COMMENT:

Can you explain to my girlfriend why putting money every month into the sharemarket makes money over the long term.

I'll do my best. When you buy shares, you are buying a portion of the company. In most cases, it's just a tiny portion, but nevertheless you become one of the owners of the company.

You can make money two ways out of owning shares:

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• If the company makes a profit, it will usually distribute at least part of that money to its shareholders — aka its owners — in the form of dividends. Sometimes, though, it will keep some or all of the profits to enlarge the company.

• When you sell your shares, hopefully you'll get more for them than you originally paid. The price will reflect how well the company is expected to do. If its prospects look good, other people will be willing to pay more for your shares.

Both of these go wrong sometimes. The company may pay no dividends for years. If this is because it needs the money to grow, that may not matter, as it should mean you'll get more when you sell the shares. But it might pay no dividends because it's in financial trouble.

Also, you might end up selling the shares at a loss. That might be because the sharemarket as a whole is in a downturn, which happens every now and then. Hopefully, you'll be able to wait and sell when things look better.

However, you also might sell at a loss because the company isn't performing well. In extreme cases, the company can't pay all its debt and goes into liquidation, so your shares become worthless.

But we're getting way too negative here. Most shares gain value most of the time.

A good way to protect yourself against buying a few shares that don't end up doing well — it's pretty much impossible to tell in advance which ones they will be — is to invest in a share fund.

Your money is pooled with lots of other people's money, and the fund managers buy many different shares. Although some will do badly, that will usually be more than offset by others doing well.

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You've got a couple of details spot on:

• It's good to buy shares regularly over time. With the markets going up and down, your timing will sometimes be bad. But given that markets rise much more often than they fall, your timing will turn out to be good most of the time. Why not buy only when the timing is good? Because nobody knows when that is.

• You write about long-term investing. Over a single year there's about a one in four chance that a share fund investment will fall. But over five years it's about one in 15, and over 10 years less than one in 50. Not only is it highly unlikely your investment will fall over 10 years, but it's also highly likely it will gain lots — much more than, say, bank term deposits.

Hope I've convinced her!

Targeting a winner

My husband and I would like some direction on what to look for when investing $12,000 in the NZ sharemarket. Our objective is to sit on the shares and hopefully maximise returns by the time we retire in 15 years, either through share price growth or dividends.

The problem is most advice on "growth" shares has a one to three-year horizon, not our longer term — which I understand is the ideal 10-plus years to ride out the highs and lows.

We have a well-diversified portfolio of 10 NZX companies, across industries, with about $5000 in each, so ideally would be looking at another two companies.

Get the Herald share price table and tape it over a dartboard. Then stand back and throw a dart. Buy the company the dart lands on — unless it's in an industry in which you're already heavily invested. Repeat.

It's telling that you're finding the advice on shares is for short-term growth. That suggests the advisers don't understand as much as you — given your correct comment about investing for a decade or more.

Short-term share investing is pretty risky.

There are, though, people who do lots of research in an attempt to work out which shares are good long-term investments. The trouble is, they're in a really competitive game.

The first one to realise a certain company is likely to perform better than everyone expects will get in and buy shares. They are probably full-time researchers working for a firm that runs KiwiSaver and other share funds, so their purchase will probably be large.

And what happens when someone buys a lot of shares? It pushes up the price. Maybe the second big buyer will also get a reasonable price, but it doesn't take long before the share price is pushed well up.

By the time you hear about a "good buy", it no longer is.

The company might go on to perform really well, but you will have bought the shares at a high price that reflects those expectations, so you're unlikely to make out-of-the ordinary gains.

Many people disagree with this way of thinking, and they can always point to some share-buying advice they took that worked really well.

But they tend to forget the advice that wasn't so great, and also to ignore the fact that — as I said above — most shares go up most of the time.

Many people in the last few years have said, "Look how well I (or my fund) has done!" without realising a share investor would have to be pretty bad not to do well lately.

Much research backs the idea that ordinary investors can't win by picking shares, and so they should just buy a diversified portfolio, as you are doing, or invest in a low-fee KiwiSaver or other share fund that does it for them.

