When a cold caller rings, it's not you that's going to be making money.
I get calls from Hong Kong, asking me to invest in shares, a minimum of US$10,000.

Recently I had calls for "SpaceX" - the Elon Musk company. Last time it was Alibaba and before that also was some top company.

How safe is it to invest in companies not listed on the NZX as an individual investor?

Alarm bells are ringing, warning lights are flashing and danger signs are looming large.

You can "safely" invest in large international companies, but not this way.

Let's say you hand over US$10,000 - close to NZ$15,000. Will you actually get those shares? If you do, will you have paid a fair market price, plus reasonable brokerage, for them? I very much doubt it.

Even if you could answer yes to both those questions, are they a suitable investment for you?

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Nobody should ever make an investment decision on the strength of a recommendation from a stranger. Always think about why they are doing this. You're not the one who is going to get richer!

I've asked the following question before, in seminars and in this column, and I'll try again now: Has anyone ever gone into an investment because someone approached them - via phone, email, snail mail, social media, or a stand in a shopping mall - and been happy with the outcome? I've yet to hear from a single person.

It's not even smart to follow the recommendations of friends or family, unless they really know what they're talking about. Having a job that has something to do with money, or having done well in the investment themselves - so far - is not good enough.

If you have spare money, always pay off any high-interest debt first. After that, if you want to invest, you need to consider:

• When you're likely to spend the money. If it's less than three years, stick with bank term deposits. If it's three to 10 years, try bonds or a medium-risk managed fund. If it's more than 10 years, consider shares, property or a higher-risk managed fund.

• How much volatility - ups and downs - you can cope with. If you would panic when the value of your investment fell, reduce your risk.

• What other investments you have. Unless you already hold many shares, investing in a single share is way too risky. If you haven't got enough to invest in at least 10 stocks and preferably 20 or more, use a managed fund that invests in many listed companies.

If you don't feel confident to make these decisions, see a good authorised financial adviser. The Info on Advisers page on www.maryholm.com gives some advice on how to choose one.

For more on investing in international shares, read on.

Meanwhile, if you get more calls from Hong Kong, tell them you're not interested and hang up. Don't wait to listen to their response. It's okay to be rude to such people.

Hedging the dollar


How does hedging work? I know airlines do it all the time. Is it common in all sectors or just the oil market? And what does it mean for the average person on the street?

Many importers and exporters hedge, to reduce their risk of losing from changes in the value of the kiwi dollar against other currencies.

For the person on the street, hedging is an issue if you have overseas investments. This would apply to most people in KiwiSaver - in all but conservative funds. KiwiSaver providers typically include some offshore investments in the mix to give wider diversification.

Hedging also applies to many investors in non-KiwiSaver managed funds, as well as people who directly invest in overseas shares, bonds, property or other assets.

So what is hedging? Well, when the value of the kiwi dollar rises that means the value of other countries' currencies has fallen against our dollar. And the value of investments in those countries will also fall - when measured in New Zealand dollars. Remember: kiwi dollar up, overseas investments down.

And the reverse. If the value of the kiwi falls, the New Zealand dollar value of international investments will rise.

If you - or in most cases your fund manager - hedges an investment, it's as if you build a protective hedge around it by also investing in financial instruments that move in the opposite direction to the kiwi dollar. One investment offsets the other. You hedge out the currency risk and leave just the normal risk of investing in shares or bonds or whatever.

Most KiwiSaver providers and other fund managers decide for you how much to hedge. They usually fully hedge international bonds, but with shares it's a mixture. Fifty per cent hedging is quite common. So is hedging within a range, depending on how the fund managers see market trends.

To my knowledge, only one KiwiSaver provider, SuperLife, lets you choose full hedging, no hedging or anything in between.

You can check your provider's website or ask if they hedge your fund. If you don't like the reply, move provider.

Hedging costs a bit, which will raise management fees. But it's not terribly expensive, so that shouldn't affect your choice. So how should you decide whether you want hedging?

If you don't hedge, you benefit from further diversification away from the New Zealand economy. It's not just that you have international assets that perform differently from local ones. Also, if our economy hits the skids and the kiwi dollar falls fast, your international investments don't join the fall. They're detached from the kiwi.

