NZ Elections

So the election is less than a week away. Some of you may not have read the last topic I posted, so I will write a quick guide to make your vote count. Partial credit goes to the Sunday Star Times. Since I'm writing this after reading the article they had, this will probably be somewhat influenced by it. I did add a lot more to it though..

First of all we should talk about your electorate vote. I'm not a political commentator so I can only informatively comment on the electorate I'm in (Pakuranga). Sadly your vote will not influence the outcome. Pakuranga is a National area, and Maurice Williamson will comfortably be reelected. Vote for whoever you please..

The most important vote for the majority of us is the party vote. You can either vote for one of the 2 main parties, vote for a minor party, or do a protest vote.

Voting for one of the 2 main parties makes a lot of sense. Either Labour or National will be in charge of parliament. Their promises will be the ones which will be passed (and the oppositions promises wont be). Helen Clark or John Key will be prime minister. A vote for the party is not only a vote for the party. A vote for Labour is also a vote against National, and a vote for National is a vote against Labour. Labour is currently trailing in the polls so every vote they get will help them narrow the gap on National, which they need to do. National do not have many friends in politics (only Act and United Future), so they need to get as many votes as they can get to assure them power. Voting for Labour or National is a sensible vote.

Why should you vote for a minor party? The minor parties have more extreme agendas compared to the main 2. The Greens are focused on the environment, United Future are focused on families, the Maori party are focused on the Maoris, Progressives are focused on state-owned enterprises (keeping them), NZ First are focused on Old people, and Act are focused on tax-cuts (much higher than what National want to give). If you have a strong view on one of these areas, you should vote for them. The more seats they have after the election, the better the bargaining position they will be in to convince either Labour or National to pass more of their policies.

The Greens are polling well at the moment. They will support Labour post-election. Voting for the Greens will ensure Labour will need to pass their policies. Vote for them if you support their enviornmental policies.

A vote for United Future is a wasted vote. Peter Dunne will win his electorate seat comfortably but they are polling well below the chance to win a second seat. Do you really think they are likely to improve between now and saturday? United Future supports National so if you support United Future, vote National instead.

Likewise, a vote for the Maori Party is a wasted vote. They will win all the Maori seats, which is well above the % of party votes they are currently polling to get. The Maori Party will 'probably' support Labour, so if you support the Maori Party, vote Labour instead.

The Progressive Party is like United Future. Jim Anderton will regain his seat, but polling shows that will be it. You shouldn't need me to tell you that Jim Anderton supports Labour, so if you support Progressives, vote Labour.

NZ First are polling just under 5%. Winston Peters is not assured of winning his Tauranga electorate seat, so every party vote for NZ First will help them stay in parliament. NZ First will probably support Labour (National wont talk to him). Analysts are saying if you support Labour, you should vote NZ First to help assure them get in (so their % of party votes aren't wasted). This will allow Labour (% NZFirst) to be in a position of power after the election. This is worth thinking about if you are a Labour supporter.

Act are polling ok but below 5%. They are safe because Rodney Hide will win his electorate. Act will obviously support National after the election. It is worth mentioning Sir Rodger Douglas is 3rd on the party list. This is worth thinking about if you are a National supporter.

Protest votes in my opinion are a waste. I'd rather you not waste your energy going to vote because it will have no effect on the outcome of the election, and you will just be breathing more air than if you just stayed at home.

So, in conclusion, I think you should vote Labour/Greens/ or even NZ First. I discussed why in a previous post. Remember, YOUR VOTE COUNTS SO DO IT (unless it's a stupid protest vote).

Retirement

I was reading newsweek again this week and came across a great article

It should get everyone thinking. Never mind the macroeconomic side, concentrate on the personal finance side of
the article (though the macroecon is just as interesting, just not to everyone).

So in your life you can either save more now to have more to spend in the future. Or you can choose to spend now and have less to spend in the future. Pretty simple.

