Something different today, I recently attended a seminar on investing in a low-interest-rate environment, presented by the financial services stalwart- Martin Hawes. Martin is an Authorised Financial Adviser, the chair of the Summer Investment Committee (a KiwiSaver scheme), member of the Board of the NZSA, writer, and a respected columnist, so he has significant experience and knowledge.
The Summer Investment Committee decides what weightings different asset classes (NZ equity, global equity, fixed interest, etc.) a portfolio should have. Martin’s talk started with a very timely discussion on Trump’s election four years ago. On the night of Trump’s election in 2016, Martin told the Summer Investment Committee they should reduce their equity (shares) weighting and move to lower risk assets such as fixed-interest and cash. This decision was based on Trump’s unlikability. However, other members of the committee convinced Martin to hold off on reducing the equity weighting and even increase the global equity weighting. Martin now admits that his initial reaction was wrong and increasing the global equity weighting was the right move. There are many reasons I find this story so impactful-
- I admire Martin’s humbleness in repeating this story and being upfront that this was a mistake. This is something I try to do with my Journey.
- This shows the importance of talking with others and getting a diverse range of views. As you want to have a diverse portfolio, you also want a diverse source of information and range of options.
- It also shows the benefit of taking the time to think critically over decisions (sometimes).
The aim of Martin’s presentation was to help people plan for retirement. One main point Martin made that really resonated with me, was that Kiwis put too much importance on owning a nice house. Houses are likely to be the most expensive asset you ever own and reduce your ability to enjoy life. By reducing how much you spend on a house, the more you will have to spend on other things that matter- travel and leisure, entertainment, etc.
For investing in low-interest-rate environments, Martin made five main points-
- Interest rates are lower for longer. And when they go back up, they will not be going up to the highs of the 1980s, maybe not even as high as the early 2000s.
- You cannot default to putting your money into term deposits, as interest rates are too low.
- Diversification is key.
- Portfolios require the right investment risk.
- KiwiSaver is a good option.
This figure, from multpl.com, shows the long-term US 10 Year Treasury Rate. The mean is 4.5% and so it can be seen the last few decades are the outliers, and the rate will likely revert to the mean over time.
Another point Martin made was that people too often end up putting all their money into one asset class. This is something that I may be guilty of, as shares makeup 72.5% of my portfolio and has been trending up, while fixed interest makes up most of the remained at 19%. The problem with this is that no matter which asset class you are in, there will always be a crash at some point if you are in for long enough. Over the years, there will be a range of events that affect different asset classes differently, including recessions, depressions, booms, etc. Thus, diversification across asset classes is key, with the exact weighting depending on your risk profile. For younger people, diversification is less necessary due to their long investing timeframe, while for those in or near retirement, it is key to ensuring a stable portfolio. To get your risk profile, got to https://sorted.org.nz/. Martin gave a list of the best assets to hold in different events-
This does not mean you should change your holdings if one of these events occurs, it just highlights the importance of diversification.
Martin gave a couple of macro views-
- Countries have ageing populations. As people age, they tend to spend less, consume less, and save more. This reduces demand for goods and can be a drag on the economy.
- Property markets in New Zealand are going up, against all common sense.
- Crises accelerate trends- automation, working from home, etc.
Some general takeaways I got from Martin’s presentation were-
- People who are working should have backup savings of 3-6 months of expenses. People who are retired likely require 1-2 years of expenses in savings. Something that came out of the pandemic was that less than half of U.S. citizens had $1,000 in savings.
- KiwiSaver is a good option for people who have less than $300k, but if you are lucky enough to have more, you should look for a bespoke solution.
- International equities provide access to sectors that you will struggle to get in NZ, such as pharmaceuticals, high-tech, and biotech.
