When property makes perfect sense

By MARY HOLM

I have a term deposit of $21,100 at 4.75 per cent for three months. Then it's open to reinvestment.

I was buying a house/land package three or four years ago with my partner in Australia. Our relationship ceased and he and I went separate ways.

As the house was owned only for 2 1/2 years, practically all the mortgage was still owed. I lost money on the sale of the house.

Hard work has almost recouped the thousands I lost from a supposedly long-term plan at the time.

I am in my late 40s. I own no property or car and have no children.

Being single and having read investment magazines etc., and seeing a multitude of choice, how do I now wisely invest, knowing I don't want to lose any of my hard-earned nest egg?

I have enough for a deposit on property. But should I forget it and use managed funds, or a mix of both?

I want to invest wisely, knowing jobs are harder to come by in my age group.

You've learned a tough lesson: home ownership isn't always all it's cracked up to be.

In the high-inflation days gone by, you couldn't go wrong financially by buying your own home. House prices always rose.

These days, though, they sometimes fall.

Even when the price doesn't fall, you can still lose money if you sell within a few years of buying.

With the most common type of mortgage, you don't pay much off the principal in the first few years, as you've found out.

And the real estate agent's commission and legal and other costs will total several thousand dollars.

Fortunately, most people don't sell quickly. But in circumstances like yours, you didn't have much choice.

Since your sale, you've done well to get your savings back on track.

So what now? I would recommend that you take a deep breath and get back into the housing pool - shark-infested though it may seem.

I'm not talking about a leap from the high diving board. Put your toe in the water by buying a low-priced house or apartment, to keep your mortgage down. You live in a small town, so that will make it easier.

It's unlikely that you will be forced to sell again in a short time. And, if you set yourself a goal of being mortgage-free as soon as possible, you may well end up better off than if you were renting and saving.

Perhaps of more importance, you'll gain security. You're always going to need accommodation. It's good to know that, if you should find yourself without a job, you won't need to come up with rent. And you won't have a landlord who can kick you out.

Regular readers will note that I don't always recommend home ownership. Some people may be better off to rent and invest the money they would otherwise have put into a mortgage.

But to do that successfully, you have to invest in something that will bring high returns, such as a share fund.

High returns mean volatile returns. And you don't sound like someone who would shrug off a drop in the value of your investment, confident that it will rise again later.

Good luck with your next property purchase.

I read with great interest your article last week on post-dated cheques.

Exactly the same thing happened to me a year ago when a water rates cheque slipped through early and triggered a $25 overdraft fee.

WestpacTrust remedied the error without any quibble.

I now highlight the dates on post-dated cheques in bright orange, which only a colour blind (presumably male) teller could miss.

Before the blokes write in indignantly, I hasten to say that the sexist comment came from a man.

And before the eye specialists write in indignantly, to say that the remark wasn't sexist because men are 16 times as likely as women to be colour blind, I hasten to add that I still think the comment was rather snide.

All that aside, the orange highlighting is a great idea. And I'm pleased to hear that WestpacTrust responded well.

You also wrote about a far worse problem that you had with another bank. But seeing it's all in the past, there doesn't seem much point in going into it here.

The 72 Rule (in last week's column) can also help you keep track of inflation.

Divide 72 by the existing inflation rate. The answer is the number of years it takes for the value of an individual's money to diminish by 50 per cent.

This is one reason I am wary of commentators stating that a little inflation is not harmful.

(Back in the 50s and 60s my parents carefully marshalled savings almost vanished.)

Good tip.

As long as we keep inflation at 2 or 3 per cent, though, it isn't all that distressing to think that the value of our money will halve in 24 to 36 years.

Looking back, the 50s and 60s weren't our worst for inflation. The CPI rose around 3 to 7 per cent a year through most of that time.

In the late 70s and early 80s, though, it rose around 15 to 18 per cent in some years.

Using your variation of the 72 Rule, people's money would have halved in value in four to five years. Horrors!

(For those who missed last week's column, if you divide 72 by a percentage return, you'll get roughly the number of years it will take for your investment to double. For example, on an 8 per cent return, it will double in about nine years.

(Viewed another way, if the value of your investment doubles in, say, six years, your return has been 12 per cent.)

If you take the fun of maths (in last week's column) a little bit further, you can work out the governing equations and calculate how quickly your money doubles in value as a function of a rate of return.

Intuitively, it is somewhat surprising that a simple "linear" relationship, such as the 72 Rule, is applicable, since it is known that an investment grows exponentially and not linearly with time if you keep reinvesting interest.

However, many mathematical problems can be approximated in a linear way. If you do so, you arrive at a simple formula.

My calculations show that 72 is indeed a good approximation, especially if your return is around 8 per cent.

As you pointed out last week, this figure has the additional benefit that many numbers divide evenly into it, thus making a quick estimation even easier.

If you calculate the correct value for the rule for different interest rates you get 69.66 for 1 per cent. That means it would take slightly less than 70 years (and not 72) to nominally double your investment on a 1 per cent return.

The value then creeps up to 72.05 for an 8 per cent return and keeps increasing with increasing returns.

For interest rates around 30 per cent, one should rather apply an 80 Rule.

But that may be rather academic anyway, since it is not very likely that you will get such a return over many consecutive years.

Wouldn't it be great if we could get 30 per cent year after year in a relatively safe investment.

A couple of years back, investors in world share funds received around that rate for two years in a row. But then look what happened!

Sorry, but I've edited out your formulas. While I rather like them, I've seen research that shows many newspaper readers are put off by articles with lots of numbers in them, let alone formulas.

Readers can still benefit from your wisdom, though.

My only criticism is that the minute we start complicating something like the 72 Rule, it loses its charm.

We could, for instance, use a 70 Rule for returns of, say, 1 to 4 per cent, a 72 Rule for 5 to 11 per cent, and so on. But who would remember it?

Another reader also sent in a letter full of formulas, making a similar point to yours.

He included a spreadsheet, covering interest rates from 1 to 99 per cent.

All fascinating. But given that we're usually looking at returns of around 3 to 19 per cent, the simple 72 Rule is good enough for quick estimates.

If you're eyeing any investment with projected returns of 20 per cent or more, you've got more to worry about than 72 versus 75. It must be highly risky.

* 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.

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Sorry, but Mary cannot answer all questions, correspond directly with readers or give financial advice outside the column.