Are bond investments a scam? – Mary Holm

A: I do explain bonds every now and then, but once more won’t hurt.

There’s not much sexy about bonds – except perhaps the image you conjured up of Hans Christian Andersen’s folk tale emperor walking through the streets naked. And that depends very much on the body of the emperor! Anyone who doesn’t know that story can get it out of the library and find a child to read it to, preferably by a fire. Or just read it yourself!

But I digress. Bonds? Well, the vast majority of KiwiSaver funds hold some bonds – usually high-quality ones. The only exceptions are the lowest-risk funds that invest only in cash and the highest-risk funds that invest only in shares or sometimes property or other less common assets.

So it’s helpful for everyone to understand them – particularly because they have caused some usually pretty steady KiwiSaver funds to lose value in recent years. They are not complicated, nor are they sinister, as you seem to think.

A bond is rather like a bank term deposit. You give the issuer – usually a company or a Government – some money for a period. They pay you interest at set intervals, and return your money at the end of the term.

Some key points about bonds and funds that hold them:

Let’s say you buy a newly issued $1000 five-year bond that pays 5% interest. Then, after three years, you sell it.

If interest rates on similar newly issued bonds have risen in the meantime, nobody will want your low-interest bond. So you’ll have to sell it for less than $1000 – perhaps $800.

But what if interest rates have fallen in the meantime? Everyone will want your bond with its comparatively high interest, so you can sell it for, say, $1200.

In other words, the value of bonds moves in the opposite direction to interest rates.

In many lower-risk funds, the main investments are bonds. While some fund managers trade their bonds quite often, others tend to hold to maturity.

Nevertheless, all fund managers have to regularly put a market value on their bonds. This is because whenever some investors want to withdraw money or switch to a different provider, the managers have to sell some of their bonds at the current market price.

This means that even if you’re sitting quietly in a fairly conservative KiwiSaver fund, the value of your units will move often. Don’t look! It’ll come right in time. The next Q&A goes into the unusual recent volatility in these funds.

If they are issued by a central or local government, it’s highly unlikely you won’t get your money back at the end. You take less risk, so they pay lower interest.

Then come corporate bonds. If they are issued by solid companies, they don’t have to pay much higher interest than government bonds. But if the company is seen as wobbly, they will have to pay much higher interest. Investors get more – unless the company defaults.

On your observation about scams, I haven’t noticed that bonds tend to feature, but no doubt they sometimes do. They will be the bonds at the high-risk end. Most bonds are pretty solid investments.

It’s the return the bond holder gets. It takes into account that if you buy a bond some time after it’s been issued, you will probably pay more or less than the original price – depending on how interest rates have moved. So your yield will differ from the initial interest rate.

This can sound confusing. Unless you’re trading bonds, you don’t really need to worry about this.

Have bonds lost the plot?

Q: Having sold a lot of bonds recently, I find to my dismay that the old adage of “when interest rates go up, bond prices go down, and when interest rates fall, bond prices go up” doesn’t seem to work. Am I missing something new here?

A: Let’s look, first, at what’s happened to interest rates in recent years. In 2020, they fell to “multi-decade lows of close to zero during the Covid-era”, says Mark Lister, investment director at Craigs Investment Partners.

Interest rates then recovered dramatically from 2021 to 2023, only to fall again since then.

Did bond values move in the opposite directions, as expected?

“NZ bonds delivered negative returns in the 2021 and 2022 calendar years (to the tune of -4.2% and -5.1%), as interest rates rose to more normal levels,” says Lister.

Those negative returns over a year were highly unusual, he says.

“We hadn’t seen a negative year for bonds since 1994 – which is 27 years earlier.”

This is what caused many lower-risk KiwiSaver funds to report losses – with members’ balances falling – a couple of years ago.

“However, 2023 and 2024 were much better, with NZ bonds returning 7.5% and 7.0%, both above the long-term average of about 6.0%. That recovery came as interest rates stabilised in early 2023, and then declined from there on,” says Lister.

That’s when KiwiSaver funds bounced back. Phew!

It seems bonds did perform as predicted – moving in the opposite direction to interest rates.

So what might have happened to you?

“If the reader had invested right at the bottom of the interest rate cycle in 2020 or 2021, their bonds might still not have recovered even by 2024,” says Lister.

“While it’s very rare for good-quality bonds to suffer those sorts of declines in value, it can happen, especially when you have something as unexpected as a global pandemic, and the level of monetary stimulus that followed.”

In other words, your timing might have been unlucky.

Lister adds that, “In my experience, private investors rarely sell bonds on market. They invest, collect an income stream along the way, and await the return of their money at maturity.”

While people who buy and hold avoid the possibility of selling at a loss during the life of a bond, they are still “hurt” when interest rates rise because they’re stuck with a bond paying what is now low interest.

