Investing for the long term - a wise choice right now?

[mani99]

Thanks for the replies all.

A question around Smartshares - wouldn't it be better to purchase the ETF through the likes of ASB rather than through smartshare and pay the fees?

Im thinking of splitting the $10k into AIA and an ETF (Maybe US Large Growth USG).

[Snoopy]

If you use the 'Fair Dividend Rate' that amount is 5%.

Just to be clear, your 'FIF income' is deemed to be 5% of the opening value of your FIF portfolio. You pay tax on that figure. But that is in no way the same as paying over 5% on the opening value of your FIF asset portfolio as FIF tax. That previous sentence is a misunderstanding of how the FIF regime works.

I'm well aware of the taxing of FIF. However, any person receiving dividends abroad say from US equities are stuck with IRS tax with-holding - 33% as marked on the W8BEN form account holders have to file every 3 years. The dividends are deposited into the same portfolio account and then IRD slaps on FIF which in effect, is a double taxation on the dividend because the calculation works on the whole total of the account.

If you structure your affairs so that cash from dividends is held under the same legal enveloping structure that also owns your overseas shares then you have a point about your 'cash' being taxed as if it was shares. I would suggest you do not use such a structure to organize your affairs for that reason. Banking your overseas dividends into an NZD account as they are paid should avoid this problem.

Dividend withholding tax in the USA is recognised under NZ's double taxation rules and can go towards your FIF bill. So you don't pay double tax as you claim.

There's no consideration for broker fee deductions / credits with FDR.

I am afraid that is wrong as well. I am enrolled in an overseas DRP for which I am charged a fee for reinvesting my dividends. This share comes under the NZ FIF regime. This reinvestment fee is tax deductible in New Zealand. I can also deduct portfolio management fees from my NZ income.

But the worse thing about this FIF is on years where you go negative, you get NO CREDIT BACK. So on the future years when you rebound back, you're taxed on the paper gains when you try to go back to your previous 'high' account value.

Yes there is no credit back on any capital loss you make, that is true. But as an investor on the NZX (not a trader) you get no capital credit back if one of your shares goes broke either. You could argue that both scenarios are unfair. But they are both equally unfair, which is the point!

Fundamentally, the FIF is a huge minus to the NZ investor (in Kiwi Saver or invested directly). Way back when Michael Cullen was pushing it through Parliament, the reason was clear to address the differences between NZ investing vs overseas N. American investing because their approaches are different. That is NZ share investors focus on dividend returns vs N. American investors focus on capital gain growth (on most part tax free capital gains). So as i've read back during the FIF introduction, "A savy investor in NZ could get away paying no tax on their US equities on capital gains". Yet at the same token, NZ investors in the Auckland housing market got away without paying any taxes on their capital gains. I was critical to Mr Cullen's office saying "You guys are pushing a double standard in NZ".

Those same housing investors in Auckland could have got a tax free capital gain on the sharemarket in NZ, if they had put their money there instead of housing.
Property investors were not favoured, except in being able to claim depreciation on their rental properties, when it was clear the asset was not depreciating. Even that was only a cashflow loophole, albeit a loophole that has now been closed.

Overseas markets like the USA tend to have larger capital gains than NZ because when you reinvest your earnings back into the business in a larger market the growth path is more straightforward. The number of NZ companies that have tried and failed to successfully reinvest their profits outside of NZ is telling. Sometimes when the right opportunity to expand is not there, it makes good sense to pay your shareholders dividends rather than chase some investment folly off-shore.

SNOOPY

[SBQ]

Just checked, see bold bit, and we are talking about $10k which is, as far as I am aware less than $50k so FIF does not come into it.

If I had a son and felt sufficiently generous to park $10k for him for 10 years then I would definitely go for diversity via a passive index fund or two covering either/or/some/all of NZ & ROW.

Yes the past page has been riddled with my comments and I must not forget we're only dealing with $10K. However, all models like in Kiwi Saver work out at the end with much larger figures for retirement (with their fancy window dressing). So, sooner or later the $50K threshold will hit ; and then where? What if another $10K or $20K cash were to come along?

I'm not sure if 'age' has been mentioned but it seems the general consensus is if your young (in 20s) and looking to invest, then going with the aggressive return portfolio would be best. But equally as aggressive is to simply hold on to the cash and wait for the next global stock market crash. Sure this is a timing game and as I said before (in different posts), no one has made $ panicking and when the market crashes, you don't see people around you flushed with cash. Human fear always prevails and irrational thinking comes into play. Does the young investor have the tolerance in a major share market crash? I remember back during the dot.com crash, almost all my friends had rushed to cash in their retirement portfolio despite the advice by their financial advisers to not do so. It's bad when from age 20 - 30, they spent all those year for contribution to only witness losing 50% of their portfolio... then they see they lose another 10%.. so they panic with fear to their financial adviser saying their portfolio could lose another 20 or 30% which would net them with nothing.

[iceman]

Thanks for the replies all.

A question around Smartshares - wouldn't it be better to purchase the ETF through the likes of ASB rather than through smartshare and pay the fees?

Im thinking of splitting the $10k into AIA and an ETF (Maybe US Large Growth USG).

