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Should I Convert My Investments To High-Quality Bonds And Cash?

Contributor:
Mary Holm
Mary Holm

Question:

I've heard before: "If you are within 10 years or so of spending your savings, move it out of shares, property and other risky assets into high-quality bonds and cash."

I am within five years of retirement and my nest egg has lost half its value in the past year or so. Apart from my losses in Bridgecorp and Nathans Finance, I was persuaded by a friend in 2007 to invest in a company with a very good track record (at the time) called Fisher Funds.

I knew that their NZ Growth fund was a long-term investment and that I could expect some volatility along the way, but I didn't imagine for a moment that it would lose over half its value.

Should someone in my situation still follow the advice quoted above?

Answer:

Mary Holm: Yes I am. And what a pity you didn't happen to read that advice a few years ago. You might have kept at least some of your savings out of the finance companies - which were clearly not offering high-quality investments - as well as out of a share fund.

But - as our mothers used to say - there's no use crying over spilt milk. And in any case, things are not as bad as they might seem.

What should you do now? Firstly, decide how much of your nest egg you plan to spend within the next 10 years. Let's say you are 60 now, will retire at 65, and expect to live until 85. You may well live longer, but many retired people decide that if they make it past 85 they will manage on NZ Super after that if their savings are all used up.

Keeping things simple, we'll say that you'll plan to spend a quarter of your retirement savings from age 65 to 70 and the other three-quarters from 70 to 85. With any luck, your investment returns on the money for those later years will more than keep up with inflation.

That means you'll be spending only about 25 per cent of your nest egg within the next 10 years. I suggest you move that money - including any further savings before retirement - into high-quality bonds. A good stockbroker will give you advice on which ones to buy.

What about the rest? If you have the stomach for it, it's not silly to leave at least some money in the Fisher fund or perhaps another share fund. Over 10 years or more, there's a pretty good chance it will regain lost ground, and perhaps more.

As it happens, in the last three months New Zealand share funds have grown really well, with the Fisher fund a top performer. Over such a short time, that means nothing. I actually strongly disapprove of keeping track of how well funds perform over short periods, for fear that people will switch to the top ones. Research shows no tendency for funds that have performed well to necessarily keep doing so. But I just want to point out that we have no idea where sharemarkets will go and when - other than trending upwards over the long term.

I suggest, though, that you put some of the money in an international share fund, to get more diversification.

If you would rather reduce your risk, you could water down your portfolio by also putting some of the longer-term money into bonds or a bond fund. Every year or two, transfer some of your money from higher-risk to lower-risk, so that you keep whatever you plan to spend within 10 years in bonds. Once you get within about two years of spending it, move that money into what's called cash - generally bank term deposits.

Some people think this strategy is boring. But given what you've been through, you are probably happy to be bored. I'm sure you can find other ways to spice up your life.

 

Mary Holm is the author of bestselling books on KiwiSaver and personal finance. She is also a highly praised seminar presenter. Her written advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following that advice.     

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