Money matters: Keep the trust and sack the accountant

By MARY HOLM

Q: In May 1997, I had $20,825 surplus funds, which I placed in a unit trust.

By February last year, the value had increased to $30,225, but by February this year it had declined to $27,175.

My accountant said I would have done just as well in a less-risky investment like bank deposits, allowing the money to compound.

Your comments would be appreciated.


A: Sack your accountant.

She or he is wrong that you would have done just as well in the bank.

According to Reserve Bank data, if you had put your money in a series of six-month term deposits from May 1997 to last November, and then a three-month deposit after that, your $20,825 would have grown to just over $25,000 if you are in the 19.5 per cent tax bracket.

If you're in the 39 per cent bracket, it wouldn't even have made it to $24,000. Both totals are a long way short of the $27,175 you've accumulated in the unit trust.

But there's a more important point here.

Your accountant could quite easily have been right about the numbers. Many unit trusts have volatile returns, so term deposits sometimes do perform better over a few years.

But I don't like the implication - that you should move your money into term deposits.

Over the longer term, an investment in a good unit trust will almost always do better. Usually, they do much better. Your accountant should have told you that.

As long as you can leave the money tied up for several more years, I would leave it where it is.

At the risk of losing a few friends, I have to say I'm sick of hearing about bad investment advice from accountants.

While some of them have studied finance and related subjects, or have learned about them through experience, others seem to know very little. They might be whizzes at debits, credits and taxes, but accounting is no more like finance than maths is like chemistry.

Q: An investor has asked me to reply to your comments in last Saturday's Herald, where you said: "Anyone writing a newsletter of stock tips can find a past example that did well in a particular period. And they don't tell you about the other recommendations in the same period that bombed.

"If it is possible to find undervalued stocks with tremendous upside potential with any consistency at all, I'm sure these writers wouldn't be publishing newsletters."

You are obviously unaware of my own company and my newsletter (names edited out).

* It's NOT a scam! I don't handle investors' money, just a $150 annual subscription fee for the monthly investment advisory newsletter. (Sorry, no "tips" either, just carefully researched analysis and specific recommendations.)

* It has been very successful at picking under-valued shares that have performed extremely well. Of course, my 20-year track record may all have been a very long string of good luck!

* It discloses all recommendations - including the few that bomb. Anyone can judge everything for themselves on my web page.

* This writer has invested in all shares recommended in the newsletter - after giving subscribers the chance to buy or sell first - and is now independently wealthy.

The newsletter business earns me a good income, but I make more from just the dividends from my investments.

I continue to publish the newsletter as (1) I need this independent research to continue to manage my own share portfolio and (2) I want to continue to help other private investors.

Many subscribers have been receiving the newsletters for the 20-plus years that it has been published, and I do not intend to abandon them.

PS: Perhaps you should also be warning the public about people who continue to offer investment advice to others but have been unable to manage their own personal finances with any significant degree of success.


A: You're right. I was unaware of your company. And I must say your results look impressive on your web page.

Perhaps you're another Warren Buffett, one of those rare people who can, over long periods, keep picking shares markedly better than a dart thrown at a newspaper share table.

"In any market it is possible for a particularly smart and insightful analyst to uncover some bargains," says University of Auckland Finance Professor David Emanuel, who remembers you as a bright student, interested in picking winners while studying for your degree more than 20 years ago.

"But," he says, "it's tough to do, as it really means taking a bet against the consensus view among analysts about what the appropriate market price is."

Emanuel adds that this may be slightly easier to do with smaller companies than larger ones, "as there is less analyst following there."

Many of your recommendations are, indeed, smaller companies. And these, Emanuel notes, tend to bring in higher average returns than big companies.

That's partly because small shares are less liquid - harder to buy and sell - so investors want to be compensated for that.

Part of your success, then, may be because of the so-called small company effect.

But that's fair enough. Good on you for doing as well as you have. And for disclosing all your results. And also for continuing to publish your newsletter when you no longer need to. Aren't you nice!

