Money matters: Smart money goes on shares for long term

Q: My husband and I (both in our late 50s) are saving for our retirement. We own our home mortgage-free and he would like to retire in about five years, sooner for myself.

Over the years we have dabbled in a number of types of investments, some okay, some not okay.

About 18 months ago, we invested $250,000 (from the sale of a property) with an investment advisory group. This is well-diversified and has made about 5 per cent. We plan to trust these advisers and leave this money hopefully to grow.

With some extra savings available we invested $30,000 in WiNZ (AMP's index fund investing in the world's biggest companies) in late August 2000, paying about $2.48 a share, a dizzy height which they have never reached again.

This bad timing has been fairly typical of our investing history.

We now have about $40,000 in extra savings to invest and no idea what to do with it.

Some of the options we are considering are: putting more into WiNZ to average down the price we paid in August, or maybe going into a NZ sharemarket fund. But most likely it will sit in bank term deposits because we can't decide.

Any suggestions?


A: I admire your spirit. While many people are thinking of getting out of shares or share funds because their value dropped last year - didn't anyone tell them that shares lose value one in every three years? - you two are considering putting more money in.

You are the smart ones.

Generally speaking, it's silly to try to time your share purchases. The best time to go into shares is whenever you have the money to do it.

As Jacques Martin NZ said in a newsletter a couple of years ago, "If you had invested $5000 each year into the New Zealand sharemarket for the past 30 years on the day in each year when prices were lowest, it would have grown to $850,000 today."

How about the priciest day each year? It would still have grown to $650,000.

That's not a huge difference. And I've seen similar findings for other countries. What's more, no one is ever lucky or unlucky enough to always strike the best or worst buying day.

In your case, you picked a bad day with WiNZ, and perhaps with other investments. But if you stay in for the long haul, it doesn't matter that much.

Now you're willing to give WiNZ another go, to "average down the price."

I'm never comfortable with that rationalisation. It's always possible, particularly with an investment in a single share, that the price will keep falling. People who average down end up putting good money after bad.

You should buy more of something only because it's a good idea to have more.

That could, though, be the case with WiNZ. It's a really broad-based investment, and you can be confident that, even though the price may drop further, it will rise again.

One day - it might be just months from now, or it might take years - $2.48 will look cheap. And the current price, around $2, will look even cheaper.

So is that what you should do with your $40,000? Let's look first at your whole portfolio.

When you say your $250,000 investment is well-diversified, I assume you mean some is in shares or a share fund, some is in fixed interest and, perhaps, some is in property.

That's a good basic fund for a couple five years off retirement.

Some advisers would argue that putting more in shares this close to retirement is risky. There's a small but significant chance that a share fund investment will lose value over five years.

But that chance drops close to zero over 10 years or more. And, as you won't be planning to spend all your money in the first few years of retirement, it's good to put your longer-term money into a share fund.

You've shown you can cope with share price fluctuations. Chances are that in a decade or so you'll be better off for going the share fund route.

So which fund? I'm all for going international, especially if you haven't got much of your $250,000 in international shares. And WiNZ and other international index funds are good low-cost choices.

If your $250,000 is light on New Zealand shares - which I doubt - you could try a Kiwi index fund.

Can't decide between local and international? Put $20,000 each way.

Whenever you get investment paralysis, that's often a good solution.

Q: From your columns there seems to be a debate on whether property or shares are better.

I believe that shares and property go hand in hand. However, it seems that the fund managers are unable to digest the Government bias towards property.

They need to realise that providing housing is a Government obligation.

But without sufficient funds the Government cannot perform its function, hence the tax breaks to invest in property.

With tax, the managed funds returns are not spectacular in the least.

Property, on the other hand, is one of the few avenues available to individuals to earn "passive income."

With regard to capital gain, I fully agree with your argument that it needs to be taxed, especially if it is used as income.

I know of certain investors who "milk properties" and live off them. This is not treated as income. This loophole needs to be plugged. Capital gain should be treated in the same way for property as for shares.

