By MARY HOLM
Q: We are approaching retirement and have a mortgage-free home plus additional accumulated savings of approximately $500,000. This is invested in shares and unit trusts.
The prospect of retirement means time to pay greater attention to our investments.
I've enclosed information about a computer program. Do you feel it would be an advantage?
There's a $5000 initial purchase price, which includes three months of downloads plus training. Then it's $99 a month. But the promised returns are considerable.
On the other hand, it does seem that this is only duplicating information already available to fund managers.
And the next question is: If you become a share trader, does this affect how the IRD views your activities and the tax rate?
A: Spend your $5000-plus on fishing, hot air ballooning, anything but share trading.
I don't know the particular program, but I've looked into similar ones. Judging by what you sent me and the company's web site, I reckon I can predict what will happen if you pursue it.
You'll go to one of their seminars, in this case billed as "major international seminars." Wow!
Enthusiastic-looking people will say they and many others have made heaps.
They'll tell you that the program recommended buying Shares A, B and C last month or last year. Since then their prices have soared.
"Returns of 200-300 per cent on an annualised basis are common in the user groups," says the literature you sent me.
The people will promise that they're telling you about every trade they've recommended. They're not leaving out the bad ones.
But how do you know that's true? Because they have expensive suits and nice honest faces?
They'll also tell you they have some kind of stop loss mechanism, which prevents you from doing too badly. You'll have "the ability to manage any possible risk."
You're not stupid. You'll look for the flaws. But there won't be any obvious ones.
What's more, you are protected by "a lifetime of support from the company on the web to ensure the user becomes a successful trader."
You'll sign up.
You might then try a "dry run" for a few weeks or months, just pretending to trade. And if you're lucky - although that really means unlucky - you'll do well enough to start putting real money in.
A few months later, when things aren't going so well, the company will tell you it's because you didn't trade in exactly the right way, or didn't do it every day, or whatever. That is, if they're there to tell you anything.
A year later, or perhaps much sooner, you'll cut your losses.
Not only will you have wasted $5000 to $6000, but you're likely to have lost money in share trading and paid plenty of brokerage.
You may also be facing a tax bill. Inland Revenue taxes share traders on their capital gains, at the same rate as on their other income.
Of course that also means you can deduct your losses. And - if your experience is like others I've heard about - you'll make more losses than gains. So in the short term the tax situation might seem helpful.
But over the years, when you get wise again and buy shares for the long haul, hopefully your gains will outnumber your losses.
And you might find then that Inland Revenue keeps a closer watch on you than it does now. It's not something to be encouraged.
Why am I so sure you won't win with this program? Four reasons:
* These people are chartists. They reckon they can tell what will happen to a share price based on patterns in charts of its past performance.
Many people have tried to do this over decades. Sometimes, a pattern seems to hold for a while. But, just when you put money on it, it doesn't any more.
Why on earth should it? Share prices are set by many people trying to assess how well a company will do in the future.
* You suggest the program would be "duplicating information already available to fund managers."
True, but I don't know of one fund manager who uses such information in the way chartists use it.
I also don't know of one academic researcher who has shown that chartism works. And many have looked into it.
After reviewing the research, American finance professor Burton Malkiel said: "The past history of stock prices cannot be used to predict the future in any meaningful way."
* I wrote about a similar program a couple of years ago in this column. The people who ran it responded angrily.
I challenged them to introduce me to a few, or even just one, person who had used their program for more than a year and wasn't a friend or relative of the company. I heard no more from them.
* I've never heard of any investment that skited about annual returns of 200-300 per cent, or even 100 per cent, that didn't turn out to be a dud.
It's the same old story. If it looks too good ... You know the rest.
Q: Various factors, other than a company's trading performance, critically affect its share value.
Being quickly aware of these other factors is the key to timely buy/sell decisions.
There is an on-line investing service, using the Investors Advantage website, which focuses on these other factor influences.
The initial cost to access the service is rather expensive, but it enables instant analysis of shares, against other factors such as news reports, indications of significant changes in the flow of institution money into the sector or industry, insider trading in shares, etc.
The strategy with this on-line program is to buy and sell shares only when all the critical indicators are right.
