Is Now the Time to Rethink Your Property and Investment Strategy?
Many homeowners are wrestling with a familiar dilemma: holding onto property in a fluctuating market, while simultaneously feeling the pressure to unlock capital for a more comfortable life. Recent market conditions – a period of price correction followed by stagnation – have left many sitting on significant assets, but feeling less secure about the future. It’s a valid concern, and one worth addressing proactively.
The Case for Considering a Sale
The expectation of a rapid property boom isn’t realistic, according to most experts. While a complete market collapse isn’t predicted, continued stagnation, or even further declines, are distinct possibilities. For those with substantial equity – potentially several million dollars – this represents a significant opportunity cost. That capital could be working harder for you, funding retirement dreams, supporting family, or simply reducing financial stress.
This is particularly relevant for those facing pressure from lenders. But even for retirees without debt, the benefits of diversifying away from a heavily property-focused portfolio are compelling. Rental properties, while potentially lucrative, come with the headaches of tenant management and ongoing maintenance. Selling one property doesn’t have to be a radical step, especially when you already own multiple.
Consider negotiating a temporary rent reduction with your tenants while the property is on the market. A small concession now could facilitate a quicker sale and unlock significant capital.
Navigating Investment Transitions: The ‘Bucket’ Strategy and Beyond
A common investment strategy involves allocating funds based on your time horizon: short-term needs (0-3 years) in low-risk options, medium-term goals (3-10 years) in balanced funds, and long-term aspirations (10+ years) in growth funds. The idea is to systematically move funds from higher-risk to lower-risk investments as you approach your goals.
Why Direct Transfers Aren’t Always Best
While it seems logical to simply transfer funds directly from growth to low-risk options, this can be a costly mistake. If markets have fallen, you’re essentially locking in losses by forcing a sale at a low point. A more prudent approach is to delay the transfer until markets recover, allowing you to sell at a more favorable price.
Pro Tip: Don’t let paper losses become real losses. Patience can be a powerful investment tool.
Building a Resilient Portfolio: Bonds, Shares, and Cash
To implement this strategy effectively, consider these key components:
- Low-Risk: Utilize a PIE (Portfolio Investment Entity) cash fund. These generally offer higher after-tax returns than traditional term deposits and provide easy access to your funds.
- Medium-Risk: Invest in a bond fund, preferably with international exposure. Laddered bonds – a series of bonds maturing at different dates – can also be a sophisticated option.
- High-Risk: Focus on a share fund, ideally one that is fully invested in equities.
Avoid balanced funds and growth funds that hold a mix of cash, bonds, and shares. This diversification within each fund means that a downturn in one asset class will likely impact both, reducing the potential for offsetting gains.
Annual Portfolio Review: A Step-by-Step Guide
Establish a consistent review process – perhaps in February or on your birthday – to assess your portfolio’s performance. Ask yourself these questions:
- Has your share fund increased in value, even after accounting for contributions? If so, sell units to replenish your cash fund, leaving the bond fund untouched.
- If the share fund has declined, leave it alone. Check if your bond fund has increased. If so, transfer funds from the bond fund to the cash fund.
- If both share and bond markets have performed poorly, continue your regular withdrawals from the cash fund.
- What if the sharemarket experiences a prolonged downturn (10+ years)? Leave your share fund untouched. Your cash and bond funds are designed to cover your needs during this period. Once the market recovers, replenish both funds from the share fund.
Did you know? It’s rare for bond funds to experience consecutive years of losses. This provides a built-in buffer during market downturns.
Fine Print: Dividends and Reinvestment
Ensure your bond fund and share fund distribute interest and dividends in cash, rather than automatically reinvesting them. Reinvesting can be counterproductive if you’re planning to sell units later. Consider diversifying your share fund investments across regional funds (Americas, Asia-Pacific, Europe) to capitalize on varying market performance.
Investing for the Next Generation
For long-term savings goals, such as a child’s future education, a similar strategy applies. However, with a shorter time horizon, a more conservative approach is warranted. Consider transitioning from a growth fund to a bond fund around age 13, and then gradually moving funds to a cash fund as the child approaches university age.
The Power of Dividend Reinvestment
Reinvesting dividends can significantly accelerate portfolio growth, particularly in New Zealand and Australia, where dividend yields tend to be higher. However, as with other investment strategies, it’s crucial to be flexible and adapt to changing market conditions. Taking dividends as cash can be beneficial when you’re actively drawing down on your savings.
KiwiSaver Access and Potential Changes
Currently, access to KiwiSaver funds is tied to the New Zealand Superannuation qualification age. While there’s been discussion about raising this age, no concrete changes have been implemented. However, if you’re concerned, consider diversifying your savings into a non-KiwiSaver fund that offers greater flexibility.
Important Note: To maximize your KiwiSaver benefits, contribute at least $1042 per year to receive the full government contribution, and 3% (increasing to 3.5% in April) of your salary if you’re an employee.
Frequently Asked Questions
- Q: Is it better to use a financial advisor for this strategy? A: A financial advisor can provide personalized guidance based on your specific circumstances. However, the principles outlined here are straightforward and can be implemented independently.
- Q: What if I’m uncomfortable with the volatility of share funds? A: Adjust your asset allocation to include a higher proportion of bonds and cash. Prioritize risk management over maximizing potential returns.
- Q: How often should I rebalance my portfolio? A: An annual review is generally sufficient. However, you may need to rebalance more frequently if there are significant market shifts.
This fortnightly column will continue to provide insights and answer your questions.
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