However, genuine investors in property should not be penalised because of some bad apples.

And from your responses in the past it seems to me that you are well looked after by the fund managers.


A: You just waved a red rag in front of a bull! Neither fund managers nor any other sources give me anything.

If we have lunch together to discuss what's going on, I pay for my meal. If they send me presents at Christmas - which a small number do - I give them to charity.

Now that that's off my chest, let's get on with the substance of your letter. I've got two responses.

First, managed funds have, indeed, produced some spectacular returns. Let's just take WiNZ, mentioned above. In 1998 the value of WiNZ units grew 39 per cent, and in 1999, 29 per cent.

Last year wasn't so hot, at minus 5 per cent. And that volatility is what scares some people away from share funds.

But over the long run, across the world, managed funds holding shares have tended to perform better than property.

Second, the Government doesn't give any tax breaks on investment property.

Property might seem to be favoured over shares. But that's just because:

* People tend to trade shares more frequently than property, so more of them are likely to pay tax on their capital gains.

However, basically the same rules on capital gains apply to all investments, says PricewaterhouseCoopers tax partner Barry King.

If, for instance, someone's business is dealing in shares or property, or they buy shares or property with the purpose of reselling, they must pay tax on their gains.

"Actually, there are specific laws about gains on property that are more onerous than on shares," says Mr King.

* Investors in property are more likely to borrow for their investment. That means they can deduct the mortgage interest payments.

But anyone who borrows to invest in shares, or anything else, can take the same deduction.

Anyway, it's silly to think of that as much of a tax break. You have to pay the interest. A deduction, at best, cuts that cost by 39 per cent, but you still pay the other 61 per cent.

* Ditto for deductions for other costs such as insurance, maintenance and rates. The investor still pays most of the cost, even after the tax deduction.

* Property investors often deduct depreciation. But if they then sell the property for more than they paid for it, that depreciation is clawed back.

In the meantime, they've had the use of the money, but it's not all that big a deal.

Investors can also claim depreciation on other investments that depreciate. There's no special break for property.

Where there is a break for property, is when it's owner-occupied. But that doesn't seem to be what you're talking about here.

Q: I read with interest (in last week's Money Matters) your response on capital gains tax being levied on the increased value of the family home.

There is clearly no intent, in most instances, on the part of a house purchaser to make a capital gain. They merely want to have as nice a home as they can afford.

If a capital gains tax is introduced on general assets, including the family home, I look forward to the benefits as I will be able to claim for the capital depreciation on such assets as my car, boat etc.

Such a tax would, of course, have the additional benefit of reducing unemployment, as the staff of the tax department can't even handle their current workload.

Perhaps you could explain the capital gains tax in a country such as Britain.


A: That might make good reading for insomniacs - guaranteed to put anyone to sleep - but I'm not sure it will further our debate.

I'd like to meet the house-buyer who doesn't hope, and indeed expect, the value of his or her property to rise.

Their main aim is probably to get accommodation. But if they happen to make a capital gain as well, why shouldn't they be taxed as much as the person who rents a house and puts his or her savings into investments?

I could even argue that home-sellers should be taxed more. Many economists say that the accommodation enjoyed by people in owner-occupied houses is a type of income, and that this "imputed rent" should be taxed.

What about deducting losses on assets such as cars and boats? Admittedly, that gets tricky.

One economist's argument is that we don't really suffer losses on cars and so on. We put in money and get back the pleasure of personal use. If we didn't value that pleasure as highly as the money we paid, we wouldn't buy the item.

All of this is grist for the mill if New Zealand considers bringing in a capital gains tax.

But I wouldn't get too panicky about whether houses would be included. Politicians probably wouldn't have the courage.

Last I heard, Switzerland was the only country that fully taxed gains on people's homes.

* Mary Holm is a freelance journalist and author of Investing Made Simple. Send questions for her to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail maryh@journalist.com. 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. Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.