By MARY HOLM
Q: My wife and I went to our bank, WestpacTrust, for advice as to which investment would be best for us.
We wanted to put the money into something for about five years or so.
The adviser said we should put it in a growth trust, which would double our money in 10 years, and we could pull out of it any time.
That was January 2001. Here we are, 18 months later, and our $104,000 is worth only $86,000.
We ring the bank all the time, and they say, "Keep it in and look at the long-term view."
Do you think we should cut our losses and pull out, or leave it? It's all our life savings, and we are both in our 60s.
We had a letter from the bank two weeks ago and they said investments have not been good for two years. Should they then have sold us this one?
A: Probably not.
In these situations, there are usually two stories.
First, the investor says something like what you've said.
Then the adviser says, "I told the clients that they could lose money, especially in the short-term. But people don't want to hear that bit, and later they don't recall it."
My response to the adviser: "Did you say it loud and clear? Did you ask them to picture their investment halving in its first year?"
Adviser: "If I said that, nobody would ever invest in any volatile investments."
Me: "Nonsense. Some people can cope with volatility. After all, as you've pointed out, such investments can double in 10 years. But it's up to you to weed out those who can't cope."
If the adviser had done that, I suspect you might not be where you are today. You're clearly not great risk-takers.
I note, too, that you were investing for about five years.
Some people say that's long enough to be in a growth trust such as yours, which has 75 per cent of its money in property and shares.
But I reckon you need at least seven or eight years, and longer for more risk-averse people.
In light of your attitude to risk and your timing, the bank should have put you in a lower-risk trust, such as its Income Plus Trust, which is 40 per cent in property and shares and 60 per cent in cash and bonds. So what should you do now?
Don't bail out completely. You would be selling at low prices, turning a paper loss into a real one. On the other hand, I don't think you should stay for another three or four years in an investment that makes you so uncomfortable.
How about a gradual shift to the Income Plus Trust? There's no charge for switching, and if you move your money gradually, you won't sell all your Growth Trust units at the lowest price.
Talk to the bank about moving, say, a quarter of your investment now, a quarter in six months, a quarter in a year and the rest in 18 months.
There are two downsides to this.
Even in the lower-risk trust, the value of your investment will probably sometimes fall, at least a bit.
Also, you won't do as well if share prices start to rise again - which they will do some time, although nobody knows when. But there'll be less total volatility, which will be good for your serenity.
Finally, a note to another reader who has had a similar experience.
His $40,000 investment in a diversified fund has dropped to $36,923 in 3 1/2 years. If it had been in term deposits, he says, it would now be worth $46,762.
"I cannot see the trust ever catching the term deposit investment from that far behind," he adds.
Given that his investment is for about 10 years, I can.
Only a few years ago, some diversified funds (shares, property and fixed interest) were bringing in returns in the teens, for several years in a row.
Then again, if he's too worried, perhaps he should also gradually move his money into a fund with fewer shares and less property.
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Q: We are a couple in our early 40s and have recently decided to confront the reality of ageing and investment. My husband is a fully paid-up Mary Holm advocate!
In the middle of last year we put some lump sums into TORTIS International (index fund), and have been putting a further $2000 a month in ever since.
You can imagine the balance we are now left with.
My husband (being of stronger mettle) reminds me that this fluctuation is exactly what your theory is saying - that in fact now is the time when we should be continuing to invest.
I'm in two minds. I've read your recent columns which say "sit tight" and I can fully sympathise with this.
But sitting tight is one thing, getting in even further seems to be another altogether.
Should I just grit my teeth, keep going and stop opening my fund statements, or is it time to look at a more conservative strategy. In which case, what is it? I'd really appreciate your insight.
A: One possibility is to go along with the following advice - an updated version of an email that has done the rounds a few times: "If you had bought $1000 worth of Nortel stock one year ago, it would now be worth $49.
"With Enron, you would have $16.50 of the original $1000. With WorldCom, you would have less than $5 left.
"If you had bought $1000 worth of Budweiser beer, not the stock, one year ago, drank all the beer, then turned in the cans for the 10 cent deposit, you would have $214.
"My current investment advice is to drink heavily, and be sure to recycle."
Beer certainly has its appeal in these bearish days on world stockmarkets!
Seriously, though, yes it is teeth-gritting time.
You're one up on the writers of today's first letter. You're content to keep what you have invested. But you're reluctant to put in more.
If you were investing in a single share, I would agree with you. You could be putting good money after bad, into a company that is going down the gurgler.
But you've invested in an international share fund, which holds shares in hundreds of companies in several countries.
It's impossible to imagine that the value of the fund won't rise again. It might take a while to get back to late 1990s levels and beyond. But it will. And you've got the time to wait.
In the meantime, by investing the same amount each month, you benefit from dollar cost averaging.
In short, that means you buy more units when the market is down and they are cheap, and fewer when the price is high. So your average unit price is lower than the average market price.
You refer to this as a "theory", but it's not really. It's very practical. It just happens, automatically, to anybody who drip feeds into a volatile investment.
And it works brilliantly. The only negative is what you're experiencing now, that some people find it hard to keep buying when the market has fallen.
Chin up! You can do it. If it means not opening the fund statements, don't open them.
If you keep putting in your money, I promise you that one day you'll be writing to say you're so glad you kept buying at those ridiculously cheap mid-2002 prices.
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Q: Thanks for your several enlightening Herald articles on index funds, especially in the July 20-21 edition.
One question please? How does a Kiwi invest in an index fund based on America's Dow Jones or S&P-500 indexes?
I can't get any joy on the net from individual US fund companies such as Vanguard, T. Rowe Price et al. What's the secret please?
I am frustrated because now and over coming months must be an opportune time to start to accumulate some of these funds on a dollar-cost-averaging basis.
I am sure there must be other local investors experiencing my problem.
And, yes, I have a US cheque account stateside with a few greenbacks in it. Payment in the US is thus not a problem.
A: We've got a progression here. The last correspondent was one up on the first one. Now you are one up on the last one. You're keen to buy more shares in a down market.
You are what is sometimes called a contrarian, wanting to do the opposite to most other market players.
Many people haven't got the stomach for it. But it's often a winning strategy, as you tend to buy low and sell high.
I just wish I had money sitting around that I didn't need for 10 years or more. I would join you.
On to your question. Whether or not an investor has a US cheque account, he or she can invest in a US index fund via many New Zealand sharebrokers.
A couple of options to look at are the SPIDER fund, based on the S&P-500, or the DIAMOND fund, based on the Dow Jones.
Both are exchange traded funds, which mean they work just like US-listed shares.
You'll pay more brokerage than if you were buying a local share. But, if you shop around, it might not be much more. And ongoing management fees on the big US funds tend to be lower than on New Zealand funds.
Another option is the Edinburgh US Tracker Trust, a UK investment trust that tracks the S&P-500.
Fees on that are higher than on SPIDER, but you can sometimes get into the Edinburgh fund at a discount to the price of the shares it holds. In those circumstances, it might be the better buy. Discuss that with your broker.
If you want to drip-feed regular amounts into a US index fund - and your reference to dollar cost averaging suggests that's what you have in mind - one way is via sharebroker ABN Amro Craigs' START programme.
Investment options include the Edinburgh US Tracker Trust and several US index funds, one of which is SPIDER.
You'll pay higher charges than for a lump sum investment. That's to cover the costs of running the scheme.
For more information, go to www.abnamrocraigs.co.nz and look for START in the column on the right.
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- Money Matters
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or email: maryh@pl.net