So by retirement, what kind of savings do you want to have? Enough to replace your income (with account for inflation)? This is probably most people's goal since it's a simple thing to aim for and if you've been living with it for the majority of your life, you can be comfortable with it if you have good insurance. This can require a huge amount of capital which varies depending on your risk tolerance. Annual returns on investments can vary from 1% to 8-9% real interest before tax. So to replace an income of $60,000, you'd need between $700,000 to $6m. That's alot of money.

Which leads to the next question...
When do you want to retire?

Oh how things have changed.

Remember the saying "Take care of the pennies and the pounds will take care of themselves"? Notice how I said 'remember' and not 'you know.' That saying seems to be obsolete now the way people act.

There's an article by newsweek and the New Zealand herald worth reading about saving. In 2005, NZ's saving rate was -14.8% of total income! Yes, on average we spend more than we earn. There's a trend around most of the world that shows savings have decreased. Our Grandparents and some of our parents would not be able to comprehend the amount of debt and little savings we have. So why is it that we have such a different mind set from our elders? I'll share a few of my opinions..

Easy credit: Credit cards are being advertised on tv as well as easy to get personal loans. Now you can even get home loans with no money down! They've been giving them out left, right and centre. The credit crisis in America highlights how many loans have been given out to people who could not afford it. This is a huge change from when people used to buy houses for cash. If it wasn't that easy to get credit, maybe we all wouldn't be in so much debt.

Consumerism gone mad: Petrol's expensive? What about water!? Water is put in plastic bottles and you're charged $2 for less than a litre. You could go home and get more for 5c, or just go to a tap outside and fill up an old bottle for free. You think people wouldn't buy this, but a lot of us do it on a daily basis. Since we're not handing over cash these days to pay for things, many people don't think about what they're spending their money on. Coffee everyday, a hamburger, lollies for a sugar fix, porn on the internet, these are usually impulse buys which shouldn't really be done. And do you need those $250 shoes? Your mind says yes but the 10% part of your brain you don't use is saying no...

Lack of education: Were you taught much about budgeting while you were at school? Probably not, and it's probably not a reason for a change in mindset either since your relatives were taught just as much. But with so many different ways of saving with no understanding of what is a good deal could be preventing us from wanting to save. And when you hear about people losing their life savings because they put their money into a failed finance company, you probably feel relieved it wasn't you. And even if you put the money in the bank, is it safe? Perhaps not with all these sub-prime loans floating about.

What can we do about this? Try and change our mindsets. Don't take up credit just because you can, save up a decent deposit before buying a house, try to cut out the majority of your small impulse purchases (only use cash to pay for things if it helps) and get educated. Does anyone have any thoughts on why we aren't saving, or how we can?

How to act during a recession.

This is a follow up to my last entry, which was rather somber. Sorry about that but these are somber times for some people. Although this doesn't necessarily apply to us here in NZ, newsweek published an article about how to survive the recession. I think it's a good read because we can apply some of the tip later on when we are in a recession (or even now since there's a chance we're going to enter one. Some of the good points in the article are:

Leave your retirement investments alone: Right now the share markets are spiraling downwards because of the credit crisis in America. But this isn't a reason to sell since they'll rebound and in 20 years or so you wont notice the loss since your average return will be high. In fact, if you make regular contributions, now would be a good time to make extra contributions since the price of shares now are quite a bargain (relative to probable prices in the future). If you have kiwisaver you can do this easily through internet banking.

Pay down costly debts: This is what I was talking about in my last entry. This applies in good times as well as bad. Since interest rates are so high at the moment, now is a great time to get them paid off.

Stretch out cheap debts: If you have a cheap interest rate, banks and companies will probably be willing to waive fees for voluntary repayments. Why? Because it's a liability for them. They can borrow out that money at the current higher interest rate. People would be willing to pay you to have debt at your low rate, so make sure you take advantage of it and keep it for as long as you can. If you can make extra repayments, pay off other debt if you have it, or put it in the bank (if the interest rates are better), use it towards an emergency fund, or buy things you think you will need in the near future. Take advantage of the cheap debt (it sounds bad, but it really isn't).

