Welcome to the October issue of the Select Wealth Management Dashboard Newsletter. It won’t be too long until you hear Christmas carols playing in the supermarkets and shopping malls… Where has the year gone!

The past week has seen some significant volatility in the share markets – something we haven’t seen for a while. But before I get into that, I’ll start this month’s newsletter with a quick quiz. Which of the following would you rather have:

1. $100,000 in your hands today, or
2. 1 cent that doubles in value every day for a month

It’s obvious – the $100,000, right? Wrong. 1 cent that doubles in value every day for a month (with 30 days in it) will give you an astounding $5,368,709! It’s hard to believe, but do the maths and you’ll find that the numbers don’t lie. (I had to check this, double check it and triple check before I was convinced…).

This simple little exercise highlights 2 things to me. Firstly, the power of compounding interest. Sure, it might be an extreme example, but it does show how potent compounding interest is. The second thing this highlights to me is that an important part of my job as a Financial Planner is to help you make good financial decisions and avoid simple pitfalls (like taking $100,000). It’s unlikely that you will ever be faced with a financial decision as extreme as this example, but from time to time you may face decisions that could have a significant financial implication. Part of my job is to offer a subjective, at arm’s length opinion free of emotional influence.

So how does this relate to market volatility? Well, when markets get a bit scary, it’s easy to make kneejerk irrational decisions. It’s a natural reaction to feel like you should do something, anything to react to the volatile environment. But reacting is futile – it’s too late. The changes you make today will not affect what has happened last week – they will affect what will happen in the future. It’s the changes that were made in the past that affect the outcome today.

That’s why an annual review of your investment is so important. Doing a systematic annual review ensures that your portfolio is robust enough to withstand this volatility. Most importantly, your portfolio will be consistent with your tolerance of risk. Nobody likes to see their investment fall in value, but the behaviour of the share markets over the past week is a perfectly natural part of the investment process. Reacting now would be taking the $100,000.

Remember, your financial wellbeing is our concern. We care more about you and your money than anyone who doesn’t share your last name.

In other news, you may have heard of the Tax Working Group which has been put together to do a review of the New Zealand tax system. On 20 September the working group released the “Future of Tax Interim Report”. This is a 192 page report outlining proposed improvements to the current tax system. The most significant talking point of this report was the proposals around “Capital and Wealth Tax” – essentially capital gains tax. Most people only associate this with investment property, but there are also other assets that are being considered for capital gains tax. These are:

Interests in land or property (other than the family home)
Intangible property, including goodwill (this would capture many small and medium sized businesses owned by mums and dads)
All other assets held by a business or for income producing purposes (such as plant and equipment)
New Zealand and Australian shares

As you can see, there are several ways in which New Zealander’s could be captured by these proposed changes, and there is a potential for a significant increase in the tax take.

Some of it might be given back in other areas though. For example, it is proposed that employer contributions into KiwiSaver be tax free (currently taxed at your marginal rate), and that the PIR rates for KiwiSaver be slightly reduced – a clear incentive for people to contribute to KiwiSaver and save for their retirement.

It is important to note that these are only proposed changes at this stage, and there is a commitment that no changes will occur in this term of Government. But if you were a betting person, I think it’s safe to say that a capital gain tax of some nature is inevitable at some point in the not too distant future.

In the past 30 days, both the Reserve Bank of New Zealand and the American Federal Reserve met to review their respective monetary policy. The recent trend of divergence between the 2 continues as New Zealand’s Reserve Bank Governor (Adrian Orr) kept our rate on hold at 1.75% re-iterating that the next move could be either up or down, while the FED increased its rate to 2.25% and re-affirmed that it is likely to continue increasing rates in the foreseeable future. It is the first time in 20 years that interest rates in America are higher than interest rates in New Zealand.

This phenomenon goes some way to explaining why the NZ$ has fallen so sharply against the US$. In January of this year, NZ$1 bought you USA$0.72. Today it only buys you US$0.64. That’s a fall in value of about 10% since the beginning of the year. That’s great if you have investments domiciled in US$, but not so good if you’re planning a trip to the States for a holiday. (Fortunately most of you would fall in the former category…)

Here are the numbers for the past 30 days:

In terms of your Select Wealth Management portfolio, you should by now have received your 30 September quarterly performance report. I am pleased to say that performance in most cases was reasonable – building on the past few years of strong performance. Our focus now is on ensuring that our portfolios are as robust as possible – banking some of the gains and taking measures to protect capital. If you want to meet to go through your performance report or review your portfolio, don’t hesitate to contact me – I am here to help.

Finally, a quick update on our Giving Back program. As you may recall, we are working with Te Omanga Hospice for the second half of the year. I am pleased to confirm that we are on track to reach our target of $2,500 by the end of the year. As always, thank you to those of you who have sent referrals of friends, family and colleagues – we really appreciate it. It is your referrals that make a donation to such a great cause possible.

You can follow progress at www.mifinancialplanning.co.nz/giving-back.html .

Until next time, keep warm and well.

Warm regards

Dave and the team at Isaacs Financial Planning

dave@mifinancialplanning.co.nz

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This newsletter is intended for general distribution and does not constitute personal financial advice. Copy of my primary disclosure statement and secondary disclosure statement.