I've been reading your Q&As on index/passive versus actively managed funds. What are your thoughts on having both, to not only diversify what shares you own but to diversify investment strategies?
For example, I put half my retirement savings in an actively managed growth fund and then half in a passive Smartshares account. I guess it would be interesting to see which fund comes out on top in 30 to 40 years.
What you're really asking is how important is diversification in investing, and should we diversify to the point of including inferior investments?
Views on diversification are - how can I put this? - diversified.
"Diversification is something that stock brokers came up with to protect themselves so they wouldn't get sued for making bad investment choices for clients," says American businessman and financial writer Jim Rogers. "Henry Ford never diversified, Bill Gates didn't diversify. The way to get rich is to put your eggs in one basket, but watch that basket very carefully. And make sure you have the right basket."
However, many people who have failed in their careers or investments also didn't diversify. We hear only about the winners. Furthermore, most of us wouldn't know how to watch our investment basket carefully, let alone know whether we've picked the right basket.
I prefer a quote from another American, Jeff Yass, founder of a global investment firm: "If you invest and don't diversify, you're literally throwing out money. People don't realise that diversification is beneficial even if it reduces your return. Why? Because it reduces your risk even more."
I think it's wise to spread your money around many different types of assets: cash, bonds, shares, commercial property, residential property - and perhaps also a bit of gold, forestry and so on.
And generally it's wise to hold more than one investment of each type. For example, research suggests you should own many different shares in a range of industries, countries and so on, or invest in a share fund that diversifies for you.
But we can take diversification too far. Many of us are content to stick with just one bank.
In your case, perhaps you're hedging your bets because I haven't yet convinced you that index or passive investing - in a low-fee fund that simply invests in all the shares in a sharemarket index - beats active investing. That's up to you.
But if I were betting on which of your two strategies will work better over several decades, I would unhesitatingly go with your passive investment - assuming of course that the two investments are at the same risk level. If the active fund holds more, or riskier, shares and/or property, it might win solely because over the long term those assets tend to perform better.
If you wanted to keep the active v passive race running, just out of interest, you could put perhaps 90 per cent of your savings in Smartshares and 10 per cent in the active fund. Then see if your Smartshares account is more than nine times as big down the track.
Get back to me around 2050 and let me know!
Passive - a few tips
You have been recommending for some time investing in index/passive funds. We would very much like to do this but we do not know how to get going.
Where can we buy into these funds? And having done so, how do we monitor how they are doing, and eventually how do we sell?
Let's start with KiwiSaver funds. The following providers have told the Commission for Financial Capability that they offer passive KiwiSaver funds. Note that you can invest in some of the ASB funds via ASB or AMP.
• AMP: AMP Passive International Shares Fund, ASB Moderate Fund, ASB Balanced Fund, ASB Growth Fund
• ASB: Conservative Fund, Moderate Fund, Balanced Fund, Growth Fund
• Booster (formerly Grosvenor): Asset Class Conservative Fund, Asset Class Growth Fund
• Funds Administration of NZ's following Lifestages funds: Australasian Equity Portfolio, Corporate Bond Portfolio, Income Portfolio, World Equity Portfolio, World Bond Portfolio, KiwiSaver Growth Portfolio, KiwiSaver Scheme Portfolio, KiwiSaver Income Fund, KiwiSaver High Growth Fund
• Simplicity: Conservative Fund, Balanced Fund, Growth Fund
• SuperLife: Overseas non-government bonds, property, NZ shares, Australian shares, overseas shares currency hedged, overseas shares (unhedged), SuperLife Income, SuperLife 30, SuperLife 60, SuperLife 80, SuperLife 100, all ETFs except Cash, NZ bonds and Global bonds, Ethical
Some other KiwiSaver funds are partly passive. For instance, they might actively manage NZ shares but also invest in a passive international share fund.
For more information on KiwiSaver funds, go to the KiwiSaver Fund Finder on the Sorted website and click on Check Your Current Fund on the left side. Note the fees, which will generally be lower than average for passive funds.
For non-KiwiSaver investing, check out what the same providers offer on their websites. Also consider Smartshares, the main New Zealand provider of passive exchange-traded funds.
On monitoring the funds and selling, the KiwiSaver providers must report to members quarterly, and sell according to KiwiSaver rules. For non-KiwiSaver, ask the provider before investing. If they don't answer clearly, move elsewhere. A good provider communicates well with investors.
Date check on a classic
In your column two weeks ago, discussing passive versus active funds, you made reference to the book Where are the Customers' yachts? and gave the date of writing as 2006.
This book is an excellent old classic, which was first published in 1940. It was reissued in 2006, and I hope it never goes out of print.
You're quite right, it turns out to be a much older book - and is said to be "one of the funniest books ever written about Wall Street".
The following is an email I saved from earlier in the year, when many readers were complaining - some with justification - about how overseas pensions can reduce NZ Super payments. It seems a good letter to run at Christmas time.
Super and migrants
I quite understand the Canadian man's grievance, but when I came to New Zealand I accepted that I had to live according to the ways and means of this country. Even 50 years on there are things that irk and irritate me about the country, its government and its people, but I know in my heart it would be exactly the same if I lived back in England; perhaps even more so.
From the financial and health point of view, I have everything to be grateful for in our public hospital services. Both my son and I have had cancer, which were effectively treated in modern hospitals. After a deadly road accident my daughter's life was saved by the skill of a New Zealand surgeon.
All our treatments cost thousands, but we were not billed for a single cent. The money has to come from somewhere, and I don't think we can reasonably expect as elderly people that we should not contribute our modest share. The national health bill increases exponentially each year.
I wish the Canuck well and that he manages to sort out his pension problems satisfactorily. But with respect, New Zealand is a wee country with a small, and not over wealthy population. Canada is an immense country with huge industries and vast natural resources. I think it is probably more able than New Zealand to have a financially adequate pension system for the elderly.
I'm not sure about the comparison, but I like your attitude. And you're not the only grateful immigrant. Read on.
Thought I'd travel down memory lane with you. Back around 2001, you provided advice to me and my then husband as we negotiated the dual pathways of co-parenting and tertiary education (with a great cartoon that I loved!).
Thanks to your advice we adults attained many of our education goals, and the children (who are now nearing the end of high school) each have about $1300 in a KiwiSaver account. My eldest (17) has just started part-time work and is contributing 8 per cent of weekly pay to the account.
I'm thrilled to have my children so focused on saving early in their work life, and that this will set them up well for the future. So thank you, Mary, for being there!
And thanks to you for writing - and confirming what I suspect about children. Getting them into a savings habit when young is a great idea.
Thanks, too, to everyone else who has written this year, including a growing number whose letters don't make it into the column. Sorry. And I do appreciate the many kind comments, even though I usually edit them out. The less-than-kind comments are welcome too. I nearly always run critical letters. Nothing like a good debate.
I'm particularly grateful to readers who add further ideas or perspectives on a topic, which I can run in the following week or two. The collective wisdom out there is wonderful.
One of my favourite emails this year came from a man whose published letter had expressed his anger about a situation. In a follow-up note he said, "Cheers. I feel way better now, and I don't even know you."
That's what I'm here for.
Have a great break everyone, with just the right mix of fun and relaxation. See you back here on January 28.