Hunt for bargains: The stock prices of the majority of companies has dropped. Some haven't been affected by the credit crisis and have just artificially dropped because of investors' fears. So there are a lot of bargains out there waiting to be discovered. But you must research and understand the company is undervalued before buying a bulk of their shares since it goes against diversity principles. This leads to the next point...

Avoid the urge to get more adventuresome with your investments as a way to make back losses: Were you planning on investing in gold before your portfolio dropped in value? Or are you doing it just because everyone says you should? Or what about derivatives? Or even bank bills if you have a lot of money? NO! Don't try to make up losses by investing in something you don't understand. Go to a professional investment advisor before you do something like that and make sure you understand the risks, the possible returns, and whether it's a good addition to your portfolio before doing anything like that. Otherwise you may as well go and play roulette at the casino. The odds are probably the same except you'll win or lose in a few seconds instead of a few days...

That's some points the article brings up. Do you have any tips of your own? Please share them...

How much debt are you in?

I was reading this article at newsweek.com when I got thinking. I pose the question to you, "If you suddenly had 30 days to repay all the loans (mortgage, credit cards, hire purchase, etc), would you be able to do it?

Maybe you could, maybe you couldn't. If you had a mortgage, chances are you wouldn't be able to unless you sold your house. Hopefully you can if you just took into account your other debt, if you can't, maybe you should look at trying to reduce the amount of debt you have (although you probably already are). Pay the minimum amounts on the lowest interest debts and pay off the higher interest debts as fast as you can. Be more frugal so you can do this as quickly as you can. Or think about getting a debt consolidation loan where all your debts are put onto 1 loan (with hopefully a lower average interest rate). Just remember to cut the credit cards up and never get any more loans otherwise you'll end up in a position where you'll become bankrupt.

You probably have all seen the news where people in America are living in tents because they've had their houses foreclosed because they couldn't make their payments. I sincerely hope this doesn't happen to anyone since it must be such a horrible position to be in. Let us try and learn from this that times are not always rosy. The banks do not always give loans out because they are certain you can pay it back. You never know when you may lose your job, not because you're not skilled at it, but because the labour market tightens and the firm can't support the amount of staff it has.

You should think about saving to have an emergency cash fund, which is completely liquid and safe. A good amount to aim for is 6 months living expenses. This would include rent/mortgage payments, food, petrol and other essentials you require. Then, if times are ever bad, you have a lifeline for things to get back together. This will give you peace of mind, something alot of people would love to have considering their finances may be keeping them up at night.

What do you think? Is an emergency fund a good/bad idea and do you have one or are you considering having one? How many months living expenses do you think is a reasonable amount to have?

Oil

This article from newsweek.com is worth reading. It brings up a few points about the rising cost of petrol and why we shouldn't worry. I'll summarise, but reading the whole article is worth it..

Oil's still not expensive: Relative to what it was a few years ago it is, but compared to 10-15 years ago it's not. Income's have risen more than oil has, so it's not taking up as much of your pay as it may seem. And while it's more expensive than coke, it's still cheaper than some bottled water or starbucks coffee. Are you using your car less since prices have risen? If no, then it's not expensive yet..

Increased prices=increased investment: As the price of oil increases, so does the potential investment opportunities for oil companies. I don't know much about the different opportunities in oil investment, but with more money, they can access areas where they may not have been able to reach if oil prices were lower.

Future demand: Ok, so demand is still going to go up with supply, but one factor which may slow the increase in demand is the decreased reliance of oil. Bio fuels are being introduced into NZ (and probably all around the world). Who knows what the future holds. Cars may have a compartment like in back to the future, where you can put any liquid into it and it'll be converted into fuel for the car. We still have 2 trillion barrels of oil in the ground and we've only used 1 trillion so far. Surely the problem will be solved before it's all used up...

Busy

Hi everyone. Sorry for not posting for a while but I'm swamped with university at the moment. I'll try and write something this weekend. In the meantime, this is an article worth reading.

Take care

Active or passive aggression?

The range of financial investments offered by institutions can be separated into 2 groups, active and passive.

