Pitfalls await on individual route

By MARY HOLM

Q. I am an avid reader, to the point that I am so rarely disagreeing with your investment advice that there is little to challenge my thinking!

I think perhaps you might emphasise individual (even overseas) share ownership a little more, particularly to those with long-time horizons and an interest in the investment world.

Cutting out management fees for 30 years can make a big difference!

A well-diversified personal New Zealand portfolio can be had in perhaps 15 stocks.

A. I strongly support your endorsement of UK investment trusts. Add in 15 to 20 international name stocks from Japan, the UK and the US, and you can create a good portfolio in well-regulated markets with few ongoing charges. This can be achieved by at least some of your readers.

One of your readers mentioned the Rich Dad, Poor Dad series of books by Robert Kiyosaki.

I have read all of this series despite them being highly repetitive. I became a little curious about Kiyosaki's claims (which vary from book to book), so checked things out on the internet.

I recommend you spend 10 minutes browsing through www.johntreed.com/Kiyosaki.html This is an excellent analysis of the large number of claims made by Kiyosaki. John T. Reed has nothing to gain by publishing this material, and I consider it fair comment.

Kiyosaki is an astute businessman, but he has only made a success of selling and promoting his books, and seems to have no other successful business experience or wisdom to pass on. Rich Dad is a myth.

I think your readers should be made aware that Kiyosaki is not all he appears to be and perhaps point out the site to them.

Done. I ended up spending more than an hour on the website. Fascinating reading, and quite funny in places.

Reed doesn't pull any punches. He calls Rich Dad, Poor Dad, "one of the dumbest financial advice books I have ever read. It contains many factual errors ... " I should add, though, that I don't know anything about Reed.

And as to whether he has anything to gain, perhaps I should quote Dolf de Roos. In response to criticism of him on Reed's website, de Roos told the Herald's Anne Gibson last year that Reed just wanted to promote his own books and to make money out of running down others.

Still, the stuff on the website, with all its quotes, click-throughs and so on, does sound credible.

Now for the start of your letter. Ownership of individual shares, as opposed to investing in a share fund, has its place.

As you say, getting rid of fund management fees is a big plus.

You do need to have the strong interest you mention, though. Who else wants to bother with lots of dividends, meeting notices, proxy statements, share buybacks, stock splits, the occasional takeover offer and so on and on?

And when I say "lots of", I mean it. Unless you hold a wide range of shares - such as the 15 to 20 you suggest - research shows that you probably won't get sufficient reward to compensate for the risks you are taking, through lack of diversification.

That's because the big institutions never hold only a few shares. And their big-volume share trading sets the prices in the market and the risk/reward tradeoffs.

So it's silly to own only a few shares.

That means, of course, that you need a big chunk of money to invest in individual shares.

Buying small parcels is too expensive. The brokerage is disproportionately higher.

In the end, I reckon that if you've got $100,000 or so to invest in a wide range of New Zealand shares, and you would enjoy keeping track of them all, buying them individually is a good idea. Less than that and it becomes debatable.

On international shares, I'm not convinced. It's harder to research overseas companies, and there are complications with foreign exchange, international tax rules and so on.

For all but the really sophisticated, I think it's better to stick with just a UK investment trust or an international index fund.

With both, you don't pay tax on capital gains, and the fees tend to be lower than on other share funds. And, for my money, having somebody else take care of all the administration is well worth it.

Does that challenge you? I hope so.

* * *

Q. We have recently emigrated to New Zealand from Great Britain. We still have some money in the UK and wish to bring it over but wish to get the best rate for our money.

We realise that you do not have a crystal ball, but you would probably have more idea than ourselves of whether the dollar is likely to carry on rising against the pound, as it has been recently, and therefore whether we are best to bring the money over sooner rather than later.

A. I could ring a few economists and quote their best guesses. But I don't think it's worth the bother.

I'm even more sceptical about foreign exchange forecasts than sharemarket forecasts.

Shares at least trend upwards, over the long term. So, at any given time, it's a slightly better bet that any share market will rise in the near future, rather than fall.

But there's no such trend with foreign exchange. It's all about relative, rather than absolute, values. When some currencies go up, others must go down.

The pound/kiwi dollar rate at any given moment reflects all the information in the market. Nobody can predict, with much accuracy at all, what will happen next. And honest economists will admit that.

So, what should you do?

I suggest you bring your money over in several lots, some now and some later. That way, you won't get the best exchange rate on all of it, but nor will you get the worst.

How many months or years you spread the move over depends on how soon you need the money here. The longer the time span, the more you spread your risk.

* * *

Q. Every year I sign over $27,000 to a trust I started too late in life.

I would appreciate if you would answer the following: I would like to give my grandchildren birthday and Christmas gifts of money. Would this incur extra duty payable after the $27,000?

When I transfer the $27,000 (eg January 1, 2003), can I start transferring the next lot during the year, so long as I declare same on January 1, 2004?

A. Relax on your first question, but not on your second.

Your $27,000 is called a "dutiable" gift. There are three main types of gifts that are not dutiable, says Bill Patterson, a partner in law firm Minter Ellison Rudd Watts. They are:

* Gifts to charity.

* Gifts of up to $2000 per "donee" in each calendar year, as long as they are given in good faith and as part of your normal expenditure. None of the donees can be the recipient of your $27,000 dutiable gift - in your case, the trust.

Sorry about the legalese. Basically, as long as you give no more than $2000 a year to each grandchild, at Christmas and birthdays, you're fine, says Patterson, even if you have 15 grandkids getting $2000 each.

* Gifts to a spouse, partner or relative to be used for their maintenance or education, "having regard to your legal and moral obligations". There is no limit on the amount, but payments cannot be "excessive".

"You could pay for a grandchild's fees at university in addition to $2000 in gifts to them," says Patterson.

On the timing of your $27,000 gifts, take care. The IRD uses a rolling 12-month period, he says.

"They can aggregate backwards or forwards. It's dangerous to make more than one payment a year."

Let's say, for instance, you paid $13,000 on January 1, and then $14,000 on July 1. Then, the next year, you pay the full $27,000 on January 1.

"They can add the $14,000 and the $27,000 together. You get whammed!"

Obviously, you can store up money for your gift in an account throughout the year. But it's best to always pay the lot on the same date each year, and stay an unwhammed gran!

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