Wait 10 years, then decide

By MARY HOLM

Q: I have become a fan of your column since returning at the end of last year from 10 years working overseas.

We did quite well financially, but are conscious that we need to make the most of our investments over the remaining 10 to 15 years of my working lifetime to protect our retirement.

So we followed your advice - a globally diversified portfolio of equities: blue-chip kiwi stock and overseas investment trusts purchased through, and with the advice of, a broker in March. Needless to say, our funds are in tatters.

Fortunately, we invested only a third of our funds in equities, in a strategy to reduce risk as we entered the market.

The rest is in cash, half kiwi, half sterling.

Last week you said that if you had any cash you didn't need for 10 years, you would be investing in stocks now - taking advantage of the current price slump.

My questions are:

* Global stocks may be comparatively cheap now compared with recent historic highs. But what makes you think they will look cheap in a couple of years when considered with the benefit of hindsight?

* What would you recommend that we do with the remainder of our cash?

A: If you made your investments on the strength of my advice, you must also have noticed what I always say about share funds: their value will fluctuate, so you should invest only money that you can tie up for 10 or more years.

You've been in your investment for just four or five months. Judging it now is like deciding what a babe-in-arms will be like when she or he is a 10-year-old.

Still, I must admit you picked a pretty unfortunate starting date. It's terribly discouraging for new investors in shares or a share fund if their holdings drop straight away, without a rise first.

And there are a fair few of you around at the moment - including many who bought a year or two years ago and have seen their investments drop much further than yours.

To all of you: those losses become real only if you sell. Don't.

In answer to your first question, I'm not at all sure international shares will look cheap in a couple of years.

I said to a correspondent last week - who had a good 20 years to go before retirement - "one day you'll be writing to say you're so glad you kept buying at those ridiculously cheap mid-2002 prices".

But, for all anybody knows, mid-2003 prices might be even cheaper.

I don't know when "one day" will come. That's the very essence of investing in shares or share funds.

Research has shown over and over, in different countries and different periods, that average share returns are higher than on other investments.

But you don't get those returns for nothing. It's a reward for putting up with the bad times, and for not knowing when the good times will return.

It's possible that "one day" won't come for 10 years - although history suggests that is highly unlikely.

I recently looked at 10-year returns on the MSCI index, which covers large worldwide shares. The data went from the 10 years ending December 1979 to the 10 years ending this June.

In New Zealand dollars, the lowest average annual return was 4.8 per cent (March 1970 to March 1980).

The highest was 28.3 per cent (May 1977 to May 1987). That's not far off 30 per cent each year, on average, for 10 years. Wow!

What's more, for most of the time since the 10 years ending November 1983, average annual returns have been in double digits, and for quite long periods above 20 per cent.

Even the latest figure is an average of 9.5 per cent a year for the 10 years ending June 30. That's not too bad at all.

All of which shows that if you give international shares a decade, they almost always perform.

On to your second question. What you should do with your cash depends on your risk tolerance.

Just because I would like to put more into shares now doesn't mean you should.

I'm a bigger risk-taker than most, partly because I've been in share funds for decades, and know they come through in the end.

You've got enough time in hand to go heavily into share funds. But you might not be able to cope with the volatility. You're certainly being tested on that right now!

Unless you're a real risk-lover, you should put at least some - perhaps as much as half - of your savings into fixed-interest investments. This will lower the risk of your whole portfolio.

You might also go into property, particularly if you don't own your home.

But, if you want good long-term growth, I don't think you should stop at just one-third in shares.

I suggest you put more into share funds on a gradual basis. Invest some now, and then perhaps some every six months or yearly for a while.

That way, if the market does fall further before its eventual recovery, you'll buy at least some shares close to the market bottom.

One way to discipline yourselves to do this is to put your cash in term deposits that mature at the time you plan to invest in shares.

* * *

Q: After reading your column in last Saturday's Herald I did a bit of maths out of curiosity.

If you receive $214 from a 10 cent per can deposit return on $1000 worth of Budweiser, this means that you would have returned 2140 cans. That means a beer consumption rate of a six-pack a day for a year.

And $1000 divided by 2140 cans means you would have paid just 47c for each can, beer and all.

If this is the true price of beer in the States (47c a can) then I'm definitely emigrating!

At least there we could drown any share market sorrows cheaply. And after a six-pack or two, who could give a toss about how their investments are doing?

A: Now (hiccup), what was that all about again (hiccup)? Pass me another, willya mate.

Oh yes, you must be talking about the American email I quoted last week that said if you invested $1000 in Nortel, Enron or Worldcom shares a year ago, you'd be left with only a few dollars' worth.

"But if you bought $1000 worth of Budweiser beer, not the stock, one year ago, drank all the beer, then turned in the cans for the 10c deposit, you would have $214."

Now you've got busy on your calculator and cast doubt on those numbers.

And, given that the price of US beer is as much of a money matter as investing in share funds, I did a bit of research, in the form of emailing a couple of friends in the US.

Here's one response.

"As the official nominee of American beer prices (what an honour. I get a vision of a 5ft 10in, 250lb guy named Zeke sitting on the tailgate of a 1972 Chevy pickup with his dog named Luke and a shotgun across his lap), I have made an inquiry to Safeway.com and did some online shopping.

"Budweiser goes for US$12.98 a case (24 12-ounce cans) and $5.99 for a six-pack.

"If you really want to get your reader excited, tell him he should live in Fairfield, California, when he decides to stay, and get a job at the Bud plant.

"Although I do not drink Bud (I have a little bit better taste in beer, Pyramid Hefeweizen Ale at $ 7.50 per six-pack), I have heard that they give free tours with tasting at the plant."

And from another friend: "I called my purveyor of fine liquors, Rocky Tucker, who runs an establishment around the corner from where we live.

"This is what he said: 'If you were to buy a case of four six-packs of Buds, it would average at around 60c a can. If you were to buy it single, it would be about 75c'.

"He gave a piece of parting advice as we hung up: 'Do tell your friend to drink Steinlager. It's a better brew than Buds'."

He might well be right. But it seems that Budweiser, at around 54c to 60c a can if you buy 24 at a time, is certainly the cheaper buy.

And if you were drinking a six-pack a day, you'd have an eye out for specials, or might be able to buy wholesale. So 47c doesn't seem out of line.

Have a good time in America! (Hiccup).


* 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 email: 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.