Mani99, I don´t think you will find a cheaper and less complicated way to invest into an ETF fund by reputable companies like Blackrock or Vanguard, than Smartshares or Sharesies. I invest in small monthly installments with Smartshares and never worry about the small and very fair fees I pay.

[SBQ]

Just to be clear, your 'FIF income' is deemed to be 5% of the opening value of your FIF portfolio. You pay tax on that figure. But that is in no way the same as paying over 5% on the opening value of your FIF asset portfolio as FIF tax. That previous sentence is a misunderstanding of how the FIF regime works.

Correct and if I recall correctly, it's the last year of your portfolio where you can simply sell up and walk away with any gain as the FIF only accounts for opening value on the following year.

If you structure your affairs so that cash from dividends is held under the same legal enveloping structure that also owns your overseas shares then you have a point about your 'cash' being taxed as if it was shares. I would suggest you do not use such a structure to organize your affairs for that reason. Banking your overseas dividends into an NZD account as they are paid should avoid this problem.

Generally, that's not normally done (where you choose to deposit the dividends into a separate bank account, especially one from overseas). It probably is possible to do from a N. American perspective but I can assure you this will have fees and if you want to it in NZD (fx from USD). As difficult now as it is for foreigners to open US or Cdn brokerage accounts / or bank accounts (because of FACTA, CRS / AML regulations by most OECD nations), the hassle and tax reporting of an additional account wouldn't be worth it. The only way I could see this done cost effective is to have another account with the same brokerage firm ; but then the client will have 2 sets of W8BEN Forms to fill out every 3 years ; a hassle. Wire TTs aren't cheap and cheque processing by international means is also not cheap. At a recent NZSA event I met a person that received dividends in chq payment form from Singapore. The amounts were around $10 in foreign currency so his local NZ bank could not process it as a 1 off transaction. To simply open up a foreign currency bank account just to clear 2 dividend chq payments, again not worth the hassle and fees to clear the chqs alone would be a waste of time. It's interesting in this day of age where so much online banking is done but on the international front, they still rely on cheque writing for the paper trail and tax tracking.

[Tronald Dump]

I think you’ll find Smartshares is much cheaper than any online broker if you buy directly. There’s a one-off $30 set up fee and after that you don’t pay any transaction fees to invest if you go through their monthly process (transfer your cash in by the 20th of the month and it goes into the market on the first trading day of the following month). And you can do this from $50 per month.

[Snoopy]

At a recent NZSA event I met a person that received dividends in chq payment form from Singapore. The amounts were around $10 in foreign currency so his local NZ bank could not process it as a 1 off transaction. To simply open up a foreign currency bank account just to clear 2 dividend chq payments, again not worth the hassle and fees to clear the chqs alone would be a waste of time.

Yes this is the reason I opted into a DRP on an overseas share I hold. I found the NZ bank charges on overseas small cheques too high. I guess one silver lining is that if we can't cash such cheques, we no longer have to declare them as income? Will Grant Robertson be pleased?

It's interesting in this day of age where so much online banking is done but on the international front, they still rely on cheque writing for the paper trail and tax tracking.

Personally I think NZ banks are making a big mistake trying to phase out the banking of overseas cheques. Or defacto doing so by making their bank charges so high that it becomes uneconomic to present them. They don't understand that the rest of the world is not as 'advanced' (sic) as New Zealand in doing electronic payments. As a result they will probably end up doing significant damage to our export sector, because they are so greedy with their bank charges.

SNOOPY

[mani99]

Yes the past page has been riddled with my comments and I must not forget we're only dealing with $10K. However, all models like in Kiwi Saver work out at the end with much larger figures for retirement (with their fancy window dressing). So, sooner or later the $50K threshold will hit ; and then where? What if another $10K or $20K cash were to come along?

I'm not sure if 'age' has been mentioned but it seems the general consensus is if your young (in 20s) and looking to invest, then going with the aggressive return portfolio would be best. But equally as aggressive is to simply hold on to the cash and wait for the next global stock market crash. Sure this is a timing game and as I said before (in different posts), no one has made $ panicking and when the market crashes, you don't see people around you flushed with cash. Human fear always prevails and irrational thinking comes into play. Does the young investor have the tolerance in a major share market crash? I remember back during the dot.com crash, almost all my friends had rushed to cash in their retirement portfolio despite the advice by their financial advisers to not do so. It's bad when from age 20 - 30, they spent all those year for contribution to only witness losing 50% of their portfolio... then they see they lose another 10%.. so they panic with fear to their financial adviser saying their portfolio could lose another 20 or 30% which would net them with nothing.

Maybe I should've mentioned that my son is 4 years old. I thought now would be a good time to start investing for his future. Im looking to save/invest around $7k a year.

Smartshare looks very good, I need to look into a bit more.

[mani99]

Mani99, I don´t think you will find a cheaper and less complicated way to invest into an ETF fund by reputable companies like Blackrock or Vanguard, than Smartshares or Sharesies. I invest in small monthly installments with Smartshares and never worry about the small and very fair fees I pay.

Thanks.

Would you invest a one-off large sum?

[iceman]

Thanks.

Would you invest a one-off large sum?

With the way the World and markets are at the moment, no I would not. I think you de-risk it significantly by spreading the sum you originally mentioned on this thread, over several months.
Your 4 year old son is very lucky you are doing this for him and I agree, Smartshares is a great method for this purpose.