Passive funds track a particular index. The money you invest is used to buy a bundle of shares which is proportion to the index. The fund manager's only buy and sell these shares to keep the bundle proportional to the index. This gives you the market return (known as beta). And example is if you invested in a fund which tracked the NZX50. You would own 50 different stocks in proportion to the size of the companies.

Since little research is required by the fund manager and share trading is kept to a minimum, the fees are kept relatively low. Of course, your returns are restricted to the market return.

Active funds are a portfolio of shares whose composition is decided by the fund manager. The manager researches the companies and buys and sells shares based on his opinion of how share prices will change. You get a return of alpha, which is the total return minus beta.

This means you can have a higher return than the market depending on how well the manager does. However since there is more trading and research involved, the fees are usually higher.

So which are better? It depends on your preference. Personally I think passive funds are better. The fees are lower and you know what you're investing in. The higher fees in active funds usually don't justify the return. This article also has some information.


So which do you prefer?

Disclaimer: You should always consult a professional finance advisor before investing your money (just like you should always consult a doctor before starting a new exercise routine/diet). I'm not a professional, I wrote this article purely for fun.

Why take the risk?

Last time I mentioned the need to diversify when you invest money. Many people either wonder "why diversify?" and they don't do it, or they don't even think about it. Why do you need to diversify? To eliminate unnecessary risk.

The old saying "don't put all your eggs in one basket," is a very wise and true one. You could put all your eggs in one basket if you think it's strong, but if you're wrong and it breaks, then you'll lose everything. Put them in two baskets and you'll be less likely to lose them all? Yes, you're more likely to lose some eggs, but it's better than losing them all, right?

Diversifying your investments work in the same way. There are two types of risk associated with investments.

Unsystematic (or diversifiable) risk is the risk a particular company/share has of losing (or gaining) value. An example of unsystematic risk in coca-cola shares is the CEO could die, or a survey coming out claiming drinking coke shortens your lifespan by 20 years.
These events will cause coca-cola shares to lose value, but it wont effect the value of any other shares (except maybe pepsi ;)
This kind of risk can be diversified away by investing in multiple companies/shares. The less related the companies, the better the diversification. An example would be investing in coca-cola and microsoft shares.

Systematic (or undiversifiable) risk is the risk you face for investing in the share market itself. This risk causes all shares to lose (or gain value). An example of systematic risk is the current credit crisis. This is making people sell their shares and since there's no one buying, the shares lose value.
You cannot diversify this risk away since all shares are affected by these events.

I will add a chart later to show how diversification can reduce your total risk to a degree. But I hope I've shed some light on why it's important to diversify your investments. While it's great that people want to invest and even get together in groups to decide what to invest in every month or so, it's saddening that these people are taking more risks than they need to be..

investing in the share market

some people wonder how they should invest in the share market. Is now a good time since the price has dropped? Which companies should I invest in? How much should I invest?

Compared to other investments (like a bank deposit), share prices are more volatile. The price which they are worth can move up and down many times during a week, depending on the markets and internal company issues (compared to a bank account which goes up slowly every month).

The good news is that the average return is higher than a bank account since you are taking more risk. So in the long term, investing in shares is a good idea.

If you want to try and take on the share market yourself, I recommend you having at least $25,000. Yes, that's a shit load of money, but you need to diversify to cut down on unnecessary risk (unsystematic risk).

Most people reading this will not have that much, so it is better to buy into a managed fund. This is where many investors pool their money together and buy a basket of shares (decided by the fund manager).

My suggestion if you have $1500 is to get smartshares (you can find out about it at nzx.com). The funds there track an index so the fees are relatively low. They also offer a regular savings scheme which allows you to put in a certain amount (by direct debit) into the fund per month. This can be as low as $50 and is a way of doing dollar cost averaging.

Remember if you don't know what you're doing, you should invest in share for the long term. 10 years should be your minimum but the longer the better.

You can always email me if you have questions...

Disclaimer: You should always consult a professional finance advisor before investing your money (just like you should always consult a doctor before starting a new exercise routine/diet). I'm not a professional, I wrote this article purely for fun.