Some fund managers and stock brokers argue this doesn't apply in New Zealand, where shares in smaller companies, in particular, aren't researched enough for the prices to reflect their value.

And because of that, we should listen to their recommendations or buy their share funds.

I'm yet to be persuaded that any one researcher is right often enough — which is why I stick to low-fee share funds where I'm not paying for any research.

Regulation revamp

I invested $5000 in a crowdfunded start-up company in 2016 with the knowledge that I could well lose the money but also with high hopes that it would pay off.

The company has gone into liquidation with no acknowledgement or notice to investors (apart from the obligatory Gazette notice — who reads those on a daily basis?). I learned of the company failure via a Herald news story.

I have submitted an (unsecured) creditor's claim form but received no acknowledgement or update from the liquidator who, in this case, has a conviction for tax fraud, according to the Herald article.

After returning my creditor's claim form I heard nothing, and so after a time I emailed both the company founder (who was extremely friendly and open with communication both by phone and email when he wanted money), and the liquidator. I did not even get the courtesy of a reply.

I have since learned that the directors of a failed company can choose the liquidator, and almost anyone can be appointed, and that the liquidator does not even need to be a professional. With no transparency and no requirement to keep investors informed, I see this area as urgently needing a review and new laws put in place.

To be "courted" as an investor in a second funding round (at a time when it now appears the company was already struggling), and then left completely in the dark as to what has happened is unacceptable and open to fraud.

Further, when it is a small uncomplicated company, probably with no assets, why is a liquidator appointed at all?

If any money was available for investors, it would certainly be used to first pay the liquidator's fees.

Why isn't an accountant able to wind up an uncomplicated company, which might result in at least some money being available for investors?

It's good that you went into this investment with your eyes open, but it's still disappointing the way it turned out. The founder's dramatic change of attitude is hardly surprising. But I don't blame you for being annoyed at the process.

However, there's hope for the future. Your call for better regulation is timely.

"MBIE (the Ministry of Business, Innovation and Employment) agrees that the current situation is unacceptable," says a spokesperson. "Some providers of insolvency services fall well short of the standards of integrity and skill that the New Zealand public is entitled to expect.

"The Government has taken steps to greatly improve the situation. A Supplementary Order Paper to the Insolvency Practitioners Bill is currently before the House that progresses a licensing scheme for insolvency practitioners," she says.

The scheme will include "such things as entry criteria, ongoing competence requirements, and a fully effective complaints, investigation, discipline and appeals system".

She adds: "The economic development, science and innovation committee has heard submissions and is due to report back by mid-December 2018."

What about keeping investors informed? "Liquidators are required to write six-monthly reports on failed companies and these reports are placed on the Companies Register," says the spokesperson.

That part is probably reasonable. If they spent more money on direct communication, that would just eat further into the company's assets. Nor do I think an accountant would necessarily cost less than a liquidator.

I also asked the Financial Markets Authority, which licenses crowdfunding providers, if those providers have any role here.

"The crowdfunding service provider does not have a responsibility in this situation," says an FMA spokesman. "They are licensed to assist in the capital raise but do not have ongoing responsibility to the companies or their investors."

He adds: "Investors need to look out for the warnings on the crowdfunding site and on our own site about the risks of this type of investing." But you already know that.

Taking credit

Having now reached 65 and receiving superannuation payments while still employed, I'm seeking confirmation that the Government's annual KiwiSaver contribution of $521 ceases from my 65th birthday.

Is there any point in continuing my minimum payment of $1043 to get the tax credit? Is there pro-rated payment from July 1 until the time you celebrate your birthday?

The tax credit stops when you turn 65 if you've been a KiwiSaver member for at least five years. If not, it stops at the five-year point.

You're right about the pro-rated payment. If, for example, you turn 65 on December 31 — halfway through the July-to-June KiwiSaver year — you'll be eligible for half the maximum $521 tax credit.

To receive your maximum, you need to contribute twice as much as your expected credit — which is 50 cents for every dollar you put in. You can deposit that money any time in the year, including after your birthday.

Don't agonise over calculating your exact maximum. After all, if you put in a bit extra, you can take it straight back out again once you're 65.

- 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 mary@maryholm.com 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.