Bonus Bonds coming to an end - now what?
In a shower of coloured confetti, $3.25 billion will be landing over the suburbs of New Zealand in the coming year. It’s Bonus Bond bonanza time as ANZ wind down the scheme and return money to investors.
If you’re like me and got given $10 in 1970, payday will involve coffee and a date scone at the local café.
But for everyone else, where can you put the money? Simple answer: Invest it properly.
I can only put out a limp and halfhearted apology for all the snide comments financial commentators have made in the last week about Bonus Bonds. While it’s difficult to read professionals slating your investment decisions, it’s only the future that matters now.
They’ve got your best interests at heart, because watching $3.25b sitting in a unit trust that pays the vast majority of people zippo is pretty tough for any fund manager to stomach. Not only that, Bonus Bond money gets left for decades, withering away with inflation. We really can’t help ourselves when it comes to giving them a bit of a verbal send-off.
If my gift from 1970 had been $100,000 it would now need to be worth $1.6 million to maintain its purchasing power. Even with bonds purchased for a millennial, $100,000 in the year 2000 would now need to be worth $151,000 to be square with the inflation devil. Consumer price rises have only averaged 2.1 per cent a year over that period. Small things can pack a big punch.
Reinvestment suggestions:
1. A fund: if you’re scared of the words “unit trust”, don’t worry, your Bonus Bonds were in one. Most people never figure that out. A fund is simply a pool of shares and bonds run by a manager such as Fisher, Booster, Simplicity, or ANZ and other banks. The bonus is they’re fully liquid with no age or poverty restrictions on getting your money back (unlike KiwiSaver).
It’s important to note that sharemarket funds are nothing like Bonus Bonds. Their risk is considered entirely different because your original capital can fluctuate up and down. Unless you have the ability to leave the money alone for a minimum of five years, then you can’t consider these.
2. KiwiSaver: If you haven’t invested enough to get the government top-up, it’s an obvious choice. If you can afford to tie up the money until age 65 and you’ve got liquid funds elsewhere, it’s also a good idea.
3. You want to keep gambling? Invest in a term deposit and buy Lotto tickets with the interest. You’ll need at least $50,000 invested to get a weekly $10 ticket. Interest after tax is often below 1 per cent.
The simple message is this; don’t let your next decision be a wealth annihilation vehicle. Investments are long term and inflation multiplies like a financial cancer over time.
Investing for the younger generation
For those investing for children, long-term comes in decades. If they’re still at school they have half a century before they retire. Over that period inflation can’t be sniffed at. The biggest trap is choosing something that meets your own risk appetite and not theirs.
We often hear “it’s got to be low risk as I’m doing it for the kids”. Nothing could be further from the truth. They have time on their side and meet the definition of a long-term investor who can withstand volatility.
So you don’t like risk?
Also bear in mind that Bonus Bonds are perversely one the investments with plenty of risk embedded. Sure they preserved capital in its raw form. But with 99 per cent of units not earning a return, they are one of the few vehicles I could label as “almost guaranteed to lose” given they get bled by inflation. Volatility-free doesn’t mean you aren’t losing.
If you invested in 1970, 93.8 per cent of your purchasing power would now be lost because of inflation.
How to find your bonds
If you suspect you have old bonus bonds call 0800 266374 and get help in tracking them down.
So you don’t like risk?
Also bear in mind that Bonus Bonds are perversely one the investments with plenty of risk embedded. Sure they preserved capital in its raw form. But with 99 per cent of units not earning a return, they are one of the few vehicles I could label as “almost guaranteed to lose” given they get bled by inflation. Volatility-free doesn’t mean you aren’t losing.
If you invested in 1970, 93.8 per cent of your purchasing power would now be lost because of inflation.
How to find your bonds
If you suspect you have old bonus bonds call 0800 266374 and get help in tracking them down.
Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.