I've found a protection income fund, where my investment is secure, earning 36 per cent a year. Found it though an investor that I personally know.
Forget about tax and get your money out pronto.
If by "secure" you mean you can't lose money, I'm afraid you've been misled. Any investment that sometimes earns 36 per cent will also sometimes suffer big losses -- if it's a legitimate investment at all.
How can I be sure? If there were an investment with huge returns year after year, everyone would want it. And if anything is in big demand -- such as Auckland houses a while back or scarce sports or concert tickets -- the price goes up. And the higher the price, the lower the return.
Let's say you invest $100 and get 36 per cent, or $36. If the price rises for new investors to $200, the $36 return has halved to 18 per cent. At $1000, $36 is just 3.6 per cent.
However, if the investment were riskier -- with returns sometimes negative -- demand would be lower. The price rise might stop at, say, $400, so that the $36 return was 9 per cent.
That's what markets do. In the short term, they are messy. But over time, higher returns always come with higher risk. That's why shares bring in more than bank term deposits.
There's no such thing as a low-risk, high-return investment.
But wait -- you know the investor who recommended this. That means little. They might be part of the scam, or a victim themselves.
Scammers often give great returns to early investors, in the hope that they will entice others. Those early returns are often funded by new investments. Think Bernie Madoff in the US, or New Zealand's own David Ross.
I urge you to withdraw your money now -- or try to. Unfortunately, many people are ripped off by overseas scams and New Zealand regulators can't do much to help.
If you are lucky enough to get it all back, please don't reinvest. That's exactly what they want you to do, until they've got their hands on enough of your wealth.
Your letter coincides with World Investor Week, and the Financial Markets Authority and Commission for Financial Capability have both been working to raise awareness of investment fraud.
The commission notes that UK research "found that older, wealthier, risk-taking men are the most likely targets for 'share fraud' when worthless or unsellable company shares are on offer.
"Women are more affected by 'recovery fraud', when scammers offer to recover funds or a lost investment in exchange for a fee. Other scams, such as Ponzi schemes, are more likely to sting younger investors."
It adds, "The UK study demonstrated that the more financially sophisticated a person is, the more likely they are to be victimised, since fraudsters prey on investors' overconfidence."
The commission also points out that "Fake documents, companies, websites and even entire government authorities are invented to dupe investors." It gives an example of a fake government authority, at www.uksfma.org. Looks pretty convincing.
Property v shares
Then you said one shouldn't include rents in the calculation of property returns. That's not correct. Indeed, the US Federal Reserve recently used exactly that methodology, and -- shock horror -- residential property outperforms. Rents are obviously a fundamental contributor to property returns and because insurance, rates and maintenance in aggregate are less than rents, the residual is used to calculate returns.
You also get a little confused when you argue that because mortgage costs are higher than rents, this is another reason to exclude rents from returns. Your finance background should have told you that if you are going to deduct mortgage costs then you need to calculate the return on equity as opposed to the return on the total value of the property. Because mortgage costs have been less on average than total return, that would enhance performance.
Experts like Case Shiller and the Fed study look at unlevered returns so mortgage costs aren't relevant.
Now for the numbers. The Fed looked at 16 countries excluding New Zealand but including Australia. The compound return in US dollars from 1870 to 2015 was 10.6 per cent a year versus 7.8 per cent for shares. From 1950, houses still outperformed at 12.5 per cent versus 10.1 per cent for shares.
Anecdotal evidence suggests residential property has also done extremely well locally because property has become more expensive in terms of price as a multiple of rents. For example, from January 1993, the average rental yield on New Zealand residential properties has declined from 6.7 per cent to 3.5 per cent, according to Infometrics.
Paradoxically, one of the best reasons for arguing that shares look better value today is because residential property has done so well in the past.
First, it was the headline writer who said shares are the winner. I said a much milder, "Shares look a better bet to me", and then explained why the comparison is difficult. There's a lack of data on property expenses. And property investors usually borrow to invest, whereas share investors usually don't.
