By MARY HOLM
Q: Early this year my wife suggested we buy some shares in a New Zealand company that was soon to be listed on the Nasdaq.
We did it mostly for the fun of it, but also for the feeling of being involved in a New Zealand company with great export potential.
One of the most important things I knew about shares was that you have to be prepared to lose the money you're investing and have the patience to ride out the short-term ups and downs in the share's price.
Bearing that in mind, we stuck a big chunk of dosh we were more or less happy to risk losing (in the worst case), or not be able to use for a couple of years (more likely).
Since then the share price has gone up and down (mostly down) in response to practically every world event.
Every time it starts to drop my wife wants to sell them. Now it is on the way down again, and she's concerned that a long-lasting global market downturn will affect our shares because they are listed on the Nasdaq.
We don't need that money for anything, as we're still a year or so off investing in real estate - with or without liquidating our shares. But she wants to sell now and cut our loses.
So the question is, am I being silly in ignoring world events and waiting patiently for the price to rise again?
There is no doubt that we would have made more by leaving that money in term investments, but returns were not the reason we bought them, so should it be the reason we sell them?
A: Why do I get the feeling I'm in the middle of a "domestic"?
The least I can do is make you both hate me by telling you off. United against a common enemy, you might get over your differences! So here goes.
You broke two basic rules:
* You invested in a single share, and a risky-looking one, to boot.
If you invest in a broad portfolio of shares or a share fund that holds many shares, you can be pretty confident that if you hang in long enough, through any downturn, the value of your investment will eventually rise. Even if some companies go down the gurgler, others won't.
In a single share, that's not necessarily so. Just ask anyone who invested in Chase, Equiticorp or some of the other darlings of the years before the 1987 crash.
* Your time horizon is too short.
You talk about not being able to use the money for a couple of years. Most experts would say that should be seven to 10 years. Over shorter periods, there's quite a big chance you'll lose on any share investment.
Having said all this, it sounds as if you made the investment as a bit of a gamble. You did it partly for fun, and you invested money that you could afford to lose.
And there's no denying that, while some people who buy single shares and hold them for short periods lose the lot, and many do disappointingly, a lucky few do extremely well.
The trouble, as your wife is discovering, is that some roller-coaster rides can be more scary than fun. So what should you do now?
You say the price is "on the way down again". But how do you know that?
Investors commonly expect a share price to continue whatever it's been doing lately, upwards or downwards.
They're right about half the time - or a bit more than half if the trend is upwards and less than half if the trend is downwards, given that over time share prices tend to rise.
There's just no knowing. And I'm sure you'd both feel a bit sick if you got out at what turns out to be a low point for the share.
On the other hand, you could wait patiently for the price to rise again, and maybe it never will. We need to take into account your wife's discomfort, too.
I suggest you set yourself a plan to sell the shares gradually. Perhaps you could sell a quarter now, and a quarter each in six months, 12 months and 18 months, regardless of what the market is doing. At least then you won't sell the lot at the lowest price.
One last thing: When I've made this suggestion in the past, some people have commented that brokerage is higher if you sell several small parcels rather than one big one.
It's a good point. If your holding is quite small, you might as well get rid of the lot at once.
In your case, though, with a "big chunk of dosh" at stake, spreading out sales is probably worthwhile.
Find out the cut-off points for brokerage rate changes from a discount share broker. Then set up your selling schedule to keep brokerage low.
* * *
Q: I'm a 45-year-old single male and was recently made redundant from a reasonably high-paying job. I'm now working at starting a business.
Two years ago, knowing redundancy was just around the corner and after listening to the likes of Don Brash and yourself, among others, I concluded I had too much invested in my mortgage-free house. I would trade down and spread my money around to "be safe".
I eventually decided to deal through a prominent New Zealand brokerage firm, which advised me to invest in the following manner: 25 per cent New Zealand equities (direct shares); 25 per cent Australian equities (direct shares); 25 per cent European equities (through two British-listed investment trusts) and 25 per cent fixed interest.
I also bought a cheaper flat (mortgage-free). And hey presto, I was now diversified.
Of course my timing could not have been worse, as house prices have gone up and shares have gone down. My $600,000 nest egg has subsequently shrunk quite considerably (the European part by about 50 per cent).
Now I could cope with all this in the belief things should pick up within the next five to 10 years or so.
But I have recently come across the "Elliot wave" - a theory that states that shares follow a predictable (albeit complicated) pattern.
They predict a depressed share market for the next 10 to 15 years.
