Money: Bank on balanced investment strategy

As is traditional at this end of the year, it's time to look back and see what pearls of wisdom we can extract from events of the past 12 months.

For investors, if the year 2000 has given us anything, it is a timely reminder of the value of diversifying - not putting all your eggs in the proverbial single basket.

That's because if this year has been notable for anything, that thing is volatility, with the value of investments moving up and down, often at alarming speed.

A few statistics make the point:

The local sharemarket has so far fallen 11.6 per cent since the beginning of the year, according to the NZSE-40 index, which measures the performance of the top 40 companies. Even if you take dividends into account, the market is still down 5.6 per cent.

And, no, that drop wasn't just a reflection of the fall in the Telecom share price (down 42 per cent, since you asked).

The local market's mid-cap index, measuring the performance of middle-sized companies' shares, is also down 8.4 per cent, but the small-cap index, reflecting the performance of the market's minnows, rose 18.8 per cent (dividends excluded in both cases).

The Australian market, as measured by the All-ords index, is up 19.8 per cent so far.

The US sharemarket has dropped 13.1 per cent since the start of the year, according to the S&P 500 index. And those high-tech US shares, which seemed so glamorous this time last year, lost 43.5 per cent of their value in 2000, as measured by the Nasdaq index.

UK shares are down 7.3 per cent, as measured by the FTSE-100 index.

Overseas shares in general are down 13.7 per cent, according to the MSCI global index, which aims to sum up the movement of world sharemarkets in a single number.

Back home, investments in Government stock have produced about 10 per cent, while money in the bank has earned in the region of 6 per cent.

Property is harder to measure, but the Watson Wyatt index, which measures returns from big industrial and commercial property, has gained about 6.2 per cent for the year. House prices have been near static, up 1.2 per cent in the year to November according to the Real Estate Institute's median house price figures.

In the midst of all those ups and downs the kiwi dollar has plunged 17.5 per cent against the greenback, 8.5 per cent against the Australian dollar and is down a shade (0.7 per cent) against the pound.

What all the numbers mean is that investors have experienced very different fortunes over the year, depending on which particular baskets their money is in.

To see why, consider a few stereotypical investors:

"Ted," a dyed-in-the-wool conservative, put $10,000 into a bank term deposit at 6.5 per cent and left it there for the entire year.

By year's end, he had $10,523 after deducting tax at the 19.5 per cent rate. Hardly exciting, but Ted was able to comfort himself with the thought that at least his savings had not lost value over the year.

Or he did until he thought about taking an overseas holiday and realised that, while he still had much the same amount in New Zealand dollars, they would now buy him much less in many overseas currencies than they would have done 12 months earlier.

"Carol," a sharemarket fan, was attracted by the dividends and the "blue chip" status of Telecom shares.

But her $10,000 investment in Telecom is now worth only $5806, plus another $679 in dividends (imputation credits included) which she has received during the year.

And Telecom's change of policy this year, cutting its dividend payout by more than half, means that if she wants another investment to provide the sort of income that Telecom used to be well known for, she has little choice but to sell her shares at their present low price.

"Mary," who is a great believer in diversifying and investing overseas, figured the internet was the coming thing and put all her cash into high-tech US shares at the start of the year.

At that time, $10,000 bought her $US5230 of shares.

Assuming her investment mirrored the fortunes of the Nasdaq, that parcel of shares is now worth just $US2955. In New Zealand dollars, Mary's $10,000 investment is now worth $6850.

Three investors with one problem - lack of balance.

It's an old message but still a good one: anyone investing for the long term needs to take a balanced approach.

That means having a mix of investments - shares, fixed interest, cash and property - and also a geographical mix, so your returns don't depend on the fortunes of one country.

It's also important to have what the jargon might call a sectoral mix.

Having lots of shares in lots of countries is all fine and good, but if they all happen to be in the same sector - all high tech, for example - then you still don't have a balanced portfolio.

Whole forests have been sacrificed printing reports explaining the theory behind the balanced portfolio approach, but the basic idea could hardly be simpler - when some of your investments are down, others will be up, thus smoothing out the highs and lows.

Why not just put all your money into one sector that has produced good returns in the past - say, the US sharemarket - ride out the highs and lows and leave it at that?

While that approach may be tempting, it requires two things that many of us don't have: lots of time and lots of courage.

Lots of courage because some of the lows are likely to be very low indeed. It's hard to keep smiling when your investments fall 30 or 40 per cent; most of us are more likely to do precisely the wrong thing and sell out at the bottom.

Lots of time because some investments may stay down for a long while, which may be fine if you can wait for them to rise again, but isn't so fine if you're getting on in years and will need to cash in your investment soon.

The balanced approach has made some headway in recent years, judging from the amount of money which has gone into managed funds - which are by definition more balanced than buying into a few shares directly - and particularly into funds which invest overseas.

Still, we have a way to go. According to figures from brokers Craig and Co, we still have about 60 per cent of our household assets in our homes, versus only about 7 per cent in overseas shares, 6 per cent in local shares and the other 27 per cent in the bank or fixed-interest investments.

While the 60 per cent in housing could be regarded as an overstatement, given that our homes aren't just an investment, the figures are a sign that most of us are dangerously reliant on one type of investment, and one country.

Not that there is any magic way of calculating the "right" way to split your investments.

One starting point is to look at what the big institutions do. According to figures from Aon Consulting, their investments are split in the following proportions: 36 per cent overseas shares, 33 per cent fixed interest (here and overseas), 17 per cent New Zealand shares, 8 per cent money in the bank and 5 per cent property.

Whether that's the right split for you depends largely on your age and how willing you are to accept falls in the value of your investments.



Investment is not so much about picking winners as it is about managing risk.

As we head into 2001, it might be worth resolving to forget hunting for that elusive "sure-thing" investment, and instead go looking for a balance.

* To contact Personal Finance editor Mark Fryer write to: Weekend Business, PO Box 32, Auckland. Ph (09) 373-6400 ext 8833 Fax: (09) 373-6423 e-mail: mark_fryer@herald.co.nz