An Alternative to Property Investment that Works
21 Feb, 2021
My last blog post was about investment property, something I don’t enjoy writing about and it received a big response with people emailing me with their thoughts and opinions. By and large, people email me instead of posting a comment on the blog itself (you are always welcome to do either) and as always, I appreciate hearing from people, so thank you 😁 for sharing your views with me. Overwhelmingly people responded by saying that they too were of the view that the housing market is in huge turmoil and that there is growing inequality which while it might be good for some, it’s not so good for others. Many acknowledge the downstream issues of their own children being unable to afford a home when the time comes for them. That is why I’m schooling up my 13-year-old in future homeownership. I kid you not that she is already saving for a house deposit because, sadly, I think she needs to start thinking about it sooner rather than later.
But I want to leave property investment behind and focus on the alternatives instead because I don’t see the point of carrying on about something I can’t change, but I do see the point of talking about other options.
What’s the alternative?
I’ve long said that there are alternatives to buying rental property and today I wanted to actually give you some decent detail on this because my view is that if you are in any of these three groups, there are some great options to more than grow your wealth:
Buying a house is out of your reach, that may be the case right now, but it shouldn’t stop you from becoming financially secure regardless
You don’t want a house of your own at all, maybe because you move around a lot and just don’t want one
Or you might be like Jonny and I, you own your own home debt free and don’t want to buy another property
Back in 2016, I started to keep some semi-decent but basic records of our net worth and where we were investing, so today I’m going to use that information to give you an idea of what investing into KiwiSaver and index funds/ETFs actually looks like a few years down the track. I find with this blog of mine that it’s helpful to share some real numbers instead of just talking hypothetically all the time.
I sing the praises of JL Collins, author of the book The Simple Path to Wealth a lot because I found him (via www.mrmoneymustache.com if my memory serves me correctly) and realised that there were alternatives to both property investment and over paying someone else to invest for me with managed funds or individual shares. When I found a suitable New Zealand equivalent to what he was proposing, I invested my first $50 on behalf of my family. And I/we have not stopped.
But if you are looking for a plan to ‘get rich quick’ you are not going to find it here because I’m a proponent of methodical slowness because from the people I speak with who are wealthy and from all the books and blogs I read, those who consistently set aside a portion of their family income week in week out are the ones who grow their wealth the most. Slow and steady is indeed winning the race and when I look at our figures and reflect on the fact that Jonny and I both work part-time and only earn somewhere between $60,000 - $80,000 (gross) a year at the moment I’m still impressed by our growth in net worth. The investments below could easily have been doubled if we were both prepared to work full time, travel less (well at least that’s been stopped for now) and do less but “life” seems hellbent on preventing that.
And by “life” I mean the fact that when we could have been working, we are often out for a run on the Otago Central Rail Trail or in the mountains around our area here in Alexandra on a glorious summer morning. THAT wins out as a way to spend our day every time I’m afraid, not working, so because of that we are both OK with the slow rise in our net worth. And our enjoyment with life.
A walk/run up Ben Lomond was rewarded with a great view of Lake Wakatipu
So, let’s get into some numbers!
I’ve used a rudimentary homemade spreadsheet to track our net worth since 2016, so with a fair bit of editing for clarity, that’s what I’m sharing today. Of course, I now track all of this in PocketSmith and Sharesight but anyone who has run their own spreadsheet for any length of time will tell you that it’s hard to let it go and I still diligently update ‘the original’ at the end of each month! I know a number of you work with some pretty epic homemade spreadsheets and you have my utmost respect but I have to say that when I bought in a bit of help it was a great day! I am only able to show you what we have actually contributed from our income for the last two years though as this information is easily available in PocketSmith but I only joined them in mid-2018.
KiwiSaver, Smartshares FNZ + USF and Meridian Energy investments for the previous five years:
What you should take from this is the following:
1.
Prior to 2016 we WERE saving and investing but we were really just finding our feet as to a firm investment path going forward. Although pretty ignorant as to what we were doing we had joined KiwiSaver on day one, one of the best moves we ever made. Despite paying no attention to it AND investing either via our PAYE if employed, or voluntarily if not, we still managed to accumulate $93,000 by 2016 (in the 8.5 years since the fund began in 2007). We have never missed a month. Since a fund change in 2018 (to Simplicity with low fees and in high growth) and while still only contributing just above the minimum required ($100 a month each) to get the government contribution this fund has now grown in value by $69,000 in just five short years to $162,000.
This is the BEST example from my own situation to show YOU that there is no need to rush, that slow and steady investment over time where all returns and dividends are reinvested is a winning formula. Einstein apparently said that “compound interest is the 8th wonder of the world” and he was spot on. If Jonny and I do no more than what we currently do, when we get access to this account at the age of 65 we are going to be two very contented retirees indeed.
2.
