Money matters: Tumbling down the mountain of risk

By MARY HOLM

Q: I am reading Rich Dad, Poor Dad by Robert Kiyosaki.

Among other things, he talks about not "working for money," instead letting "money work for you." Instead of thinking about "being employed by a good company," we should think about "making/building a good company that employs others." Makes sense.

It started me thinking about money working for me.

I have saved a combined $5000 over the years (by regular deposits) for my two sons, now aged 13 and 14 1/2. Both intend to take on tertiary education.

For at least another two years the $5000 will not be "used." It is in an ASB Bank Moneymaker account.

I am wondering if there is somewhere the money could be put that would maximise the return over that two years.

Your opinion on options would be greatly appreciated.


A: If you follow the advice of Kiyosaki, you will go for an investment that pays high interest.

Here's an excerpt from his book: "A few years ago, a friend told me he was excited because he found a 6 per cent certificate of deposit [like a term deposit].

"I told him I earn 16 per cent from the state Government. The next day he sent me an article about why my investment was dangerous.

"I have received 16 per cent for years now, and he still receives 6 per cent."

When I read this, it intrigued me but also worried me.

Kiyosaki's investment must be pretty risky. Why else would the state Government pay 16 per cent? Nobody pays more than they have to for anything, including the use of somebody else's money for a while.

Risky investments sometimes turn out well. And obviously this one has for Kiyosaki. But they don't always.

Elsewhere in the book, he says, "I have lost money on many occasions. But I only play with money I can afford to lose.

"I would say, on an average 10 investments, I hit home runs on two or three, while five or six do nothing, and I lose on two or three."

That suggests that if you go into a Kiyosaki-type investment, there is a 20 to 30 per cent chance that you will lose your money.

My guess is that you would not be happy with those odds.

There are other options for your $5000, such as a share fund. But two or three years is too short a time for that sort of investment.

While share fund investments almost always do well if you stick with them over 10 years or more, there is no guarantee over shorter periods.

You want an investment you can count on, which means sticking with a bank or bank-affiliated company.

But don't leave the money in a savings account. You can make more by putting it in a two-year term deposit.

Have a look at the back of the Herald money section (the paper version) to see which bank is paying the highest interest rates.

Incidentally, the bit about the 16 per cent return is not the only piece of Kiyosaki wisdom that I would challenge. I reckon his advice is of mixed quality.

I approve of such quotes as:

* "If you start young, it's easy to be rich. There is a large difference between a person who starts saving at age 20 versus age 30.

* "Wise investors buy an investment when it's not popular.

* "Don't get into large debt positions that you have to pay for. Keep your expenses low. Build up assets first. Then buy the big house or nice car."

But some of his suggestions - while they might work well for someone with his background, confidence and appetite for risk - would not suit many people.

Your quote about employing others rather than being employed is an example. Not everyone is a born boss.

In one memorable passage, Kiyosaki says, "Playing it safe and going balanced on your investment portfolio is not the way successful investors play the game. To make progress, you must first go unbalanced."

That is counter to advice from every expert I respect. If you have an unbalanced portfolio, you take risk that you are not rewarded for.

Sure, you sometimes win big. But, on average, you will do worse than someone with a balanced portfolio.

It confirms that Kiyosaki, who says he has twice failed in business, is a risk-taker extraordinaire.

Another thing: Not everyone would feel comfortable with some of his tactics, such as looking for people desperate to sell property and offering them extremely low prices.

And how about this? "I always make offers with escape clauses.

"In real estate, I make an offer with the words 'subject to approval of business partner.' I never specify what the business partner is.

"Most people do not know my partner is my cat. If they accept the offer, and I don't want the deal, I call my home and speak to my cat."

It sounds cute. But is it ethical?

Q: I am 64 and my wife is 63. After retiring at 60 with a modest work pension, I have been doing casual "on call" work, but will quit this when I become eligible for NZ Super.

My wife works in a sole trader professional business and is also a director in a small training provider company. Our home is debt-free.

We now have $40,000 available for investing, and in two years' time a further $60,000 will become available.

We intend this $100,000 to buy a modest independent annuity for my wife when she eventually stops working, but the problem is that we don't know when this will be.

She enjoys her work, and might keep going for another 10 years, or might have to start scaling down in two or three years if health becomes an issue.

We have an uncertain time horizon for investing the money before we use it for the annuity.

Should we stay with term deposits, or go into bonds, or go into a passive-index, low-fees international share fund like Winz or TORTIS-International?

Previous experience with a poor-performing unit trust with a 4 per cent entry fee gives us an aversion to paying high fees, and makes us relatively conservative in our attitude to risk.

A: Reality hits!

People like me are always spouting on about long-term and short-term investments.

But often, as in your case, people aren't sure how long they want to invest for.

If - like the person who wrote the letter above - you knew that you were investing for only two years or so, I would say stick with term deposits.

If you knew you had 10 years, I would go with the international index fund.

You also suggest bonds, and you could venture into bonds that pay more than the banks.

But we have had a few reminders lately of how such investments can go wrong. Because of your conservative attitude, I would skip them.

So what should you do, with your time horizon quite vague?

It would not be silly to just stay in term deposits.

You could vary their terms. Then, if interest rates rise you won't be stuck with all your money in low-yielding long-term deposits. And if interest rates fall, you won't be stuck with everything maturing soon, to be reinvested at lower rates.

Or you could get a bit braver and put, say, $30,000 of the $40,000 in an international index fund.

Consider it a 10-year investment, regardless of when your wife retires.

If she retires in two or three years, buy an annuity with the $60,000 and remaining $10,000. That, plus NZ Super, will give her a reasonable income.

By 2011, you will have been in the index fund for 10 years and I would be surprised if it has not grown a fair bit more than if you had left that money in term deposits.

At that point, you could buy another annuity for your wife with that money.

She will be 73 by then, so the insurance company will give her much bigger monthly payments for a given purchase price.

That's because her life expectancy will be much shorter than it is now.

Just one warning: I'm a bit worried about your bad experience with the unit trust.

You lost 4 per cent going in - which makes a big hole in your money before you start.

Then, I'm guessing, the shares in the unit trust performed badly. When you saw the value of your investment fall even further, you bailed out. Right?

That's understandable. But it is not the way to invest in any fund that holds shares, including an international index fund.

If you decide to put $30,000 into an index fund, picture getting a statement a year later that says your investment is worth $25,000, or even $20,000.

Now picture yourselves shrugging and saying, "Bother! But we were warned that this might happen. We won't bail out." And don't. Not until 2011.

That, of course, is a worst case scenario. If your investment rises before it falls, it is always easier to take.

But there is no doubt about it - some time in the 10 years the world market will fall for quite a while. Have faith. It will go up again.

* Mary Holm is a freelance journalist and author of Investing Made Simple.

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