This goes against the passive strategy that you often expound, which is to buy shares and hold for the long term.
With this strategy it is possible to make profits from peaks and troughs, even though the overall direction of the share price may be moving down.
This is normally risky. But the availability of critical information that is normally unobtainable, and the computerised buy/sell indicator graphics, facilitate less risky decision-making.
I would be interested in your comments.
A: I like this better than chartism. But not much.
You're right. It is possible to make a profit on an upward blip of a share price that is trending down.
It is also possible to make a loss on a downward blip of a market winner. Peaks and troughs are easy to spot later, but virtually impossible to pick at the time.
You say having "normally unobtainable" information makes the difference. But this info must either come from insiders, in which case you could get into legal trouble by using it, or it is in the market.
And if the person who runs the on-line service gets hold of it, don't you think the big institutional investors will, too?
If it's useful information, they'll act on it before you've turned your computer on.
That's not to say that even the most experienced analysts know for certain how a news item or change in fund flows will affect a share price.
Sometimes, it's hard to tell even whether the price will go up or down, let alone by how much.
Say, for instance, that your on-line service hears that a competitor of Company X has gone bankrupt.
That gives X a bigger market share. But it might also mean the industry is in trouble.
As American analyst William J. Bernstein puts it, "Markets are not circuits, airfoils or bridges - they do not react the same way each time to a given input. "An investment strategy based solely on historical data is a prescription for disaster."
Even if you have faith that the online service can outdo the big institutions, do you really want to constantly watch a computer screen?
If you need to make instant responses, you can't just check things out every few hours.
Both you and the man in the first Q&A seem to want to spend lots of time on investing in shares.
In many endeavours, the more time you put into it the better you do. But that's not true with shares.
It really is better to follow the example of the hugely successful US investor Warren Buffett, and buy and hold.
One final question for the two of you: If you held the secret to picking shares, would you set up and run a computer service, or traipse around the country running seminars?
Or would you quietly get hugely wealthy, and disappear into the sunset?
Q: I am a member of the Government Superannuation Fund, which was compulsory when I first joined some 27 years ago.
It is a two-for-one scheme, and whilst we in my profession moaned about it all those years ago, the benefits of the scheme will be realised in the next few years or so.
The dilemma facing myself and colleagues is the argument between a one-off lump sum payment versus a pension.
Using some figures for the argument, we could get $500,000 as the lump sum or $20,000 a year for a pension. The pension is tax-free, CPI-adjusted until one's death and then at half for one's spouse until death.
The unknown factor is how long one will live for, and perhaps that is the key.
Correct me if I am wrong, but the lump sum, if used wisely in whatever investment form, will outstrip the pension figure quoted, even if the pension rises slightly every year with inflation adjustments.
The compounding effect of say 7 per cent net means that that lump sum will double in value in 10 years.
Your thoughts?
A: At first glance the lump sum does look better. But it might not be.
Experts predict that long-term returns on all investments will be lower in future decades. And who knows what will happen to inflation?
A pension is the same thing as an annuity. Get quotes on annuities from several insurance companies, perhaps via an insurance broker.
Ask for the same conditions as the pension you're being offered, with half being paid to your spouse after you die.
You won't be able to get automatic inflation adjustments, but you can get an annuity that rises by a fixed percentage each year to allow for inflation.
You could go for, say, a 3 per cent rise each year.
What you will get in monthly payments depends very much on your age and your spouse's age.
If your $500,000 will buy you an annuity starting at more than $20,000, choose the lump sum over the pension.
Then you could either buy an annuity or, if you're a risk taker, invest the money and hope you'll do better with it.
But if the annuity isn't as good as the pension, that suggests you're getting a pretty good deal on the pension and I would be inclined to go with it.
Can't decide? You could ask for part pension and part lump sum.
Or, if that's not allowed, take the lump sum and spend part of it on an annuity.
Then you'll have some assured income until death, and the opportunity to invest.
* Got a question about money?
Send it to:
Money Matters
Business Herald
PO Box 32, Auckland
or e-mail: maryh@journalist.com.
Please note: Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number in case we need more information.
<i>Money matters:</i> Market traps for the computer mouse
AdvertisementAdvertise with NZME.