Mary Holm: The good oil on your portfolio

Q. Is there such a thing as getting your investments serviced? I check my vehicle every six months, but in two years I haven't checked the actual performance of my retirement fund.

In layman's terms, is it possible to compare the performance of one investment portfolio with that of another? And how pro-active should I be about altering the composition of my portfolio?

I believe I should leave this to the experts in this sector. But my portfolio has been operating for two years, and the recommendations have been for no changes to the allocation of my portfolio asset classes.

Surely in the last two years trends would have developed, and it should be recognised that parts of my asset class should be refocused to attain a stronger return.

The details: I have set up a family trust that contains my investment portfolio. I deposit $2000 per month.

My strategic asset allocation and investment strategies are: Ten years-plus with a high risk/return investment strategy aimed to build long-term retirement capital.

My asset allocation is: Property 5 per cent, shares 90 per cent, hedge funds 5 per cent.

My 12-month net return is 5.72 per cent?

OK, I feel frustrated with the net return and I really feel as if I am unable to discuss this with my planners at this stage.

A. I would dearly love a third opinion. It's a good idea to review your investments every now and then, but take care before you leap into action.

Working out the return on an investment into which you drip feed a regular amount isn't simple.

One way is to use an internet calculator, for example the regular savings calculator on the Retirement Commission's website, Sorted.

The calculator is designed to show how much your savings will grow if you know your rate of return.

But you can also use it backwards, as it were.

Insert your regular savings, how often you save, and the start and end dates. In "Amount you have, if any, to start with" put your opening balance. The rate of return will be set at 2.5 per cent. Leave it that way for now. Hit calculate.

You will get an amount labelled "Today's savings in today's dollars". If that is less than your closing balance, hit "Try again" and insert a higher rate of return.

If it is more, insert a lower rate of return. Keep adjusting the rate of return until your answer is approximately right.

Whatever the rate of return is at that point is what you have earned on your investment.

Using a calculator like this, you can indeed compare the returns on different portfolios. But if yours has performed worse than another portfolio, that doesn't necessarily mean you should change your investments.

Generally speaking, investments that have performed well in the recent past are no more likely than any others to continue to perform well.

If anything, there's a slight tendency for the recent good performers to do worse than the recent bad performers. Trying to pick up on trends is a fool's game. The fact that there has been no change to your allocation is probably fine.

So how should your savings be allocated? That depends not on recent performance, but on your tolerance for risk and when you plan to spend the money.

Given that you have 10 years or more and can apparently cope with risk, your current allocation looks pretty good. As long as you don't bail out when your savings total falls considerably - which will happen sometimes - you will probably get excellent growth in the long term.

I hope you are widely diversified within each type of asset. For example, it's good to have shares in NZ and overseas companies and a wide range of industries - or in share funds that give you that sort of spread.

I'm not all that comfortable with hedge funds.

They can be riskier than they seem, and often investors don't really understand how they work. Do you? If not, get out. Misunderstood investments often end in disaster.

The bigger worry, though, is that you feel unable to discuss your portfolio performance with your planner. That's a sign that your relationship is not good enough.

Your planner should tell you not only what your return is, but also compare your investments' performance with that of the property, share and hedge fund markets as a whole.

If you're not being told that, or you don't trust what you are being told, it's time to move to another adviser.

Q. I recently took out a term deposit from my bank that had offered a 90-day rate at 7.47 per cent. I was also offered a 60-day rate at 7.44 per cent.

Which offer would have the most compounded interest gain - the 90-day compounded twice or the 60-day compounded three times?

Do you know of a mathematical formula that could work this out?

A. It's not so much a formula as a series of calculations - preferably with a calculator.

Let's say you have $100 to invest. First calculate 7.47 per cent of that, which is of course $7.47. That's the interest you would get in a year.

But you're getting interest for only 90 days, so divide by 365 to get the daily amount, and then multiply that by 90. That comes to $1.84, rounded. After 90 days, then, you would have $101.84.

How much interest will you get on that amount over the next 90 days?

This is the trickiest bit. If you wanted 70 per cent of something, you would multiply by 0.7. If you want 7 per cent, you multiply by 0.07. In this case, you want 7.47 per cent, so you multiply $101.84 by 0.0747, to get $7.61 rounded.

(Tip: If you're not sure how many noughts you should have in a calculation, check that the result looks roughly right.)

Again, that's an annual amount, so divide it by 365 and multiply by 90, to come to $1.88.

Add that to $101.84 to get a grand total of $103.72.

How about the 60-day option? Well, 7.44 per cent of $100 is $7.44. Divide that by 365 and then multiply by 60 to get $1.22 of interest. Add that to $100, and you have $101.22 after the first 60 days.

For the next 60 days, multiply $101.22 by 0.0744, to get $7.53. Divide by 365 and multiply by 60 to get $1.24. Add that to $101.22 to get $102.46.

Repeat for the last 60 days: Multiply $102.46 by 0.0744 to get $7.62. Divide by 365 and multiply by 60 to get $1.25. Add that to $102.46 to get $103.71.

After all that, we find that the two results are one cent apart. In this case, it doesn't matter which option you choose. But you don't know that until you do the calculations.

There are, though, two other options. (Now she tells us!)

* Ask the bank to do the calculations for you. They should be happy to, if they want your business.

* Use an internet calculator, such as another one on Sorted, the lump sum calculator.

Feed in your numbers for the first 60 days, 90 days or whatever, and calculate the answer. Then insert that answer in the "Lump sum to start with" to calculate for the next period.

A couple of notes about the two Sorted calculators mentioned in this column:

* The results on the site are "ballpark figures," not correct to the exact dollars and cents - which explains why I got slightly different answers from my answers above. But they are always near enough.

* The site uses "real" rates of return and the answers are expressed in "today's dollars". This is to enable you to allow for inflation. If you were doing calculations over many years, you could allow for inflation by inserting a return after inflation.

Over shorter periods, though, you don't need to worry about inflation. Just insert your ordinary numbers - in this case 7.47 per cent and 7.44 per cent. The answers you get are then also ordinary numbers, with no allowance for inflation.

Q. You have to wonder about some of these finance companies, don't you - with names like Lombard, Hanover and Dorchester?

I'm sure Lombard NZ has nothing to do with the original Lombard, just some smart guys here who decided the name would give their enterprise some mana so they registered the name for use in NZ.

I'll wager too that Hanover has no connection with Hanover, Germany, nor Dorchester with the famous London hotel. Now what about Buckingham or Regent Finance? They'd work well don't you think?

A. Now, now. The poor old finance companies have got enough on their plates, in the current climate, without you taking pot shots at their names.

I must admit, though, that some years back, when everyone was calling people Yuppies, Dinkies and so on, we used to call some people Lombards.

Lombard stood for "lots of money but a real drongo" - or something to that effect.

When the finance company emerged, I assumed they hadn't heard of that use of "Lombard"!

So what did all these people have in mind when they chose their names? Finance companies: you're invited to explain to us.