Money matters: If timing is tight, shares are tricky

By MARY HOLM

Q: I'm 20 years old, and I'm in the last year of my IT degree at the University of Auckland.

I have been working part-time for the past three years and, after scrupulous saving, have managed to save $30,000.

My savings plans have included term investments, high-interest savings accounts and effectively using the interest-free period on my Visa card.

I have also recently agreed to a monthly $100 as part of my work employee shares scheme - more of an adventure than a balanced savings strategy.

I am currently comfortably saving at the rate of approximately $800 a month, after including alcohol, food, clothes, travel - in that order. I will work full-time from next year, so hopefully this will increase.

What would you suggest, holding in mind that I should not hopefully require access to my savings until about 2005, when I want to enrol at Harvard for an MBA, which will definitely leave my savings account in a serious deficit.

Hopefully, I should be able to score some sort of scholarship/sponsorship arrangement, which will reduce the impact on my savings.


A: First, congratulations. You're doing extraordinarily well for someone so young. And leading the good life, too. Once you've got your MBA, there'll be no stopping you.

Even your "adventure" in the employee share scheme is probably a good move, if you can get the shares for less than market price.

Just take care that you don't end up with too much of your savings in the same basket as your job. But that doesn't seem likely for you.

As for what you do with the rest of your savings, the timing makes it tricky. A share fund is too risky for the short term, but it is the best option for the long term. Is four years long enough?

I recently saw some data on returns on New Zealand shares, including dividends, from 1958 to 2000.

The returns over single years were negative 23 per cent of the time. Over three-year periods, though, they were negative only 14 per cent of the time.

Over decades, they were never negative. And that's looking at every 10-year period ending on March 31, June 30, September 30 or December 31 in the 43 years.

Note that this was looking at the share market as a whole - and the performance you might expect from a broadly diversified share fund. You could do much worse if you held just one or a few shares.

Also, there are no guarantees that the market will continue to perform as well as it has done.

Getting back to your four-year situation, there's perhaps a one in eight chance that the value of a share fund investment will fall over that time.

On the other hand, there's a good chance that it will grow more than if you leave it in term deposits. And it might grow lots more.

Could you cope with seeing the value of your savings rise and fall? And is your timing flexible?

If so, you're in a position to take a few risks. I suggest you put at least half of your savings into a share fund, preferably an international index fund.

As 2005 approaches, if you haven't done well, you could put off your trip to the States for a year or two, until the market rallies.

If that doesn't appeal, stick with term deposits in a bank or bank-affiliated company.

Even though interest rates are falling, if you tie up your money for a few years you can still get a return well above inflation.

Don't go chasing higher fixed-interest investments. They can be much riskier than a share fund.

Good luck for a scholarship.

Q: I see little point in notifying you of the seven serious errors in your latest biased and uninformed article (500 words and a kick from the next article, compared with my 300 words - hardly a fair fight), owing to your complete lack of journalistic integrity.

You selectively quoted from a subscriber's letter, giving a totally misleading impression of that person's financial situation. Who would guess he is a low-income earner from your article?

I have some information on the tax situation - which would clearly "surprise" you - but it won't confirm your preconceived view of the world.

I don't want a free ad. Nor your Judas kisses. I am not seeking additional subscribers for personal gain (although I do want to help others invest better), I'm just seeking intelligent and fair discussion to inform your readers.

I really don't need the money (unlike you, despite all that "hidden wealth").

I cannot continue contributing to your column which is so biased and dishonest. A cute little mischievous elf? You are the retirement savings Anti-Christ!


A: And you are not an accountant. The headline writer got it wrong last week. Sorry about that.

About my quote from your subscriber's letter, his income level was irrelevant to the point I made. Beyond that, as I said last week I always correct errors that are pointed out to me. But I can't if you won't tell me what they are.

Q: No doubt [the newsletter writer in last week's Money Matters] has his fans, but there must also be those who had poor results on his recommendations and those like me who lost money big time, in the thousands of dollars.

I can't remember the details (I'm busy trying to forget and it was six years ago), but think it was about $10,000.

What is not immediately obvious is that to achieve the same results as (the newsletter writer) one would have to buy and sell the exact same shares as he does at exactly the same time and in exactly the same quantities.

Clearly this is impossible, and if you happen to choose the "bombs" (his words) out of his recommendations, as I obviously did, you are in big trouble.

Like it or not, his philosophy is to concentrate on small and emerging companies, which in my experience have a bad habit of taking on water, if not sinking without trace, so that your losses can be spectacular.

I tried to convey my concerns to him in writing and verbally when I cancelled the newsletter, but he seemed unable to understand my situation or why I should want to cancel the newsletter.

Talk about an impervious skin. He even sent me a couple of reminders to join up again. I hope you will continue to warn people about the pitfalls of investment advisers.

Please feel free to use any of the above in your column. If it helps someone avoid the disaster I had, then it is worthwhile.


A: Before this thing escalates any further, I need to say that I've received about half a dozen letters from happy subscribers to the newsletter, and only two from unhappy ones - you and a man who wishes he hadn't acted on a recent recommendation, to buy Air New Zealand.

The imbalance in letters may be because, as one happy subscriber wrote to me, "in [the newsletter writer's] most recent mailing he has asked if we would like to give you some feedback."

And presumably those still subscribing are the happy ones.

Still, I want to acknowledge again that this man has his fans. An example: "I have subscribed to and acted with success on this newsletter for some years, and have found it to be invaluable both with its research and recommendations."

But I also want everyone out there to realise that following anybody's tips on what shares to buy and sell is risky.

Thank you for making a point that needed to be made.

Q: Because of advice I recently gave to a local investor, your first item two weeks ago (on an accountant giving bad investment advice) was interesting. And, as some figures are very similar, possibly your letter was from my client.

In case this was so, the lesson to me is: Don't give verbal advice (or, if you do, follow up with a written note), so that all factors are covered.

I attach a copy of the note now forwarded to my client.

[The note, in part, reads as follows:] "There have been, as set out in the six monthly reports, substantial management fees deducted from your fund.

"And although not shown, there will have been various managers and trustees fees deducted within the various sub-investment trusts. In addition, in at least some of the sub-investments the tax treatment will not be tax-efficient to yourself.

"My comments to you were that your investment carried risk greater than the risk associated with bank term deposits, yet your return was only similar to such deposit returns calculated on a similar basis, i.e. after fees. And my calculation was also on an after-tax basis; your adviser figures are before tax.

"I suggested that you consider changing your investments to either:

"* A deposit type investment, thereby reducing risk but maintaining similar returns to those which you have received over the past three years, i.e. low income with low risk (bank deposit, government or local body stock, etc), or

"* Investments which would, with similar risk, provide you with a greater return, i.e. greater income because you are prepared to be exposed to greater risk.

"In this case I suggested that you, to obtain further information and advice, and to allow comparison, make an appointment with [a financial planner]."


A: This wouldn't be the first time that an accountant - or for that matter a financial adviser or lawyer - said more than a client could absorb.

Good on you for sending the follow-up note. And your version of what you told your client certainly sounds better than the client's version.

If the unit trust is charging high fees, your client would be wise to look at alternatives.

Still, it would be good if you took into account - and pointed out to your client - that three years is too short a time to judge the performance of any unit trust that holds shares.

* Mary Holm is a freelance journalist and author of Investing Made Simple. Send questions for her to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@journalist.com
. Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.