Cautious investors ready to splash out

By MARY HOLM

Q. I have a very successful business that makes excellent profits.

My problem is (probably because of a lack of education) that when it comes to investing money I am an absolute wimp and extremely distrustful of "money managers" and "investment consultants."

My wife and I have worked extremely hard and do not want to see our profits disappear in some dodgy investment.

We therefore are ultra-conservative in our investments, and have over $900,000 sitting in 30-day term deposits which, although safe, seems such a waste. I am reluctant to lock up in a long-term deposit although I don't need the money for anything else.

I am 58 and my wife is 68. We have our house mortgage-free and another rental property mortgage-free.

I am in the throes of setting up a family trust for my two grandchildren aged 5 and 8.

I read in your December 11 article about two examples that opened my eyes: Tower's TORTIS-International at 30.8 per cent and AMP's WiNZ at 32.4 per cent. It makes my bank rate look sick.

Yet in a more recent article you described both these investments as risky (if borrowing money on mortgage to purchase).

My main priority is the safety of my grandkids' inheritance, but also to maximise their future returns as safely as practical.

Questions:

1. Do you supply a personal investment strategy either directly or, if you work for a company, through them?

2. If you were going to invest an amount of $500,000 for your heirs, what would you do? Would you recommend, say, $50,000 to $100,000 per grandchild in TORTIS and WiNZ? Or would you spread the amount among other investments?

3. Do you actually exist, or is the name "Mary Holm" an illusion (no insult intended)?

4. Is the sharemarket over-boiled and ready for the downward spiral in 2000?

I would welcome a personal reply if possible.


A. Lots of people have rather more in term deposits than makes financial sense. But almost a million dollars! You're a candidate for the Most Conservative Investor Award.

Let's look at your questions in order.

1. No, I don't. I'm a journalist, not an adviser.

2. Given that your grandchildren are just 5 and 8, and so are unlikely to need the money for 10 years or more, I would put most of it into one or two international share index funds, such as the Tower and AMP funds you mentioned, or a similar one just set up by BNZ.

I would probably also put a smaller amount in a couple of index funds of New Zealand shares, including not only a fund holding the large companies but also Craig & Co's MIDnZ fund, which holds shares in our middle-sized companies.

You might want to be more cautious than I would be.

You quoted me as saying that the Tower and AMP funds would be pretty risky investments for someone who took out a mortgage to get into them. But that doesn't apply in your case.

Even without a mortgage, though, any share fund is risky in the sense that returns will wobble around a lot. It's quite common for a fund to lose value in any given year.

Over 10 years or more, however, there's a very good chance that you'll do well - although you certainly shouldn't expect those 30-per cent-plus returns to continue. They are extraordinarily high.

Given your approach to investment, you might want to put, say, half the money in index funds and leave half in term deposits. With interest rates on the rise, the return on term deposits isn't too bad, relative to inflation.

Put at least some in longer term deposits, which pay quite a lot higher interest rates. Rates may go higher still over the next few years. But generally interest rate structures reward people who tie up their money for longer.

You're in a position to do that, so you might as well.

3. I do exist. And if I was using a nom de plume, it wouldn't be Mary Holm!

4. I don't know. Nor does anyone else, despite some people's willingness to make forecasts.

I do know, though, that cautious folk like you have been staying out of world sharemarkets for the past few years because they feared downward spirals. They've missed out on an amazing upward spiral.

You can afford to live a bit dangerously with at least some of your money. Be a wimp no more!

Finally, I'm afraid I cannot give personal replies to you or any other reader.

Q. Your recent article (January 29) prompts the following question regarding revolving credit mortgages.

We recently applied for a revolving credit facility, but were required to pay a 1 per cent fee for the unused portion of the loan.

Another bank offered us a term mortgage plus a generous $100,000 overdraft facility. It had the obvious advantage of no utilisation fee and lower interest rate.

However, the overdraft may be withdrawn at any time, which I would assume would be if the borrower got into difficulties, but also if the bank was in trouble, as in the case of the BNZ fiasco.

My question is: Which is the more prudent, the revolving credit, which is reviewed annually, or the overdraft?


A. I would go with the overdraft, because of its lower interest rate and the lack of the fee.

Basically, the two options should work similarly. You put all your income into the account promptly, and you make withdrawals as late as possible, so that you keep the debt balance as low as possible. This reduces interest payments.

As far as withdrawal of the overdraft is concerned, I presume you're not expecting to get into difficulties yourselves. If you did, you would probably find the revolving credit mortgage would be withdrawn, too.

But what if the bank got into trouble? That seems pretty unlikely.

Since the mid-1990s, banks have had to make regular disclosures of their financial situation.

These include key information summaries, which each bank must make available to anyone who asks. They cover profits, credit ratings, risk, capital and so on.