A recent Herald article also stated that a time frame of even 20 years is not long enough to even out the highs and the lows of the share market. (How long did it take to recover money invested just before the 1929 decline?)
Now I'm really worried, as my initial "long-term" time frame was five to 10 years. I'm not sure I could cope with a negative return after waiting for 10 years plus.
The sharemarket all of a sudden doesn't sound like a safe place to be any more.
What are your views?
A: I think you probably made a really good move a couple of years ago. I'd be surprised if, in 10 years' time, you're not pleased you made it.
I say "probably" because your initial time frame was five to 10 years. I would be happier if you had just said 10 years.
As I said above, five years is rather short for share investment, unless you're fairly comfortable with risk.
Still, it sounds as if you are now prepared to hang in there until, say, 2012. Great.
Why am I so keen on diversification? There's more to it than eggs in baskets. A basic rule in investment is that risk and return go together. The higher the expected return, the higher the risk.
But there's one exception: Through diversification, you can reduce risk without reducing expected returns.
How does that apply to you? When you moved to a cheaper home and put the spare money into other investments, you created a diversified portfolio.
The return on that portfolio will be an average of the returns on the individual investments.
But, says economist Peter Bernstein in a fascinating book called Against the Gods - the Remarkable Story of Risk, the volatility of your portfolios "will be less than the average volatility of its individual holdings".
That's because, when some investments fall, others rise.
"This means that diversification is a kind of free lunch, at which you can combine a group of risky securities with high expected returns into a relatively low-risk portfolio," says Bernstein.
He adds that this works as long as your investments don't tend to move up or down at the same time. And, with your mix, you're fine in that respect.
As you've said, the European shares have fallen. But, with any luck, your other shares and your fixed interest will have risen. So has the value of your home.
In different years, different investments do well.
It's easy to forget that just a few years back, New Zealand housing prices were falling.
In the three years from December 1997 to December 2000, the median New Zealand price dropped 2.3 per cent, and the median Auckland price dropped 6.1 per cent, according to Quotable Value NZ.
Meanwhile, the value of an investment in an international share fund, with dividends reinvested, almost doubled. And, in the earlier 1990s, international shares also clearly outdid housing.
That trend did not continue. But nor will the current one.
So what will happen in the next 10 years?
The Elliot Wavers, physicist Michael Lauren who wrote the recent Herald article, and many others have their theories.
I don't know enough to judge them. I do know, though, that the gloom and doomers, who are always there, get more press in tough times.
As Martin Allison of JBWere said in a recent article: "Behavioural finance studies conclude that investors see patterns in random numbers that don't exist.
"When bad things happen, investors tend to overestimate the chances of more bad things happening. Psychology is at work now to make extreme bear market predictions seem more plausible than they really are."
I also know that if somebody comes up with a new financial theory that looks reasonable, academics who do know enough to judge will look at it.
That's how we've all acquired knowledge about, for example, diversification.
Thus far, nobody's market predictions have been proved right. And, with so many ever-changing factors feeding into share prices, I doubt if they ever will.
Given our inability to forecast, I firmly believe that diversification is the way to go.
* * *
Q: Real estate agents keep telling me that you cannot buy a three-bedroom house with a garage, on its own fully fenced 900sq m section, that is only 25 minutes or less from the city, for under $200,000. I have talked to quite a few.
Yet I have just bought one in Beach Haven for $160,000.
How is it that someone who earns their living by selling houses in and around Auckland can be so mistaken?
I am friends with people who have just bought similar houses for around as much as I did, and upon asking them what they had heard, I found that they were told a similar story.
So can you really trust what a real estate agent tells you?
A: Real estate agents, like journalists, are so easy to pick on that there's no sport in it.
I won't go so far as to stick up for them. They should know enough about their market to be aware that properties like yours exist. If they don't want to tell you about them, they should at least say they don't know, rather than fibbing.
But asking an agent who operates in a higher-priced suburb about lower-priced houses is rather like asking a Rolls-Royce salesperson about cheap cars.
It's just not in their interests to tell you.
And there are, after all, several other sources of information.
Would-be buyers can just look in the Herald's property section to get an idea of prices in different areas.
Or they could go to a real estate website, such as www.realenz.co.nz, which is run by the Real Estate Institute, or various sites run by real estate firms.
On the websites, you key in details, such as your region, maximum price, number of bedrooms and so on, and you'll get a list of properties on the market that meet your specifications.
Meantime, good on you for finding what sounds like a good buy.
* Got a question about money?
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Market ride goes from fun to frightening
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