Bernard Hickey: Stocks no longer the way to build nest egg

The accepted wisdom for years has been that savers with some time to spare before retirement should choose shares rather than bonds, property or bank accounts because equity investments make much better returns over the long term.

The theory is any investor will be able to ride through the ups and downs by simply "buying and holding".

But how long is long-term, and is it actually true that buying and holding works?

The stockmarket's collapse in the last six months has shocked baby boomer investors globally, forcing many to re-examine this immutable truth.

A quick look at history is sobering. There have been several periods of more than 20 years where stocks have underperformed or fallen outright and the latest episode looks like being another one of these multi-decade stockmarket slumps.

US stocks fell 83 per cent between 1929 and 1932 and then took a further 26 years to recover in real terms, according to Rob Arnott of US index analysis firm Research Affiliates.

He also points out that the 64 per cent fall in US stocks in the last nine years means since 1969 investors have been better off investing in bonds.

There was a similar sized collapse in European stocks between 1905 and 1921 and the Japanese market is now at the same levels as it was 29 years ago.

A bear market lasting 20 years means investors need to be very careful about buying and holding. This is why investors globally are looking at other options more focused on protecting capital and regular income.

New Zealand has actually been slightly ahead of the game globally, albeit with a nasty little twist in favour of residential property investing.

New Zealand baby boomers who started saving in the mid-1980s briefly fell in love with stocks. They then fell out of love with them permanently when the 1987 crash was much more severe here than elsewhere.

After some initial enthusiasm between 2004 and 2007, the NZX50 has given up all its 70 per cent of gains over that period, including dividends because the index is a gross index.

Investors who put their money in the bank would have been much better off over those five years. It's very difficult to compare the performance of the New Zealand stockmarket over a very long term because of the change to the NZX50 gross index from the old Barclays 40 Capital Index.

Most view the New Zealand stockmarket as never having recovered to the levels it reached in early October 1987.

That has meant that New Zealand's baby-boomer savers have looked for either a regular and high dividend or yield, or have depended on capital gains on property. Savers fell deeply in love with property when real house prices almost doubled between 2001 and 2007.

Even with the slowdown in the property market in the last year, New Zealand's baby-boomer savers have not given up their faith in property. But any residual desire for stocks has been wiped out completely and is likely to have been destroyed for the generation behind them too.

This explains the insatiable demand for corporate bonds in recent months and raises the question: what happens when the baby boomers want to liquidate their property holdings to sustain themselves in retirement?

Will we see Generations X and Y fall out of love with property as prices remain depressed for a decade or two? No wonder so many are putting their money in guaranteed bank accounts, corporate bonds and guaranteed finance companies.

* Bernard Hickey is the managing editor of www.interest.co.nz, a website for investors and borrowers wanting free and independent news and information about interest rates, banks, finance companies and the economy.