Does that mean, though, that if every second reader begs me to tell them who you are, I should respond? Sorry, but no.

Firstly, I'm not in a position to check your claims.

Secondly, you're in a high-risk game. More than a third of the recommendations on your web page resulted in losses. Many investors couldn't cope with that.

Thirdly, your published returns don't seem to make any allowance for brokerage or taxes on capital gains. And anyone who makes even a portion of the trades that you recommend could well end up being taxed.

Those two costs, plus your subscription fee, would cut people's gains a fair bit.

Fourthly, at least part of your success probably is attributable to a "long string of luck."

After all, without the remarkable success of just one of your recommendations, NZ Refining Co, your average return would be somewhat lower.

Maybe, over the next few years anyway, your luck will turn. Even Buffett has had his down times.

As one finance expert said to me recently, "There's a lot of randomness out there."

As far as your PS is concerned, I would be happy to warn readers if I knew of such advisers.

But it's hard to tell just how successful people are with their own finances, unless they go bankrupt or something.

I suppose you could call me someone who offers investment advice. But I certainly wouldn't want my own financial success to be judged by outward signs, such as flash cars and posh clothes.

Beneath my modest exterior, only I know what wealth lies hidden!

(Just a minute. I still need that pay rise, boss!)

Q: As regards your column on March 17th about annuity buying, my husband and myself, 56 and 53 respectively, have about $300,000. But when I spoke to my husband, he said putting it into term deposits would get us about the same, even after tax, and we would still have the capital sum.

When we retire, in about 10 years, would the annuity amount and the interest amount be taxed, after we obtained New Zealand Superannuation, as extra income?


A: Your hubby sounds like our accounting friend above.

While term deposits are great short-term investments, they're not the be-all and end-all, you guys.

In answer to your question, getting NZ Super doesn't affect the taxability of anything else.

You will still be taxed on interest income. And you won't be taxed on annuity payments, as tax has already been paid by the insurance company.

Your husband needs to keep that in mind when comparing annuities and term deposits.

I got some annuity quotes from Tower, to fit your circumstances.

You would get full monthly payments for at least 10 years, regardless of deaths. After that, when one of you dies, the payments would drop by a third until the second one dies.

For simplicity, I've assumed you're now at your retirement ages, of 66 and 63.

Of course, market conditions won't be the same when you actually retire, in about 2011, so you may get more or less than current quotes.

But the same applies to term deposits. The comparative returns on the two alternatives will probably be pretty similar.

With $300,000 annuity, you two could get a bit more than $19,200 a year. That's a 6.4 per cent return - after tax.

To do as well in a term deposit, you would have to get 7.95 per cent if you're in the 19.5 per cent tax bracket, 9.55 per cent in the 33 per cent bracket, and 10.5 per cent in the 39 per cent tax bracket.

Six-month term deposits now pay around 5.75 per cent.

What might have thrown your husband was that, in the March 17 column, the quoted annuities grew by 2 per cent a year, to allow for inflation.

If we did that in your case, you would start out with around $15,700 a year, or just 5.2 per cent on your $300,000.

But that's still quite a bit more than you can get, after tax, on a term deposit. And your payments would increase every year.

You certainly can't count on that in term deposits.

The opposite could well happen. Just over two years ago, term deposits were paying only 4.15 per cent. Who knows what the future holds?

It's also worth noting, as I've said before, that annuities are a much better deal if you're older, because the insurance company won't have to pay out for so long.

If you two were 76 and 73, your $300,000 could get you an annuity of $24,300 a year, after tax.

What's more, if you handed your $300,000 over to the insurance company at 66 and 63 and told them not to start paying you until 10 years later, they would have the use of the money for a decade.

The result: at today's rates, you'd get an annuity of more than $35,900 a year.

That's an after-tax return of about 12 per cent.

Let's see a term deposit match that!

* 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 e-mail: maryh@journalist.com. 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.