It is a great idea to head off over the horizon with some of your investment dollars to diversify your portfolio. Photo / Thinkstock
Q: I was pleased to see the interesting letter last week from the New Zealand share investors who are school teachers and have made a reasonable investment return over many years.
However, without trying to be critical, just how much better off they would have been if they had considered the better class of US stocks.
If we look for the premier fund manager of the US, it must be Warren Buffett and his Berkshire Hathaway stock A and B.
If they had invested $1,000 early in 2012 in either the A or B stock it would now be valued at $1,440 or $1,430 in just 12 months. That is a 44 per cent and 43 per cent increase, so just imagine how much this stock would be valued at when they decide to retire in say five to 10 years?
By the way, the Berkshire Hathaway stock did plunge by 45 per cent in 1998, as did other equities. But it is still a very good buy now, as it made up this loss after 2000 as did many other sound US stocks.
The point is that to rely on the New Zealand market only, without considering either the US or Australian market, is foolish for your long-term investment health.
A: I like your conclusion, but I'm not happy with how you got there.
It is, indeed, a great idea to head off over the horizon with some of your investment dollars - and not just to Australia and the US, but to the whole world.
The clear advantage of this is diversification. As our table shows, when one stock market is not performing well, that will usually be offset by another market.
There are some years, such as 2008, when there's no good news anywhere. But look what happened the following year - with Japan's respectable 9 per cent performance the worst of the pack.
A couple of other things to note about the table - which includes all the big sharemarkets plus Australia and New Zealand:
• New Zealand recorded the best returns in the early 1980s, and among the ugliest worst returns in the 1987 crash. This suggests that our market might be more volatile than many others - at least back then.
• Sometimes a country stays "best" or "worst" for two or three years. But then we find a country switching from one extreme to the other, such as India from 2008 to 2009 and the Australia/China swap from 2003 to 2004. There's no predicting sharemarket trends.
The obvious worry about investing offshore is foreign exchange risk. But that can be controlled. See the next Q&A.
Okay, now for my concerns about your comments. It's unfair to compare anybody's investment performance with what turns out, looking backwards, to be a winning performance. It's much harder to pick future winners.
Berkshire Hathaway shares have done brilliantly over much of the company's history. But - and this is a key point - that doesn't mean it will continue to be a good investment.
Because of Berkshire Hathaway's great performance, many people have wanted to buy the stock, which has pushed prices up to around $114 for the B stock and an astonishing $170,000-plus per share for the A stock. Those prices reflect all the positive feelings about the shares.
But will they rise further? Or have investors overreacted, and pushed the prices higher than they should be, so they languish for a while, or even fall? Just because Berkshire Hathaway is a great company doesn't mean it's not overpriced. Your extrapolation of recent performance over the next five or 10 years is seriously misleading.
You seem to be also implying that the "better class of US stocks" will outperform New Zealand stocks. Sometimes they will and sometimes they won't. When we compare New Zealand and US - or world - share performance over long periods, it's actually remarkably similar.
It's best, then, to have some money in offshore shares, but also some in local shares - partly to take advantage of dividend imputation.
The easiest way to invest offshore is in a diversified low-fee New Zealand-based fund that holds international shares. There are plenty of KiwiSaver and non-KiwiSaver funds that do that. The fund managers take care of tax. And if you die with money in the fund, it will be a lot less complicated for your estate than if you invest offshore directly.
Hedged or unhedged
Q: I am a long-time follower of your columns and have taken your advice and put much of my retirement savings into international shares. These are all unhedged, a decision which was difficult to make. But over the weekend a couple of articles caught my eye.
First this from Nick McDonald in the Herald: "Using a hypothetical example, if the Reserve Bank cut rates by 1 per cent in a sudden move tomorrow, the NZ dollar would plummet in an instant. Literally in seconds our dollar would be worth much less. Equally, if the US Federal Reserve were to raise rates by 1 per cent, the same thing would happen."
Then Martin Hawes on the Stuff website in reference to agricultural scientist Dr Clive Dalton: "Dalton writes as if foot-and-mouth disease is inevitable - a 'when' rather than an 'if'. That should be sobering for all of us.
"Such an outbreak would be the worst thing that I can think of for this country: our two main export industries - agriculture and tourism - would be devastated and our currency would go through the floor ..."
Bearing these very plausible scenarios in mind, in having my investments unhedged am I not exposing myself to less risk than if I was hedged?
A: The experts would debate the plausibility of the two scenarios - especially the first one. I can't imagine the Reserve Bank or the Fed making such sudden drastic moves. But that aside, it's always possible our dollar could fall quite fast for one reason or another.
First, though, we need to explain hedging.
In a hedged international share fund, the value of your investment is protected from fluctuations in the kiwi dollar. If the dollar falls - which makes the value of offshore investments rise - you miss out on that gain. But if our dollar rises - which means your offshore investments fall - you don't suffer that loss.
However, in an unhedged fund like yours, investments rise or fall with currency changes. Sometimes this has a modifying effect. The currency movements might offset positive or negative investment returns. But if returns and currency changes both go the same way, you can do really badly or really well.
It seems that you realise that a plunge in the kiwi dollar would be great for you.
Our dollar would be cheaper to buy, so if you cashed in your investment - bringing your savings back into New Zealand - you would get a lot more kiwi dollars.
On the other hand, if the kiwi dollar soared, you would end up with much less money. And it would be a big mistake to assume that won't happen. Foreign exchange movements are even harder to predict than shares.
In a hedged investment, neither would happen.
So your unhedged situation is not lower risk, I'm afraid.
All of which leads to the question: is it good to hedge international investments? I recommend hedging half your savings. Then whatever happens to our dollar, you'll be half happy. It's not as good as really happy, but it beats really sad.
By the way, I wouldn't want other readers to take from your letter that I recommend that everyone saves in an international share fund.
Such funds often work well, but only if you don't expect to spend the money for at least 10 years, preferably longer, and if you know you won't bail out when prices drop a lot - which will happen sometimes.
On KiwiSaver
Q: I have contributed to the GSF (Government Superannuation Fund) since 1978 with contributions of 6.5 per cent of my pay. Am I able to join KiwiSaver by contributing $20 a week and getting the tax credit of $521 per year and the kick-start? Or does the Government contribution to my GSF make me ineligible to receive the government tax credit?
A: Anyone can join KiwiSaver and get the $1,000 kick-start, even if they're in another super scheme.
Often - as in your case - the employer doesn't have to contribute to KiwiSaver because they are contributing to your other scheme. But as an employee, you'll have to put in 3 per cent for the first year and you'll receive a tax credit.
After the first year, however, you can easily take a contributions holiday and renew that every five years.
While on a holiday, you can contribute $20 a week and get the $521 tax credit. It's a good idea. For more, see here.
• 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 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 mary@maryholm.com 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.
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