Offshore investments and exchange rates

BY MARY HOLM

One plaudit, one comment and one question: Plaudit: I always look for and enjoy your column and point my finance students towards it - a nice mix of underlying basics, practical advice, opinion and humour. Thank you.

Comment on last item in last week's column on how long it takes to become a millionaire: obvious to you but possibly not to all readers - even if you wait 144 years for your dollar to become a million, you are going to need it all to buy your $1 cheeseburger.

Question: Do you have any views about exchange rates on diversification? I have heard a view that one should invest in NZ dollars if one requires the ultimate money (say, for retirement) in New Zealand. Would you recommend gradual repatriation as retirement age draws near?

Now to answer: 1. Thanks.

2. You're quite right. It's really important to take inflation into account, especially over periods of a century or more.

Another reader made a similar point. If your dollar will be $1 million within 144 years, you will not be a millionaire, he said.

Well, you will be. But the millions of other millionaires won't be particularly impressed.

Only Howard Hughes could have said in 1937, that "a million dollars is not what it used to be". But long before 2146 we'll all be saying it.

Still, I think you're both being a bit pessimistic.

In last week's example, the correspondent assumed a 10 per cent return. In your comment, then, you assume 10 per cent inflation.

You'd better not say that in front of Reserve Bank Governor Don Brash, who has been keeping our inflation basically under 3 per cent for some years now.

Nobody knows, of course, what will happen to inflation in the next 144 years. But we can hope it will stay closer to Doctor Don's rate than to 10 per cent.

If it does, you should be able to get at least a feast of cheeseburgers for a million bucks in the mid-22nd century.

3. In many cases, I don't think people do need to bring their investments back to New Zealand before retirement.

But before we get into that, I think it's a great idea to put more than half your retirement investments overseas - probably through a New Zealand-based managed fund.

Although in the last couple of years the New Zealand sharemarket has performed better than world markets, that is often not the case. And the New Zealand market tends to be more volatile.

What's more, if you stick to local shares you miss out on investing in many industries not represented here.

It's true that, when you invest overseas, you take on exchange rate risk. If the kiwi dollar rises against most other currencies, that will hurt the value of your foreign investments; if the kiwi falls, it will boost the value.

But experts say this added risk is cancelled out by the risk reduction you gain from broader diversification.

Still, many people might feel happier reducing their foreign exchange rate risk as retirement approaches. Does that make sense?

It depends on how you will spend your money in retirement.

If you expect to spend most of it on New Zealand-produced food and local services, you probably should bring your money back home.

But better-off retired people often spend lots on overseas travel and imported goods such as cars, books, clothing, and so on.

It's better for them to keep a portion of their savings overseas. It gives them a hedge.

If the kiwi dollar falls, the prices of travel and imports will rise. But so will the value of their overseas investments, to help cover those rises.

If the kiwi rises, travel and imports will be cheaper.

The value of their overseas investments will fall, but with their cost of living falling, they won't mind too much.

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