They could have done better elsewhere. Term deposit holders have seen this in recent years too. However, as in term deposits, bond holders get back exactly what they put in when the bonds mature.

To avoid losses like yours, Lister says, “it’s important to ladder a bond portfolio with securities that have a range of different maturity dates, or to use a fund that does this for you”.

“For what it’s worth, I think good quality bonds look attractive at the moment. Yields are at higher levels than we’ve seen for much of the past decade,” so investors get high interest income.

“The income buffer that had almost completely disappeared a few years ago has been restored.”

In short, says Lister, “Bonds are a good option for conservative investors looking for steady, reliable income, as term deposit rates continue to fall.”

The same applies to KiwiSaver funds holding lots of bonds. The Smart Investor tool on sorted.org.nz will tell you how much of your fund is invested in bonds.

In defence of gold

Q: From Richard Coleman, a director of New Zealand Gold Merchants:

In response to last week’s article, “Gold’s risk outweighs rewards for cautious savers”, physical gold isn’t flashy, but that’s the point. It’s not designed to chase profits or beat the market. It’s about keeping what you’ve already earned safe.

Shares, property, crypto all have their place, but they also come with risk.

Gold plays a different role. It doesn’t try to impress – it just quietly holds value, as it has for thousands of years.

I’ve watched markets shift since the 80s. I’ve seen the rise and fall of corporates, tech stocks, housing bubbles.

The Global Financial Crisis really drove it home. When confidence disappears, gold tends to hold its ground or move up. It’s physical, portable, and trusted everywhere.

Gold isn’t for getting rich. It’s the base layer in a portfolio – the foundation under every other investment. And when the ground shakes, that base matters.

The US debt? It’s not going away. Realistically, it’ll be inflated down or lead to a correction. I’m not calling a collapse – but I will say this: official inflation numbers aren’t telling the full story. To break even today, you’d need 6 to 7% returns just to stay ahead.

Gold reflects that uncertainty – along with the growing global doubt in the US dollar and its direction. When people finally realise they need a hedge, gold may be hard to find or already expensive.

Advisers rarely mention it – it doesn’t pay them to. But thousands of my clients would say this: gold works. It’s dependable, inflation-resistant, and always there when you need it. Buy it. Store it. Hold it. That’s the strategy.

A: Fair enough. And note that I said last week that while gold wasn’t suitable for the conservative reader, it might work well as a small proportion of some people’s savings. And I also said that, to some extent, gold offsets shares, rising when shares fall.

But didn’t you notice, in our graph, that the gold price almost halved from 2012 to 2015? Sure, it recovered and has since zoomed up. But that’s not quietly holding value.

Sorry but ...

Q: Thank you so much for your incredibly helpful reply to my question last week about mixed messages on reducing your fund risk.

I didn’t realise it was possible to split KiwiSaver that way – moving some of it at a time into a different fund. I will get in touch with Simplicity to get that started!

A: Not so fast! As it happens, you are with one of only two KiwiSaver providers who won’t let members invest in more than one of their funds. They are Simplicity and Pie funds, according to a survey by Te Ara Ahunga Ora, the Retirement Commission.

When I asked Simplicity boss Sam Stubbs about this recently, he said, “We have looked again at allowing KiwiSaver investors to invest in more than one fund, and have (recently) decided against it for this year. It’s technically possible, but after getting customer feedback we’ve decided to make online chatbots, a phone-based call centre and more comprehensive and consolidated performance reporting higher priorities.

“We will get there on multiple KiwiSaver funds, but with a fee way lower than most, there simply isn’t the money to do everything.”

As I’ve said before, the two situations in which it’s useful to invest in several KiwiSaver funds are:

Stubbs had earlier said Simplicity planned to allow investment in more than one fund in 2024, then 2025. Simplicity is a good provider in many ways, but I think it should get on with this change.

Meanwhile, I suggest you switch to another low-fee provider. You can find one by ranking funds by fees on Sorted’s Smart Investor tool. And do tell Simplicity why you are moving!

‘Extremely naïve’

Q: A surprising question to get from the couple in the column last week who have rented out their home while they rent elsewhere.

It’s extremely naive for the couple to think the Government should give tax relief because they rent somewhere else. It’s a business decision to rent. It was their lifestyle choice to move to be close to family and grandchildren.

We rent out a property in the same city as we live but still incur significant costs on our home, with rates at $12,000 a year, insurance at $4500, etc, etc. The Government or IRD are not going to give us tax relief on those costs. But let me know if I’ve got that bit wrong?!!!

I wonder if they are lodging the tenancy bond as required. And is the son paying tax etc on the $750 weekly income he gets from the parents paying rent?

A: I don’t know, but these are issues the couple should look into. And you’re right, of course, that their situation isn’t really different from yours. Why should they get tax credit for the rent they pay when you don’t get it for the costs of your home?

* Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.