KEY POINTS:
Life's become tough for investors who are reliant on small- to medium-sized nest eggs for income.
For some the tried and tested formulas from recent years are proving of little use. Not that long ago they could get 8 per cent return on deposits with the likes of
Kiwibank and Raboplus, and 10 per cent or more with finance companies - although many investors have lived to regret those investments.
Nowadays mainstream banks are offering 4-5 per cent interest and bond issues aren't as attractive as they have been.
Add to that, points out Brian Gaynor, director of Milford Asset Management, just this week several companies including Freightways, Millennium and Copthorne and CDL Investments have cut their dividends. More are likely to follow.
Many income-reliant investors have been snapping up debt securities (bonds) as they are issued. Gaynor wrote in this newspaper last weekend about the frenzy over the recent 7.75 per cent pa Fonterra bond issue, arguing that few investors or their advisers had read the prospectus and the investment statement was not vetted by any regulatory body.
While Fonterra's bond issue was rated A+ by Standard & Poor's, which made it investment-grade, investors still need to assess credit risk and not just assume that because Fonterra is a well-known brand the 7.75 per cent adequately rewards the risk.
Another investment Gaynor warns about that has been popping up of late is commercial property syndicates. Some have been offering 10 per cent returns and have been "inundated with people asking for the offer documents". But as a shareholder in the syndicate it is very hard to get your capital back if you need it.
It seems, then, if you're reliant on fixed-income investments and dividends, you're a bit up the proverbial creek.
So where should the elderly and those reliant on their capital for income put their money in this market? The answer, says Gaynor, is to be a bit patient.
Everyone is suffering, he says, not just older people. "That is the reality of the world we are living in." The financial woes are even shared by the affluent.
It can be tempting to jump at high-interest investments. "But I still feel capital preservation is the No 1 [thing] in this environment," he says. So investments with too great a risk of capital loss should be avoided no matter what the interest rate.
And just remember that 5 per cent returns for New Zealand may not appear attractive, but they won't stay at that level forever.
More good news, says Gaynor, is that the buying power of every dollar is rising and inflation is so low that the relative returns from cash deposits are better than they have been at other periods in the past - such as the 1980s, when a lot of wealth was eroded.
And once we pass through the eye of the storm, history shows that good investments will emerge from the credit crunch.
Some will be better regulated and others have fewer competitors, or both, says Gordon Noble-Campbell, chief executive of Spicers Portfolio Management.
In the present market, says Gaynor, investors could be spending a small percentage of capital while rates are low, knowing that the remaining capital will have greater buying power next year.
If your nest egg has been well and truly dented, or even cracked open, the answer may be to get a part-time job, consulting, or even starting a small business. Many retired folk who never imagined themselves going back to work may find themselves in that position this year.
If that's not an option due to age or health, letting a room or two is a possibility, or getting a foreign student in.
Mike Ross, financial planner of Newton Ross Private Wealth Management, points out that Kiwi investors are too preoccupied with total yield.
They put their entire nest egg into income-bearing investments based on interest rates alone, says Ross. "They think, 'I have $100,000, if I earn 6 per cent I am going to get $6000 a year'. They don't think what is the likelihood of capital growth."
The trouble is that cash returns the least long term. Should they live for 20 or more years after retiring, the capital will probably dry up or be eroded by taking that approach.
Spicers Wealth Management, using data from the Reserve Bank and Standard & Poor's, worked out that if you had invested $1000 in the bank in January 1970, in real terms after inflation you would have $1840 in today's dollars. This compared with a sharemarket return over the same period of $87,000.
Pity the 60-year-old retiree in 1970 who put all his or her nest egg in the bank and is still alive today, as a few will be.
Virtually every investor, even the most conservative, should have a proportion of their capital in growth assets according to their age and risk profile, says Ross. That way a balance can be found between eating into capital and growing the pot at the same time.
One rule of thumb trotted out is that investors should have an equivalent percentage of their capital as their age in safe, fixed-income investments. As you age, you move more of your assets into cash and bonds, but not all of it.
He adds that sceptical investors are usually turned around when the returns are modelled to them. "The problem is that [capital growth] is not tangible. Some years you get it, some years you don't. DIY investors don't know how to plan for something that is not likely to occur at the same rate each year."
Hence the need for a diversified portfolio.
Few DIY investors would know how to model their own portfolios, although investment simulation spreadsheets can be downloaded from the internet.
Another mistake investors have been making that is coming back to haunt them was to assume that the 8 per cent return they were getting on cash and term deposits would stay forever. Too many put a far greater proportion of their nest egg into cash and now that it's rolling off, they find the rates to be abysmal.
Instead, says Ross, if they had been planning around a cash rate of 5.5 per cent instead of 8 per cent their capital would have been better diversified. Myopic investors are said to be piling back into finance company debentures thanks to the Government guarantee. It can be tempting as some are offering more than 7 per cent a year over three years or more.
The trouble is that while investors are covered by the Government guarantee until October next year, the investment term goes beyond the guarantee period.
And beneath the guarantee, it is the same old companies with the same old balance sheets. "What happens if their assets don't match their liabilities at maturity?" says Ross.
Gaynor concludes that investors should be taking a cautious approach to their portfolios for the next six to nine months. "Be frugal and wait for the opportunities."
And Ross believes some of those opportunities will come in the form of corporate and local authority bond issues over the next two to three years.