This added diversification reduces risk - arguably offsetting the reduction in currency risk that you would gain from hedging.

Also consider how you plan to spend the money. Let's say you're saving for retirement. Quite a lot of your retirement spending might be on foreign travel and imported goods, such as cars, electronic goods, books and clothes.

The price of those will rise if the kiwi dollar falls. But if you've been saving in unhedged international investments, the value of those investments will rise, so you're okay.

Of course the reverse might apply. If the kiwi rises over the years, this will reduce returns on your international investments. But you won't mind much, because the price of travel and imported goods will have fallen, or not risen much.

To the extent you expect to spend on travel abroad and imports in retirement, it's a good idea to hold at least that portion of your savings in unhedged overseas investments over the decades - although you'd be wise to move that money into bonds and cash when you're within about 10 years of spending it.

One argument in favour of hedging is that - through the offsetting investment - you benefit from the "interest rate differential", the fact that New Zealand interest rates tend to be higher than elsewhere. This is not a big deal, but it is a plus.

Where does this leave us? With overseas share investments, perhaps not hedging at all, or maybe half and half. With international bonds you typically want more certainty, so hedging is probably a good idea.

Footnote: If you find all this confusing, please don't decide not to invest overseas. It's really good to spread your money around the world. The hedging decision is not nearly as important as the "going offshore" decision.

Index funds


I am interested in setting up a portfolio with about 70 per cent equities to save for retirement. I am in my early 50s so my time frame is at least 10 years.

My husband and I have other retirement funds. This is a lump sum of $240,000 I want to invest in index funds. I read it is better not to invest everything in New Zealand equities so as to diversify the risk. I would be looking at about $30,000 per fund over eight funds, both New Zealand and world index funds.

I discovered Smartshares World index funds. They would be easy to administer, low fees and I don't have to worry about the FIF tax rules. I am aware there are ishares index funds in Australia, but I don't want to open an Australian bank account, etc.

However, I read the Smartshares funds are not hedged. I don't know much about hedged and unhedged index funds.

Would the fact the Smartshares world funds are not hedged be an issue down the track? Is there any way one could do some self-hedging by buying foreign exchange?

Also would you think the next six months would be an okay time to drip feed into the Smartshares funds at equal amounts until I got to the $30,000 holding for each fund?

Well done on several fronts:

• Including a large proportion of shares - also called equities - in your retirement savings. It's a great idea given that you don't expect to start spending the money for at least 10 years.

• Choosing index funds. Because they simply invest in the shares in a market index, they cost less to run than actively managed share funds. They therefore charge lower fees, and this makes a big difference to long-term performance after fees.

• Investing beyond New Zealand. This considerably reduces your risk. When the local market is performing badly, other markets may be performing well.

• Planning to drip feed into the funds. Nobody can predict what sharemarkets will do. If you invest all your money today and the markets plunge tomorrow, you will wish you had waited. But if the markets zoom up tomorrow, you'll be glad you didn't wait. It's better to drip feed over a period, and then at least some of your money will have gone in at a good time.

On the question of hedging, see the Q&A above. If you still want a hedged fund, there's an easy way to get around the fact that Smartshares international exchange traded funds (ETFs) aren't hedged. You can invest in SuperLife's Overseas Shares Currency Hedged option.

SuperLife, like Smartshares, is a subsidiary of the stock exchange company NZX. SuperLife invests in Smartshares' funds, and its fees are about the same or slightly lower. And, as mentioned above, it offers the choice of hedged, partly hedged or unhedged international investing.

For more about the differences between investing directly in Smartshares or via SuperLife, see this column two weeks ago.

If you choose SuperLife's hedged option, you won't get eight different funds to invest in, but I don't think that matters. Rather than dividing your money into funds that invest in different regions of the world, you can put the lot in a world fund. Who knows which region is going to do best anyway?

On drip feeding, it may be better to do it over 12 or 18 months rather than six months. And now is as good a time as any to start.

Put in equal amounts, perhaps monthly, regardless of what the markets are doing. If you're investing in SuperLife, you can put the lot into its cash fund now and ask it to transfer it monthly for you.

By the way, you asked about doing your own hedging. It's possible, but it's not cheap. I wouldn't recommend it unless you have, say, $1 million to invest.