Nobody should count on good results in shares or property over less than, say, 10 years
The Herald recently had an article about share investment in which the headline was trumpeting shares but excluded rent and gearing of property.
It also used a 40-year period, which is a timeline that is way in excess of what many of us do. Most of us are (wrongly) in and out of asset classes in shorter time frames.
I would be interested in your comments about the Herald article.
Oh no, not shares versus property again. Over the years I've come to the conclusion that comparing the two is not comparing apples and oranges, but apples and elephants.
Among the difficulties:
* Should you include rent? If someone buys an expensive house to live in - as opposed to buying a cheaper house and also investing in shares - they don't get any rent. Then again, they do live in a flasher place.
* On the other hand, if we compare shares with rental property, of course we should include rent in the same way as we include dividends. But what level of rent? It varies so widely.
* We should subtract expenses, which are much higher for property than shares. But how much for rates, insurance and maintenance - all of which also vary hugely?
* With shares, unlike direct investment in property, it's easy to spread your money by investing in a share fund. How should that be taken into account?
* It's usually much easier and quicker to get out of shares than property. That might not matter much. But if a property investor loses their job and can't keep up with mortgage payments, having to sell a property fast can mean accepting a much lower price than hoped for.
* It's also much easier to sell part of a share investment than part of a property. Again, that flexibility might or might not matter.
* The biggest difficulty is what do we do about gearing - the fact that nearly all rental investors, but hardly any share investors, borrow to invest.
With gearing, and good luck, you get gains on the borrowed money as well as your own deposit. And the more you gear, the more you gain - or lose if things go badly.
It's largely gearing that makes some people wealthy through property, and many others comfortably off. House prices usually rise, and most people cope with cash flow requirements along the way.
There's no denying, though, that gearing boosts risk. A heavily geared rental property is probably a good deal riskier than an ungeared diversified share portfolio.
The upshot of all this?
If we compare a typical share investment with a typical property investment, the winner will depend on our assumptions.
Then there's the tricky question of time period. As you point out, 40 years is unrealistic. But if we go shorter, our results may depend on which asset happened to go through a boom during the period.
And how do we quantify the various worries? With a rental property, there's the possible absence of tenants, or non-paying tenants or destructive tenants. With shares, there's the helplessness of watching a sharemarket plunge.
In the end, I think there are property people and share people. As long as you invest in either with an awareness of the risks - and a plan in case things go wrong - you will probably do well over the long term.
But I do mean the long term. Nobody should count on good results in either shares or property over less than, say, 10 years.
By the way, I don't go along with one comment in the Herald article, that because the research looked at the biggest 50 companies it missed the small "penny-dreadful" shares.
Small shares include losers, but also up-and-comers whose prices are about to zoom. On average, small shares usually outperform large ones. If they had been included, shares would probably have done even better.
Apples and elephants? Let's just let the elephants eat the apples, and each reader can choose which are shares and which are property.
Footnote: It's not really fair to say the article was "poor". It included criticism of the research. A bit of messenger shooting going on?
Get head out of the sand
You said last week, "As for a future catastrophe, it depends how you define it, but I certainly don't see a catastrophe as a certainty - in whatever time frame you choose. Collectively, we're not that stupid."
Mary, your comments show you have a bad case of head-in-the-sand syndrome. What if Doom Merchant was correct in all but his/her timing predictions? What if we collectively are that stupid? What if Bernanke was correct despite your almost flippant dismissal of his statement which, despite what you say, can be readily verified?
Does your research extend beyond the blinkered and controlled views of your fellow domestic journalists? I would suggest that a person in your position has a duty of care to the public to be much better informed than you appear to be, but as they say, time will tell.
To answer your questions in order: Then we're all stuffed. Then we're all stuffed. Then we're all stuffed. And my research is certainly not confined to what New Zealand journalists say. I wander far and wide on the internet - but perhaps don't linger in the shadowy places quite as long as you do.
Meanwhile, our Doom Merchant friend has responded to last week's query about whether he uses banks, as follows.
