I like investing in listed insurance companies. They tend to be large. Relatively profitable. They have plenty of spare cash to invest themselves. They often ride with recovering markets.
Yet, when it comes to selecting insurance products, there’s a question I tend to ask in my own situation. If I can readily afford the cost of what I’m seeking to insure against without damaging the majority of my savings — do I need that insurance?
Insurance is often a price people must pay for a lack of savings and investments.
For example, the insurance against smaller risks. Phone insurance, pet insurance, funeral insurance come to mind. And a raft of smaller risk areas that someone with reasonable savings might be able to cover.
Then there is health insurance. Which gets steadily more expensive as you age. If you can afford the most expensive operation the insurer covers, without eroding too heavier a chunk of your savings or investments, then such insurance could be questioned.
Though there may be benefits in having ready access to service and private hospitals. And serious operations such as heart surgery can run to $60,000 or more.
Homes and third-party risk are different matters. Catastrophic risk events in these areas could wipe most people out with no insurance.
All I’m saying here is that some insurance could be an extra cost you must face due to lack of savings and investment.
Savings and wise investing give you and your family ‘margin of safety’
In 2018, New Zealand had one of the lowest household savings rates (as % of household income) in the OECD.
Unfortunately, this has been consistently the case for the past 5 years:
Household savings (Total, % of household disposable income, 2014 — 2019)
What we tend to see is that countries with higher household savings are able to invest and experience higher rates of income in the future. They also pay less interest to foreigners.
So, if you want to rely less on insurance and debt, and have a higher income in the future, one of the easiest routes is more savings and investment. That means finding ways to generate a surplus now.
You may not be better off in the short-run, of course. Since savings involves sacrifice. But life runs a long time, and you could be much better off in the longer term.
The concept of saving for tomorrow — or next year or many years’ time — is one that has accelerated the progress of humanity. Once civilisations began using granaries to store harvests for the winter months, it then became possible to move to the next level of advancement.
Saving at 1%?
My bank currently offers a term deposit for 18 months at only 1%. This, after tax, may not even keep pace with inflation.
So when it comes to saving and investment, if I want a higher return, I’m going to have to consider some riskier assets. Risk provides greater return. But also greater risk of loss, drawdown, or volatility. Which we’ve just seen during the coronavirus disaster and recovery path.
My personal preference beyond bank savings is dividend-paying stocks. In particular, larger businesses that offer a margin of safety. Due to the assets they own, the number of customers they serve, or a moat around their earnings.
Although I am taking more capital risk in such stocks, and having to accept their value may rise and fall with business conditions and the market, I am often getting a yield of 5% or more. And the chance of capital growth as well.
Many New Zealanders turn to rental housing for yield and capital growth. While net rental yields have come down here in Auckland, capital values have risen to an all-time high.
So much so that it’s attracted government attention. In fact, we’ve been warning investors of this previous, including the option of restricting debt by tax deductibility.
Nobody has a crystal ball on the market. But we have high prices fuelled by low interest debt. And now significant government intervention in the market to re-price that debt via the tax system. Investors should carefully review their position.
This could be one reason for the low savings rate in New Zealand. By household, we have significant investment into housing and high household mortgage debt to support that. Among the highest in the world.
Wealth Morning has researched one solution to the housing crisis in New Zealand, raising our investment concerns. And providing an opportunity to invest and add rental supply. You can learn more about that and sign our parliamentary petition here 👉 TheKiwiDream.nz
If you’re interested in building a robust share portfolio focused on income and growth, this could be an alternative to property.
If you are a larger or more experienced investor, in particular Eligible or Wholesale, we have a Managed Account Service for qualifying readers.
In case your investment brings trouble with the IRS, you can look into settling IRS tax problems with a lawyer. It is understandable that a vast portfolio can result in some missed taxes as the tax laws are broad.
In such instances, a tax lawyer can offer you reprieve by dealing with the authorities and getting you out of the mess. Consider the above points if you ever get into a tax mess based on your investments.
One thing is for sure: The more you can save and be able to invest, the more of an edge for the future you may be able to build.
Editor, Wealth Morning
This article is general in nature and should not be construed as any financial or investment advice. To obtain advice for your specific situation, please consult an Authorised Financial Adviser.