Nor did I say we shouldn't include net rents in calculating returns. I just said it's not doable. I also pointed out that for many landlords, expenses plus mortgage interest exceed rent.
You're right, though, that I should have looked more closely at returns on equity -- the money an investor puts into the property. I said, "Borrowing ups the ante. If the investment goes well, you get gains on the bank's money as well as your own." But I should have made that point more strongly.
Thanks for supplying the numbers. As you say, it's interesting to note that because New Zealand house prices have grown so fast, rental property will probably not be as good an investment from here on.
However, there's a major argument you have ignored.
I looked not only at returns but also risk. Although share prices are more volatile, property comes with other risks. If an owner with a mortgage is forced to sell in a down market, they could end up with no property and a debt. And then there are disputes with tenants, unpaid rent and so on.
Also, shares are less risky because: they differ from your home; it's easier to own many shares including offshore; you can drip-feed into shares so you don't buy lots at a market peak; and you can easily sell any portion of your shares if you need money.
These are all important issues for New Zealand investors. That's why shares look a better bet.
You say you cannot exclude dividends from share returns, yet you don't include rental income -- saying there is "no way to come up with representative numbers for net rental income". Seriously?
If there is a mortgage on rental property, the interest is deductible, as are maintenance, rates, insurance and other expenses.
The mortgage is typically secured against that property, and with the demise of LAQCs, many are now either in LTCs or family trusts. So the investment is less risky than if the person borrowed the same amount (if they were able to) to buy shares.
As for Tenancy Tribunal claims, it is pointless noting the numbers involved in disputes without knowing the total number of landlords and tenants. My educated guesstimate is that as a percentage, that would be quite small.
Any accountant with rental property clients could give you an idea of net rental return. For a property with a mortgage, the landlord is effectively using the rental as a savings scheme, using borrowed money, the interest on which is deductible as a business expense. For a property without a mortgage, the net return for a typical gross rental is about 5.5 per cent of the current value of the property. After deducting expenses, the net return is about 4.5 per cent.
Taking into account capital gain and income, that in my view has historically put rental property way ahead of straight shares. And if the investment has been made sensibly, as most are, it is probably more secure as well.
The trouble with typical data is that it's easy to debate. One set of reasonable numbers gives us one conclusion, another gives us the opposite.
Still, you make some fair points. Rental property expenses -- and for that matter share expenses, but they are much smaller -- are tax-deductible, although most of the cost is still borne by the landlord.
And yes, it's generally riskier to borrow to invest in shares than property. But as I said, few people do the former these days.
On Tenancy Tribunal disputes, in the 2013 Census, 355,554 households were renting from the private sector. Let's say the average landlord owns 1.5 properties, given that some own many properties. That suggests there are about 237,000 landlords.
Last year, the tribunal considered 18,900 complaints from landlords and tenants, so that involved about 8 per cent of all landlords. But that's only in one year. If you own a rental for 10 years, there's a fair chance you will be caught up -- to say nothing of lesser disputes that don't make it to the tribunal.
On the security of the two investments, we could probably argue endlessly. See my reply above.
Double the money
The S&P NZX50 Gross index has doubled in five years, but that includes dividends. You have done it without dividends. Congratulations.
Using the Rule of 72, if something doubles in value, divide the number of years into 72 and you get the annual return. In your case, 5 into 72 goes 14.4, so you've averaged about a 14 per cent return. Nice! But don't count on that continuing. Read on.
Over 40 years, the two times that the New Zealand share market has climbed sharply above the world market, or vice versa, there has been a subsequent sharp correction. If that trend repeats, the New Zealand share market is due for a sharp correction sometime soon!
Maybe. We can be sure it won't grow forever at the current rate. But nobody knows when or how much that will change. Share investment should always be for the long haul.
Mind you, much the same could be said about the housing market. It's not as volatile, but recent growth can't continue.
Many other readers wrote to me about the shares versus rental issue. More next week.
• Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a 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, Private Bag 92198 Victoria St West, Auckland 1142. 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.