Bullion works for me
My definition of "doom" is the inevitable collapse/devaluation of global currencies through inflation of the currency supply, not an apocalyptic Mad Max scenario as many might think.
I hold just enough currency in the bank for day-to-day life. Other than that, I'm out of the financial system completely. No "paper" assets or investments. My wealth is preserved in bullion, secured in a private vault. I'm all in.
This is about wealth preservation for me, not profit. I'm stoked to be out of the corrupt, counterfeit Ponzi scheme that uneducated "sheeple" call a global financial system. Every currency on the planet is fiat and, without exception, every fiat currency that ever existed has collapsed.
I refuse to "play ball" while the world's leading economies stand teetering on the brink of bankruptcy. I refuse to wake one morning to learn the New Zealand dollar has been devalued 20 per cent or more, and that I, along with the rest of the nation, just lost 20 per cent or more of our wealth. No thank you!
Isn't it interesting that 60 per cent of respondents to my letter on your online column on the Herald website are in favour of my theory/opinion. Folks are catching on ...
Well, some folks. I take much more notice of those who bother to email me and sign their letters, and their opinions are gloriously mixed. See the next two Q&As.
PS: I love "sheeple".
Re investing in gold; if we all sold our investments and withdrew our deposits or bonds and bought gold, the gold price would rise but economies would collapse, as Doom Merchant says.
Then gold will be as useless as money, as we cannot eat it. The basic necessities of life are food, water and shelter, so the greatest commodity might be rural land. Hence the need to include primary production in our investments and not let our true gold be sold to offshore investors.
Investing responsibly in equities, property and deposits means the world has a financial chance. Not only do we see our investments grow, but as we support companies by investing in them we are actually supporting the economy. As New Zealanders we can do this either directly or indirectly (such as KiwiSaver).
The purchase of gold produces no growth for a nation except those mining gold. Those who have sufficient wealth to invest in start up companies (such as angel investors) create wealth for individuals and nations, which seems much more constructive than taking a gloom and self-centred approach to something that can be financially responsible and individually and nationally rewarding.
Answer: Well put.
Stupid, but also resilient
You state, "Collectively, we're not that stupid". I think that we are and that the human historical record of war, terrorism and financial failure supports my view, even before we get into a debate on the impact of humans on climate.
However, it is events beyond the control of humans that pose the significant risk of catastrophe that I am certain will eventually occur, whether from disease, famine, or a global "winter" arising from volcanic eruption or asteroid strike.
The good news is, despite periodically demonstrating stupidity beyond belief, humans are also smart and very resilient and often bounce back from adversity stronger than ever.
But that's my very point. We do bounce back - although perhaps not from a major asteroid strike. But there's not a lot we can do in preparation for that risk.
More on this topic next week - but not too much more.
Benefit for carers, too
Re the article "NZ Super lifts income" in last week's column. The writer says that he/she is caring for elderly and frail parents and is receiving a Carer's Benefit. Can you please inform who pays this benefit, the amount and eligibility criteria? Many thanks, as I have never heard of this benefit before.
You've probably heard of the Domestic Purposes Benefit, but thought it was available only to sole parents.
It turns out, though, that there's also a DPB - Care of Sick or Infirm. It's for people caring for someone - other than a spouse or partner - who lives at home and needs full-time care, and who "would otherwise need hospital care, rest home care, residential disability care, extended care services for severely disabled children and young people, or care of a similar kind."
There's a name change coming, though. "Under welfare reform changes to be introduced next year, benefit categories will be reduced to three types, and this benefit will become a Supported Living Payment," says a spokesperson for the Ministry of Social Development.
The benefit is paid by Work and Income - aka the Government, aka taxpayers. It's probably a pretty good deal for taxpayers, actually, given how much the Government might otherwise spend on providing the care.
The maximum weekly amount is $256 after tax if you are a single carer over 18, or $213 if you have a partner and the combined family income is less than $39,890 a year. The amount you receive depends on several variables. Generally speaking, people on higher incomes are not eligible.
Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to firstname.lastname@example.org or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.