By MARY HOLM
Q. I understand little about managed funds, shares, etc. (My first experience was Contact, and I'm still waiting for them to reach $3.10 to get rid of them.)
I recently came into some money and put the $10,000 with a bank in a five-month term deposit at 6.4 per cent, thinking it was the easiest thing to do, and earned $215 after tax!
I have since saved another $5000, and I will need access to all this money in about 12 months.
Is it worth putting the $15,000 into shares for 12 months (and how would I do this?), or just sticking with the bank for such a small amount?
There must be a lot of people around with just small amounts of cash who would be interested in a better return, if there is such a thing?
A. There is such a thing as a higher return, but probably not a better one. That is because the higher return will be riskier.
The reason you should not venture into shares is not that your amount is small. Plenty of people invest much less than $15,000 in shares.
Your trouble is that your time is too short. If you invest in shares for a year, there's about a one-in-three chance that you will come out with less money than you put in.
There is also a one-in-three chance that you will do okay, and another one-in-three that you will do pretty well, perhaps even brilliantly.
But most people find those odds rather worrying.
I do not recommend investing in shares or a share fund for less than several years - say three years for risk takers, and 10 years for the conservative.
The longer the period, the smaller the chance that you will lose money. It is rare for a 10-year share investment to lose, and pretty common for it to double or better.
That is why I do not like to see long-term savings sitting in term deposits or, even worse, savings accounts.
With your short timespan, though, I would definitely stick with the bank.
After all, term deposit returns are not too bad these days. They are way above inflation, so the value of your money grows at a reasonable pace.
About your comment on Contact: I presume you are waiting for the price to reach $3.10 because that is what you paid for the shares.
It is a common way of thinking. People feel they have not really made a bad investment until they sell at a loss. Meanwhile, their money is tied up - perhaps for many years - in something they do not want to be in.
The day you decide an investment is not right for you is the day to sell it. What you paid for it is irrelevant.
I suggest you sell your Contact shares and put that money into a managed fund holding lots of shares, to spread your risk. See below for info on some types of share fund.
Once again, though, do it only if you plan to leave the money in the fund for several years.
Q. I am looking at investment options for international equities. I have found some information on British-based listed investment trusts.
Apparently these have good tax efficiencies. Could you please explain the advantages and disadvantages of these types of investments.
A. British investment trusts are a type of managed fund, pooling lots of investors' money to buy many different shares.
Some of the trusts invest in global shares, or those of one country or region; others specialise in emerging markets, small companies or some other market segment.
"Listed" means the trusts are companies listed on the UK Stock Exchange. Several of them are also listed on our stock exchange. You invest in them in the same way as you would in any other shares, by buying through a sharebroker and paying regular brokerage.
On the other hand, unlisted managed funds, such as many unit trusts, sell and redeem their own units according to demand.
This can limit the investment flexibility of unlisted funds. And often they have to sell units when the market is bearish, which is not a good time to sell, and buy when the market is bullish, which is not a good time to buy. They must also cover the costs of providing the sales and redemption service.
Partly because of these costs, unlisted funds tend to charge higher ongoing fees than listed investment trusts.
Other differences:
*British investment trusts do not pay tax on the capital gains they make when they sell shares. By comparison, most New Zealand-based managed funds - except index funds - do have to pay such a tax. That eats into their returns.
*Some people say that listed investment trusts are more volatile than unlisted funds, because they are more directly subject to sharemarket forces. Also, investment trusts are more likely to borrow than unlisted funds. This can boost returns, but it also boosts risk.
*Investment trusts often trade at a discount, or lower value than the assets in the trust would suggest. But, given that you will probably both buy and sell at a discount, I do not think this matters much.
Over all, British listed investment trusts are a pretty good investment, largely because of their tax advantage and relatively low fees.
Q. You make no secret of your preference for British listed investment trusts, owing to their diversity and low management costs.
This makes good sense to me, and I inquired from sharebrokers Craig & Co how best I could invest on a regular monthly basis into one or two trusts.
They recommended their "Start" programme, and certainly the selection of trusts looked very encouraging.
They emphasise that this is a low-cost management option compared to other programmes, but when I look at the costs - 2.5 per cent entry fee (brokerage?), 0.5 per cent stamp duty, 0.5 per cent annual fees and 0.5 per cent custodial fees - they total 4 per cent. This does not sound very low cost, especially when compared to unit trusts, which are now very competitive and often waive the entry fees. I still feel investment trusts are a good deal, but the 4 per cent worries me. Perhaps I'm missing something.
A. You are adding together entry costs and ongoing costs. It is more logical to look at them separately.
In this case, you pay 2.5 per cent up front. If you are going into a British registered and listed investment trust, add the 0.5 per cent stamp duty.
"Bear in mind, though, that over 30 per cent of the UK investment trusts in Start are listed in New Zealand, where there is no stamp duty," says Roger McDowell of Craig & Co.
At 2.5 or 3 per cent, the entry fees are not, as you point out, as low as on some unit trusts, which sometimes charge no entry fee.
But the ongoing annual and custodial fees total just 1 per cent, half of which goes to Craig & Co and half to the British investment trust.
That 1 per cent is lower than on most competing products. Some other similar international investments charge around 1.6 to 2.2 per cent.
And if you plan to be in the investment for the long term - which should be the case in any share investment - having lower ongoing fees is more important.
Let us look at an example of a $10,000 investment over 10 years, earning 6 per cent.
With no upfront fee, it would grow to about $17,910. Introduce an upfront fee of 3 per cent, and it would grow to $17,370. It is not a huge difference.
Turning to ongoing fees, with a fee of 1 per cent a year, it would grow to $16,290. Raise that ongoing fee to 2 per cent a year, and it would grow to only $14,800. That is a much bigger difference.
If you looked over a longer period, the stronger influence of the ongoing fee would be even more pronounced.
In total, Craig & Co claims its fees on the Start programme are reasonable.
Mr McDowell points out that "the concept of Start is to encourage regular contributions, as low as $100 each. So I would doubt there is a less expensive way for a New Zealander to place small dollar amounts into the products mentioned."
Okay, but you would expect him to say something like that. So I rang another stockbroker, John Reuhman, of Reuhman & Co, whose firm puts investors into many unit trusts with no entry fee.
He thinks Craig & Co's upfront fee is "probably not unreasonable." They are putting your money directly into overseas funds and have to pay overseas brokerage. And, Mr Reuhman adds, the ongoing 1 per cent fee is "pretty reasonable."
Given that Start is the only major New Zealand programme that accepts small regular contributions, "the charges are very fair for what you're getting," says Mr Reuhman.
Incidentally, I am a bit puzzled when you say I have a preference for investment trusts. I do think they are good. But I have always been more enthusiastic about index funds, which also have a tax advantage, charge low fees and, I reckon, have a better chance of performing well over the long haul.
As it happens, the Start programme also offers some index funds, listed mainly in the US and Britain.
*Mary Holm is a freelance journalist and author of Investing Made Simple. If you have a question for her, send it to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: ="mailto:maryh@journalist.com">maryh@journalist.com Letters should not exceed 200 words.
<i>Money Matters</i>: Bank or shares: how do I invest my $15,000 nest egg?
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