From the Grownups website. Posted by Alec Waugh
From the Grownups website. Posted by Alec Waugh
The Aussies are up in arms re fees. In general NZ management fees are higher than our Tasman counterparts. Go figure. This article shows industry spokespersons are fudging their comments . Get them all below 1% and we might be on the right track
Did you know that New Zealand savers biggest investment is in Bonus Bonds. Apart from the fact the provider ANZ creams 1.28% management fee, it should be about .50 or less. Bonus Bonds as a sound investment decision raises many issues.
Bonus Bonds – are they an investment worth having?
Updated: March 2018
TLDR Review Summary of Bond Bonds
Bonus Bonds – An Introduction
|It’s a Lottery first, and an investment second
Bonus Bonds are an investment, and the interest or return you receive comes down to luck, as it does with any lottery. You can invest or withdraw without penalty, and each bonus bond is worth $1. A bonus bond will not increase or decrease in value, so if you invest $1,000 you buy 1,000 bonds, and will receive $1,000 when you withdraw your investment. Each $1 bond has the same chance of winning a prize. As it is a lottery, the more bonds you hold, the higher chance you have of winning. It’s important to know that a bond has the same chance of winning in another draw if it has already won, so a winning bond is still relevant for future prize draws.
What you need to know:
|It’s heavily regulated, and offers a risk-free investment.
Bonus Bonds is run by ANZ via their “ANZ Investment Services (New Zealand) Limited” company, and it’s heavily regulated by the government. The government determines the return on investment by setting the maximum odds of winning. Bonus Bonds are mandated to invest your money into cash deposits, and currently invests all its funds in deposits with New Zealand registered banks (50%), bonds issued by New Zealand registered banks (45%) and New Zealand Government debt (5%). Together, this represents a risk-free investment – your money sits with banks and the government.
|The odds of winning a prize are not good
The exact number of prizes award each month does vary; here is November 2017’s distribution which is typical of an ordinary month.
The table makes one thing clear – the odds are not great. With a $1000 investment, you’re looking at a 1 in 3.4 million chance every month of winning a prize above $5,000. 99.996% of bonus bonds return $0 to their owners.
|Every prize is paid out tax-free
Bonus Bonds pays all tax on the prizes (the interest), which means whatever you win won’t be treated as income. For bond holders who pay tax, that gives some advantage to the investment. However, despite the overall return on investment being 1.5%, those with average luck won’t win cash prizes anywhere near that rate.
|Bonus Bonds states the annual return is around 1.5%, but for an individual investor its much lower.
The median prize is $0, which accounts for 99.96% of all bonds. The median cash win is $20, which accounts for 98% of all cash prizes awarded. So, almost every bond wins nothing or at best, next to nothing, with their investment . For every lucky bond that wins $1m, there are 3.4 billion bonds that win nothing.
ESTIMATED CASH PRIZES WON OVER ONE YEAR WITH AVERAGE LUCK
|You can increase your odds…by buying more
|Bonus Bonds markets its cash prizes as “winning” – it’s in fact only a return on your investment.
The marketing talks about the wonderful things “Bonus Bonds $1 MILLION winners” do, and the impulse is to invest to “win” big. Yet the cash prizes are merely the interest paid on everyone’s investment. We all know a friend which says “I win with my Bonus Bonds quite often”.
But if they’ve got $10,000 invested and “win” $75 in a year, the same investment in a bank would “win” $300, and that “win” is guaranteed. Despite this, everyone loves to win things, so there is a strong psychological pull towards keeping money in Bonus Bonds even if the return is relatively poor.
|Bonus Bonds are unlikely to beat the inflation rate
Consumer prices in New Zealand increased 1.9% year-on-year in the third quarter of 2017, meaning general goods and services cost 1.9% more today than they did this time last year. Bonus Bonds, unlike a term investment, don’t pay a guaranteed amount of interest. This means that as inflation increases, your money loses value in real terms. What you could buy for $1,000 last year would cost a lot more next year. Most saving and term investments beat inflation levels, but Bonus Bonds do not.
|If you hold Bonus Bonds for the long term, inflation will eat your investment!
If Inflation averages 2.5% over 10 years (since 2000 inflation has averaged around 2.7 percent in New Zealand), in the most simplest terms your investment will be worth 25% less if you don’t receive any interest on the principal.
For example, if you invest $1,000 in Bonus Bonds for 10 years and don’t win anything, you’ve lost in real terms $250. This can add up the more you invest, eating away at the value of your savings.
|How Bonus Bonds compare with other savings and investments
Bonus Bonds compete with other low risk investments such as term deposits and cash saving offers. It’s easy to compare the overall rate of return of Bonus Bonds to other savings. Firstly, the Bonus Bonds cash prize fund rate is currently 1.4% (although this can change at any time, for better or worse to bond holders). Compare this to:
Our table below presents the estimated “return” on Bonus Bonds for differing investment amounts – we know that Bonus Bonds prizes are awarded in set amounts ($20, $50 etc) so we’ve used some assumptions in our calculation to see how it compares in real terms with the best savings and deposit rates available.
HOW BONUS BONDS COMPARE TO CASH SAVINGS (UPDATED FEBRUARY 2018)
Concluding Comments – Are Bonus Bonds Worth Your Money?
Posted by Alec Waugh, this article is from Money Hub.