Experts remain cautious on long-term returns

By Mark Fryer

Recent years have been kind to investors who have been prepared to look beyond New Zealand, and past the comfort of bank deposits. Investments in some overseas share funds, for example, have earned spectacular returns as foreign markets have risen, with an added bonus lately from the fall in the value of the kiwi dollar.

Even some reasonably safe and steady investments have done well. One of Tower's "balanced" funds, for example, has earned more than 7.4 per cent a year after fees and taxes for the last five years. Not spectacular, but still a useful return for a diversified investment spread over a number of sectors.

But if you're investing for the long term, it may be wise not to expect the good times to last forever. How much should you expect? Given that no one knows what the sharemarket is going to do tomorrow, let alone in 10 years' time, it's anybody's guess.

However it is worth noting that those whose jobs involve predicting long-term investment earnings are not banking on high returns in future. Before Winston Peters' compulsory super scheme was killed off by a referendum, the plan assumed that long-term investments were likely to earn just 3 per cent a year, after fees, tax and inflation.

If that sounds miserly, the Office of the Retirement Commissioner is even more conservative. In working out how much you need to save to meet certain targets, it assumes that a spread of investments is likely to earn an average of around 2.5 per cent a year, again after deducting tax, fees and inflation.

Consumer magazine is more cautious again, working on a figure of just 2 per cent.

Retirement Commissioner Colin Blair has defended the 2.5 per cent figure as reasonable, and based on expert advice. Only the future will tell whether the experts were right, but the figures do have several lessons for the rest of us. The first is to be careful about projecting recent returns out 10 or 20 years into the future; the last few years' earnings may have been just a blip - albeit a welcome one.

Lesson two: don't get too hung-up on precise figures when working out how much you need to save - calculators such as those provided by the Office of the Retirement Commissioner are a useful guide, but only that.

The third lesson: when comparing competing investments, be especially wary of earnings projections - when you are looking out 20 years, even a small change in the expected annual return can have a huge impact on the total return.

One more lesson: it pays to keep costs and taxes low. When returns are high, such things may not seem important, but if future earnings are low, even a small saving in the cost of investing can make a big difference.

* If you want to calculate how much to save to meet a certain goal, use the Consumer's Institute publication Your Future Nest Egg, or the Retirement Commissioner's Action Planner.