For help in understanding them, ask the Reserve Bank Knowledge Centre for a free copy of the booklet "Your Bank's Disclosure Statement: What's In It For You?." (phone 04 471-3660, or write to PO Box 2498, Wellington, or e-mail knowledge@rbnz.govt.nz).

If you can't be bothered doing that, you can probably rely on "the system" to check out the banks for you.

Some economists, journalists, academics and - perhaps the closest watchers of all - other banks, do bother to check what the statements disclose.

The very fact that each bank has to tell the world what it's up to probably helps to keep them prudent.

And if a bank was looking shaky, hopefully you would hear about it before it directly affected you. Then you could switch your loan to another lender.

In any case, even if your bank did get into trouble, it seems unlikely that you'd lose your overdraft.

Statutory managers would be brought in. Their role is to sort things out without letting the problem get any worse.

I'm told by an expert that they would try to keep the bank running, giving depositors access to at least some of their money and keeping people with overdrafts and other loans liquid.

If anyone loses, the statutory manager would try to make it the shareholders rather than bank customers.

Q. My mother, who lives south, is selling her leasehold pensioner's flat and moving to Waiheke, where she will rent.

She has entrusted control of the net proceeds of the sale (approximately $50,000) to me, and I would like to invest it wisely.

Mum, who is nearly 74, is single and lives solely off her superannuation. She would like to use $5000 off the principal per year to supplement her "super."

What are the options I have to consider in investing this amount on her behalf?


A. Good on your mum for making use of the money that was tied up in the flat. It will make a big difference to her standard of living.

But what's going to happen if she's still alive when the $50,000 is used up? Her income will drop sharply.

I've got a better idea. She could get an annuity. That will give her guaranteed monthly income for as long as she lives.

At her age, with $50,000, Tower would sell her an annuity that pays just over $5000 a year.

Or she could get one with two popular extra features: continued payments to her estate until 10 years after she buys the annuity, if she dies within that period; and payment increases of 2 per cent a year to allow for inflation.

With those extras, she would get just under $4000 a year in the first year, rising slowly after that.

Incidentally, I was pleased to hear, from Tower annuity expert Hilton Paul, that the company has noticed an increased awareness of annuities (which it prefers to call pensions). I think they're under-used in New Zealand.

One reason for the change, Paul thinks, was last year's falling interest rates, which cut incomes for those relying on term deposits.

"This may change with interest rates on the way up again, but that in itself leads to the next issue, which is lack of certainty."

Some elderly people, he says, no longer want to be concerned with a bewildering range of investment options.

Should they invest now or wait until next month when interest rates may be a point higher? Do they go to Bank A that they have been with for 20 years, or go to Bank B that is offering 0.5% more today?

"They want something that is simple - just one decision to make and then a regular income for the rest of their life."

Security is also important. "There is effectively no risk of them losing their money in their lifetime with, in our case, the product supported by the life insurance fund of Tower Life (NZ) Ltd," says Paul.

The company has also recently had some inquiries "where an elderly relative is looking for an option to provide for a handicapped child into the future." An annuity works well in this situation.

A letter from Mark Reynolds of American Express New Zealand:

With regard to your comment on the American Express blue credit card interest rate in last week's Money Matters, our press statement mentioned an "extraordinary low" interest rate, being the six-month introductory interest rate of 9.99 per cent we are offering on balances transferred from other credit cards.

Transferring to American Express at this rate might be of benefit to many of your readers. We noted our standard annual percentage rate of 16.99 per cent is "the lowest in the market."

I appreciate that credit card interest rates might seem high, but I'm sure you are aware that reflects a cost of funding.

As a credit card provider we have to ensure the full credit facility is available for our card members, even if they do not draw down on it.

I liken it to having to keep a hotel room available for someone, even if they do not use it. Obviously there is a cost in keeping that room available and that cost has to be recovered.

A. And "recovered" it certainly is, if you don't pay the tariff promptly.

OK. I shouldn't have said that American Express called its 16.99 per cent "low."

But "lowest in the market" still suggests card holders are getting a good deal. As I said last week, there's nothing good about paying credit card interest.

Even the 9.99 per cent introductory rate is way above inflation.

I accept that it might cost lots to run a credit card business. The market seems competitive, so if all the providers charge high interest presumably they need to.

One of their costs, no doubt, is running the system for those of us who pay our bills in full each month, and so never pay any interest, only the annual fee.

Clearly, the prompt payers are subsidised by those who don't pay in full. The former are winners in the credit card game; the latter are losers.

While we're on annual fees, American Express says its $35 fee, which it is waiving for the first year, is about average.

The fee on my card, though, is about half that. And last time I looked, several other providers were charging $20 or less.

While the new American Express offering might benefit slow credit card payers, prompt payers are probably better off sticking with what they've got.

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