The annual increases that you see come from the price of each unit we own increasing in value and any dividend income each investment produces being reinvested into that fund. Then we also top each investment up with automatic monthly contributions. The key is automation and a hands-off approach because if I left it to myself to do it then chances are that I would either forget or most likely second guess the purchase by trying to time the market. Now I have committed to an investment plan I just stand back and let it happen and looking back, this is what the New Zealand and US share markets have done in the last five years:
Last 5 years of the NZX 50 Index
Source Google
Last 5 years of the S&P 500 Index
Source Google
So, the key is to stop pretending that you can predict the future and to instead just continuously buy into a low fee, diversified fund. I predominantly use SmartShares NZ Top 50 ETF (FNZ) and US 500 ETF (USF) because when I started, that’s pretty much all there was! However, Kernel is now a worthy alternative and one worth checking out (read the blog they produce as there are some excellent educational tools on there).
Access to buying share investments has changed since I began investing and it’s extremely easy for you to do something similar to me. Because these new providers have popped up and because I’ve blogged about each of them so I could check out their user experience, I do have additional SMALL but growing satellite investments using Kernel (into their NZ 20 fund and now their new S&P Kensho Moonshots Innovation fund), Sharesies (into their NPF fund), and Hatch (into the SHE fund - high five to all the female CEOs!). To round out our finances we have no debt at all, no access to credit cards and we have money set aside for emergencies, everyday spending, sinking funds etc that’s not shown here.
The idea is to show our main investments and how despite a global pandemic we just keep on keeping on!
3.
I don’t buy individual stocks!
For those new to my blog, the ONLY individual company I own - which in all honesty I should have sold - is Meridian Energy. We were the “Mum and Dad investors” who former Prime Minister John Key thought might benefit from becoming involved in shares when they partially privatised many state-owned assets. He thought we might learn something and he was quite right. It’s served us well since our initial $9,000 investment. We have never put another cent into it, it’s share price has increased year on year and it’s steadily produced dividends (income that we reinvested into the NZ Top 50) of about $1,000 a year. So, why should I sell?
Well, because individual stocks are too darn volatile and too risky because as COVID has shown us, what was a winner one week can be a loser next week (Tourism Holdings for example) and we have no way of knowing in advance. So, that’s why we now only invest in index funds/ETFs. But because that annoying old thing called EMOTION actually plays a far bigger role in personal finance than you think, we continue to keep them. We got lucky when we invested in this, it was pure good fortune that we signed up, not due to any type of skill on my part. It’s been very profitable for us, but I’m not willing to bet I could pick a company today and do it again. So, I don’t even try.
4.
Just like a fine whiskey, good things are worth waiting for. Share investments take time to start cranking. Initially, you invest your money month after month yet it feels like nothing is happening, yet slowly that snowball starts to build and roll and those investments start to show capital gains and then the more units you hold, the more dividends and returns are paid out to you. For example, Meridian pays us a passive income of about $1,000 each year. Instead of spending it, although tempting, I immediately reinvest this back into one of my investments. To put it another way, this dividend almost pays for my entire KiwiSaver annual contribution. So, that’s what people mean when they talk about “passive income” and we have reached the point where we are regularly receiving some.
For now, we don’t need to use any of this income that our investments generate, we still have day jobs, so we continually reinvest it but the plan is to build them up to a point where they provide either part or all of our income. That’s the long term plan that we are working towards.
In just five short years, with both of us working part-time and sometimes not at all, we have increased our investment total by $170,000, or 145%. That's an average yearly increase of $34,000 which is far in excess of what we actually contribute from our incomes.
A peaceful way to grow our wealth
No-fuss, no-hassle, plus an easy tax return and the knowledge that I own a tiny little slice of hundreds of companies because my investments are diversified far more than if I just decided to buy another debt-fueled house. I want people who read my blog to understand that becoming financially secure is a slow, steady and consistent process that you can do just by setting aside a portion of your OWN INCOME. No need for debt with this strategy and apart from our KiwiSavers which are locked in until 65, our other investments can be liquidated within hours if required.
It’s such a peaceful way to grow our wealth, which I know sounds like a lot of airy-fairy bollocks on a personal finance blog, but it is. I have tried over-thinking investing but the fact is that you honestly don’t need to. You don’t need that much money to set yourself up to win. You just need to earn enough to cover your costs, live well and always invest a portion of every paycheque for your future.
The book The Richest Man in Babylon says it best: “A part of all you earn is yours to keep”
Darn right it is.
I worked all of this out by reading books and blogs, listening to podcasts and talking to people who I respected and who I knew to be wealthy. And I suggest you do the same because my take-home piece of advice is “don’t take financial advice off people who have no money” and that includes heavily leveraged and exceedingly complicated investment strategies of property investors whose plan takes eons before they actually get to enjoy their wealth. No offence. Seek out people and talk to them, ask them what advice they might have for someone like yourself. Then ruminate on that and form a plan of your own. Then just get on with it. No financial plan is perfect and I’m still tinkering with mine as the years go by.
Check out these resources, these are the ones that I most often send out to people who are looking for information about growing wealth:
JL Collins The Simple Path to Wealth - hands down the best book I have read on index fund investing
For those who don’t like to read, check out this episode of Choose FI where they interview JL Collins about his book: The Stock Series - Part 1
Also, the book The Richest Man in Babylon for teaching you to have balance in your life, something that Jonny and I really do feel that we have.
And finally, investing legend Jack Bogle once quipped something along the lines of that the best investors are either dead or have lost their logins - his point being, create a simple investment plan, contribute to it regularly and then just leave it alone! Simple is best.
