Here's why you probably don't want Bonus Bonds… and four other investments

Wednesday, 2 October 2019

The FMA has published a new guide to managed funds following research suggesting more New Zealanders are considering alternative investments because of low interest rates.

OPINION: Investing is usually seen as a 'good thing'.

We're told to invest young. We're told to invest early. We're told to plan for retirement or think about the best way to save for a house deposit.

What about the investments that just sort of… aren't so good?

Here are a few to think twice about before you throw your money in.

* I took $50 and invested it: Here's what I learnt

* Term deposit rates are still low, should I switch to shares?**

Bonus Bonds

New Zealanders have a lot of money invested in Bonus Bonds, although it's not easy to see exactly why.

There is $3.25 billion in the scheme, a figure which started to slide in recent years.

You're probably better off just drinking it.

The idea is that the bonds are a bit like a conservative managed fund, in that your money is pooled with others' and invested in fixed interest and cash investments.

The minimum investment is $20.

But instead of getting any return for your investment, you get the chance to win cash prizes each month.

The odds of winning are getting worse over time.

In 2015, investors had a one-in-17,447 chance of winning. In the year to March, it was one-in-32,296 but 99.91 per cent of all prizes were worth $50 or less. Prizes worth just 1.2 per cent of the scheme's assets were awarded.

By comparison, if you'd invested $10,000 in an ANZ term deposit over two years, you would have had a return of almost $400, no finger-crossing required.

Lotto offers a higher chance of winning.

Multi-level marketing sales kits

If you've been on Facebook lately, you've probably encountered someone who wants to sell you something - and then to have you sign up to sell more of it.

Along the way, you have to buy a 'kit' to get started, or commit to regular product purchases.

The cost of getting started varies.

Scentsy offers a full-sized starter kit for $187. Isagenix requires a qualifying initial purchase and then $210 of purchases every month - but promises you'll spend less on food because of the shakes you're buying.

Your new car will lose value as soon as you take it home.

Arbonne charges $75 plus a $45 upgrade for preferred-client discounts.

These businesses usually peddle promises of self-employment and easy income.

But actually getting a return is difficult. Often, you'll only earn any commission if you meet a set level of sales.

Arbonne data shows that in 2018, of all the independent consultants who made any money, the average amount earnt by those on the base layer was A$908. That does not include expenses/

If you love the products and are getting a real discount, multi-level marketing schemes might make sense. Otherwise, you're better off saving your money and buying retail.

Because of the way these businesses are structured, you have a better chance of success if you get in early and sign up new consultants beneath you in the chain.

Cryptocurrency

This time two years ago, the buzz was about bitcoin.

Its value shot up from about $1000 at the end of 2016 to nearly $30,000.

It then dropped away to $5000 before recovering to $13,151 this week.

Bitcoin is the highest-profile of the cryptocurrencies but far from the only one.

Ethereum rose from about $30 at the end of 2018 to $1800 in January last year. It is now worth $271.

It seems likely that cryptocurrencies of some sort will be important in the financial world of the future.

But that doesn't mean that betting on the coins being traded now is a good idea.

One of the biggest issues is that their value isn't tied to anything. They aren't regulated by a central bank and are only worth what supply and demand dictates. The underlying blockchain technology might have value but the tokens themselves have no intrinsic worth.

Most of the people fervently buying and trading bitcoin at its peak never intended to use it as a currency but were speculating.

It's inevitable that some currencies will do better over time while others disappear. There's no guarantee as to which ones will succeed - and the eventual victor could be one that doesn't yet exist.

Cryptocurrencies are largely outside the remit of the Financial Markets Authority so you don't have a lot of protection should things go wrong.

Wine

As far as investments go, wine is a pretty appealing one to lots of people.

But it's far from a sure bet. You have to pay to look after it. It gives you no return while it's sitting in the cellar. If you want to sell it, you have to find a willing buyer at the right time. If it hasn't been professionally cellared and you don't have a large amount to sell all at once, it'll be hard to move. Leave it too long and it'll pass its best.

If you're thinking about investing, pick one that you'd drink if things don't go to plan.

New cars

With money so cheap to borrow, new cars might start to look quite tempting on car dealers' lots.

Don't buy one expecting to be able to sell it for a windfall later, unless it's something particularly rare.

New cars generally lose about 20 per cent to 40 per cent of their value in the first year. The bigger the car is, the faster it depreciates.

The Dog & Lemon Guide estimates that a car that was bought for $100,000 would be worth $30.720 by the fifth year.

Consumer NZ says our new-car prices are higher than other countries in part because so many new cars here are sold as company fleet cars or rental cars. You can get a much better deal by buying a nearly-new car.