That million-dollar question

By MARY HOLM

Q: I have inherited more than $1 million and was wondering what advice you have for investing it.

I am inclined to cut it in $100,000 chunks and use shares, managed funds and Government bonds.

PS: I was badly burned by so-called financial advisers to the tune of many thousands of dollars, so am doing it myself.

Why should I put effort into helping you, you lucky ... Oops, sorry, just got a teeny bit envious there!

Your question is awfully broad. I could write a book in response to it. So I'll concentrate here on the first, basic questions you must ask yourself. When are you likely to be spending the money?

How much risk and volatility can you tolerate?

The longer your investment period, and the more risk you can cope with, the more you should invest in shares, and perhaps also property.

They will almost certainly give you higher average long-term returns. But their volatility makes them a bad bet over a few years, as their value could be down when you need the money.

On the strength of your answers, you should decide your asset allocation.

This is hugely important. Research shows that how you spread your money over different types of assets affects your returns much more than which particular assets you hold.

A recent article in an ABN Amro Craigs newsletter may help you pick the right allocation. It says that if you invest:

Fully in shares, your average return will be 8.5 per cent, and annual returns will range between minus 47 per cent and plus 45 per cent. Your return will be negative once in three years.

In 75 per cent shares and 25 per cent fixed interest. Average return: 7.6 per cent. Range: minus 34 per cent to plus 35 per cent. Negative return once in four years.

Half in each. Average return: 7.0 per cent. Range: minus 21 per cent to plus 25 per cent. Negative return once in five years.

25 per cent shares and 75 per cent fixed interest. Average return: 6.2 per cent. Range: minus 8 per cent to plus 15 per cent. Negative return once in 12 years.

All in fixed interest. Average return: 5.5 per cent. Range: minus 4 per cent to plus 12 per cent. Negative return once in 15 years.

The data used is America's S&P500 share index, 90-day New Zealand bank bill rates and US Treasuries (US Government bonds).

It is important to note that the returns are before tax and don't allow for inflation.

Note, too, that if you invested in just a few shares, rather than a broad portfolio or a share fund, the share volatility would probably be higher.

So there you have it. If you could cope with occasionally seeing your investments halved in a year, go with all shares.

But if a drop of even 20 per cent would worry you, go with all or mostly fixed interest.

Once you've decided your asset allocation, you need to select which shares, share funds, fixed interest and so on.

I favour index share funds. And Government bonds sound good. But with your amount of money you need more than that to go on.

Despite your experience - and the nasty things I've sometimes written about financial advisers - I think you might need to get some advice.

There are some good advisers around, who will boost your net worth more than they will charge you.

With the large sum you have, look for an adviser who'll charge by the hour, rather than a percentage of your money.

Mark Fryer, in last week's Weekend Money, wrote about how to select a financial adviser.

See Keeping tabs on investment advisers.

You might also ask potential advisers how they invest their own money.

* Mary Holm is a freelance journalist and author of Investing Made Simple. Send questions for her to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@pl.net. Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.