Time for investors to batten the hatches

Nervous punters may have suffered excess perspiration this week when the sharemarket went into free fall on Monday. The market recovered its composure on Tuesday, but is it time to run for cover?

No, says Mark Brighouse, chief investment officer at Arcus Investment Management, a company that manages money for several financial planning networks including Spicers and NZ Financial Planning.

The volatility this week was a return to the norm after a period of two years of relative stability.

He said put into context against the property market, it would take only a 0.25 per cent fall in the value of housing stock to cause the same loss in net wealth as the sharemarket downturn.

However, the jitters were a timely warning to investors who have seen little but rises during the past couple of years.

A crash was inevitable at some point in the future but was unlikely to happen soon. "You don't get worried about bubbles until valuations stretch and there is widespread participation by naive investors," Brighouse said.

He recalls an occasion in the late 1990s when private investors were obsessed with technology stocks and an Australian customs officer took note of his occupation and cheerfully told him what the Nasdaq index had been doing overnight. It wasn't long before such investors were burned. Badly.

Some investors will no doubt wonder whether it's time to move their finances to safer ground. The trouble for nervous mum-and-dad investors is that migrating from growth investments too early can be more damaging to long-term growth than riding the financial market rollercoaster.

"If you want to batten down the hatches you have to be in safe assets and you give up a lot. You give up the excess return on risk premium, you give up the ability to hedge against inflation and the long-term cumulative gains," Brighouse said.

The guardians of the New Zealand Superannuation Fund weren't taking cover. "They are in it for the long term and that is the rational thing to do."

Brighouse predicts more modest rises over the next 12 months, with stock picking and international diversification being more important.

Although sharemarket investors may have got a fright this week, it is those with the bulk of their money in property that have the most to fear.

Bank economists, including Westpac and the BNZ, are predicting drops in property prices - albeit between 5 and 10 per cent. AMP Financial Services savings and investments general manager Roger Perry believes there could be a major "repricing" downwards in a number of asset classes, including property and stocks.

Investment property expert and author Kieran Trass, of the Hybrid Group, said while many seasoned property investors were biding their time waiting for the fall-out, thousands of potential landlords were still looking to buy their first rental property. But if they planned to borrow heavily to get their investment properties they could see their entire portfolio come down like a pack of cards.

He said naive investors were still being pulled into the Auckland apartment market where there were not enough tenants to go around.

Yields, which represent the rent in relation to the market value of the property expressed as a percentage, on Auckland properties have dropped as low as 4 per cent in some niches.

That means that landlords who are borrowed to the hilt buying properties at today's values are paying more out in mortgage payments than their rent. Over and above that, they need to find cash to pay rates, maintenance and insurance.

Trass said property investors, reliant on their credit cards to make ends meet, ought to make moves to improve their cashflow.

These could include:

* Getting their properties in tip-top shape.

* Making their properties more desirable in an oversupplied rental market.

* Selling off poorly performing properties to strengthen their overall portfolio.

* Increasing cash flow from outside of property investment.

"If there is overtime available at work, take it. As the economy softens, there will be fewer opportunities," he said.

The worst-case scenario for overstretched investors is mortgagee sales and possible bankruptcy.

Financial planners often have difficulty getting hardened property investors to diversify out of the property market into shares and other investments.

"Your typical property investor is not diversified at all," said financial planner and property investment author Lisa Dudson. "They are suspicious about managed funds."

Perry said many private investors had portfolios that had become skewed in the direction of property, stocks or fixed interest and it was time to get the balance right.

"We are at the point where we could see some quite large movements in the property market and some movements down in the sharemarket.

"If people have been taking a position, this is an appropriate time to get some good advice."

INSURANCE

As winter sharpens its claws, insurers say it is time to make sure your house, contents, health and boat insurances are in order.

It's not a matter of if, but when the next flood comes and there are plenty of other winter hazards that result in insurance claims ranging from increased road accidents, boats slipping their moorings and being smashed to pieces, through to flu outbreaks.

Insurance Council of New Zealand chief executive Chris Ryan said in some communities as many as 40 per cent of people had inadequate or no insurance at all for their homes.

Tenants also needed to make sure that they had contents insurance - as their landlord's insurance would not cover them in the event of a loss.

Prevention was always better than cure and routine maintenance on homes should be done before winter set in.

"If you are prone to claims, insurance companies won't keep paying out forever. If your insurer pulls the plug on you, it may become difficult to sell your property, because buyers will have difficulty getting a mortgage in the circumstances."

Employing a tree surgeon was good for those with large trees and claims could be prevented by clearing house and street guttering of leaves and other debris and by checking that roofing iron was secure.

Other precautions include checking wiper blades and tyres on cars and by ensuring boats were moored securely.

Those serious about reducing flood risk could consider more major preventive measures such as installing a submersible sump pump that came on automatically when the water level it was sitting in rose - pumping floodwater out into the storm water system.

Those with properties at risk should keep a close eye on weather bulletins and move expensive belongings to higher levels within a house.

Southern Cross says winter illnesses make it timely for those without a comprehensive health insurance policy to consider buying one.