World, Smartshares Total World.
  • Adding a property and infrastructure fund may reduce your portfolio’s volatility due to the relatively defensive nature of these companies. Examples of property & infrastructure funds are Kernel Global Infrastructure, Kernel Global Green Property, Smartshares Global Infrastructure, Smartshares Global Property.

If you’ve seen our recent articles, you’ll know which of these funds we’ve invested in 😉

Further Reading:
6 ways to build a long-term investment portfolio in New Zealand

3. Is there any specific reason you like Kernel Global ESG over Foundation Series Total World?

In our actual personal investment portfolio we’ve chosen the Kernel Global ESG Fund over the Foundation Series Total World Fund. Yes, we know that contradicts the answer we gave for question 1, but we have the following reasons:

  • Foundation Series charges a 0.50% while Kernel does not. Over the long-term the low management of Foundation Series Total World would make up for this transaction fee. But we’re not married to a specific index fund provider so want to maintain the flexibility to switch funds without being penalised by such buy/sell fees (whereas our answer in question 1 assumes we’d hold for life and never switch).
  • The ethical investing side of things isn’t hugely important to us, but the fact that Kernel Global ESG doesn’t invest in things like weapons related companies is a bonus.
  • Kernel offers a currency hedged version of their Global ESG Fund, while Foundation Series does not (their fund is only available as unhedged). We don’t believe there’s a definitive best between hedged and unhedged funds, so personally like to invest 50% in each (50% in Kernel Global ESG unhedged, and 50% in Kernel Global ESG hedged).
  • Kernel also has a few other funds that we like (such as their Cash Plus, NZ 50 ESG Tilted, and Global Infrastructure funds) so choosing Global ESG allows us to have all our funds on one platform. Kernel’s user interface is also better than InvestNow’s (the platform the offers Foundation Series funds).

Though none of these factors are major ones. Both are great products that we think we’d be happy with over the long-term.

4. I have KiwiSaver and an investment account. What’s the next step, or is this enough to keep growing?

Investing can be complex. And it can be boring especially because it can take years to see any results. So it’s understandable to continually question what other products you could add or what actions you can take to improve your results.

However, investing in more stuff or taking more action isn’t necessarily better. Some people may play with new asset classes, try out new investing strategies, or get greedy and begin dabbling in things that are more akin to gambling in an attempt to make money faster. This often has detrimental results. We’ve been in this position before, putting our money in lots of assets across various platforms, only to underperform the market and to have our money spread across an overwhelming number of investments.

So most of the time, all that’s needed in investing is to keep it simple and focus on the basics – such as ensuring you’re in the right KiwiSaver fund, contributing regularly, and being patient by holding your assets long-term and not panic selling when the markets are choppy. There are a few regular maintenance tasks you need to do with your investments (which we detail in the article below), but these aren’t as hands on as you might think.

Further Reading:
Portfolio WOF and service – How to maintain your investments

But ultimately the financial products you need will depend on your goals and personal circumstances, and that might be a conversation to have with a financial adviser.

5. Any tools to weigh up extra mortgage repayments vs investing, taking into account the % rates for each?

It’s quite simple. Take your mortgage rate and compare it with the rate of return you expect on your investments. Put your money towards whatever is higher.

The tricky part is knowing what rate of return to expect from your investments. No one has a crystal ball to tell how they’ll perform into the future, so you’ll just have to make an assumption as to what you’ll make. Lots of people like to assume a 10% return but this is unrealistic – You’ll also need to take tax and fees into account which could easily reduce your total returns by 2-3%.

You’ll also want to take the non-financial factors into account when choosing between your mortgage and investments. Paying down the mortgage is risk free, while investing is not. On the other hand investing allows you to diversify your wealth into different and more liquid assets instead of tying up all your money in your house. And remember there’s another option that people often miss – There’s nothing stopping you from doing both! Putting some of your money towards extra mortgage repayments and some of your money towards investing might allow you to get the benefits of both.

Further Reading:
You probably won’t make a 10% p.a. return on your shares

6. Is the answer to paying off the student loan vs investing the same as above? Overseas interest is 2.9%

Yes, the mathematically better option depends on whether your student loan interest rate is higher or whether your expected return on investment is higher (after fees and tax). Compare both rates and put your money towards whatever’s higher.

The difference with the mortgage situation is that student loans have different interest rates. Those overseas currently have an interest rate of 2.9%, while those in New Zealand don’t pay any interest at all. These low rates might provide more incentive to invest over paying the loan down faster. Even putting the money in a savings account could put you ahead of paying down the loan.

But as always, the answer is more complicated than just maths. Paying off debt has its psychological benefits. And if you intend to buy a house, paying off the student loan could improve your ability to get a home loan.

7. Tips on what’s the best performing or most rewarding credit card?

There’s essentially 3 tiers of credit cards in New Zealand:

  1. Low rate credit cards – These have no/low fees and low interest rates, but usually don’t provide any rewards.
  2. Rewards credit cards – These have a medium level of fees, and give you a basic level of rewards (such as Airpoints or cashback) when you use the card to make purchases.
  3. Platinum credit cards – These have higher fees, but allow you to earn rewards faster than a normal rewards credit card. They can also come with a range of benefits such as free travel insurance for trips paid for through the card.

So platinum credit cards are the most rewarding as you can get a bunch of free stuff just for spending money through them, but that doesn’t automatically mean you should get one. There’s a few catches associated with credit cards that you need to consider:

  • In general rewards cards have annual fees, with platinum cards charging the highest fees. The higher the fee, the more you have to spend through the card just to break even on them.
  • Many retailers impose credit card surcharges, so the rewards you’re getting might not be worth it – You’re just losing money if you’re paying a 2% surcharge to get 1% worth of rewards. This could reduce the amount of spending you do through your card.
  • Every time you use your credit card, you’re borrowing money to make a purchase, rather than using money you already have. This could negatively influence your spending behaviour, and you’ll start incurring interest on your purchases if you fail to pay off your credit card every month. This interest could easily be much greater than the rewards you earn. In addition, platinum credit cards usually require larger credit limits, so may make it even harder to control your spending.

In other words, we wouldn’t choose a credit card purely based on its rewards, because the rewards might not be worth the costs. It will require a bit of shopping around and analysis on your own spending habits to determine which type of card is right for you. For example, we’d personally only spend around $1,000 through our credit card each month so it’s not worth for us to spend $100 or so each year on a platinum card. Instead a regular rewards card (like the American Express Airpoints Card) works fine for us. But the card that works best for you could be totally different!

We do have a half finished credit cards article in our backlog, but it’s horrendously long so we’re unsure if it’ll ever see the light of day 😂

8. What’s the best way to invest $100k? It’s just sitting in my bank account and I feel lost. Please help!

When it comes to deciding what to invest in, it’s your financial goals that matter, rather than the amount of money you have. So what is that $100k for? Do you intend to use it in the short-term (within a few years) or long-term?

  • For a short-term goal you’re probably looking at investing it in conservative assets like cash (bank deposits) and bonds. It’s generally too risky to invest in things like shares because they can go down in value, and 1-3 years might not be enough time for your investment’s value to recover. Conservative assets might not deliver the high returns you’re looking for, but at least they’ll protect your capital.
  • For long-term goals you might be looking at shares or property. They’ll provide greater potential returns and help your money beat inflation. You’ll experience volatility with these assets (where the prices fluctuate up and down everyday), but here time acts as your greatest asset – You can afford to wait several years or decades for your assets to recover from any downturns.

We know this probably isn’t the answer you’re looking for. Most people wish we could tell them to invest in fund X or company Y, then get very disappointed when we share our answer. And that’s understandable because aligning investments to your goals is a hard concept for investors to grasp. But there really isn’t a universally best way to invest your money (and we really don’t have a crystal ball to tell which asset is going to perform best!).

Further Reading:
How to invest $1k/$10k/$100k in New Zealand

9. I saw a YouTube video saying that buying a house might not be a good investment. Does this apply to the NZ property market?

This YouTube video argues that your own home might not be the great financial investment as many people make it out to be. While the video is American, the arguments are also very relevant to the New Zealand market.

So why isn’t your own home a good investment? Sure you can save on rent and benefit from the capital gains if your house goes up in price. But being a homeowner comes with lots of costs that you wouldn’t incur as a renter such as mortgage interest, rates, insurance, and maintenance. When you account for these costs, the financial benefits of owning a home aren’t that great. And it’s true that a renter who allocates their capital towards investments in shares rather than a house can often end up wealthier than a homeowner (we also ran the numbers in the below article).

Further Reading:
Buying a house – an overrated way to build wealth?

That doesn’t mean you shouldn’t buy your own home. It might not be a good investment, but it can still be a good lifestyle asset, allowing you to live somewhere without instability and the risk of being kicked out by your landlord. It also forces you to grow your wealth in the form of paying down the mortgage – You can easily stop your contributions to an index fund portfolio without any consequences, but you couldn’t say the same for stopping your mortgage repayments.

But the main message is that your own home isn’t the be-all and end-all of growing wealth, and that you should be buying one for the right reasons.

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The content of this article is based on Money King NZ’s 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 an authorised financial adviser before making any investment decisions.

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