Mary Holm: Mum's legacy that wasn't - why one-track investments are (mostly) a bad idea

Photo / Josh Appel, Unsplash

Mary Holm's regular column is on hiatus until January 29. In the meantime, the New Zealand Herald will be publishing extracts from her book A Richer You - How to Make the Most of Your Money.

OPINION:

Q: My mum bought 1000 shares for $2150 in CDL Investments in 1980. It was a scheme by her employer, Canterbury Frozen Meat, where employees were offered an interest-free loan to buy shares.

Mum chose to reinvest any dividends, and as of today these shares are now worth $2020. CDL Investments are in property development. How can this be? As a sharebroker said to me, his parents bought a house in 1980 for $19,000 that is now worth at least $600,000.

Mum is dead now, but she believed she was doing the right thing and helping us for the future. I feel at a loss to know what can be done. I still have the original application form in Mum's handwriting.

A: A sad story. And there's not much you can do except sell the shares. Then perhaps use some of the money for a family dinner acknowledging your mum's good intentions.

You could of course keep the shares and hope their value will grow. But that's just continuing a pretty risky strategy — investing in a single company.

Sometimes such a strategy works brilliantly. NZX says, for example, that if your mother had invested the same amount in Tourism Holdings — listed on the stock market in 1986 — it would now be worth close to $1 million with dividends reinvested. But you don't want to know that.

Back in the 1980s, there was no way to predict which shares would zoom and which would slump. And that's still the case.

CDL has actually had a good run over the past 10 years. With dividends reinvested, it has performed well ahead of the average top 50 share, says NZX — despite declining in the past 17 months. But before 2009, it's not a pretty picture. Last century, the company changed its name from Apex to Kupe Group to CDL. We won't go into the whys and wherefores.

But it's interesting to see the journey of the share price.

The first available price the stock exchange has is $3.50 in June 1986. No doubt caught up in the mid-1980s craziness, the price rose to its highest ever, at $4.25, in just a couple of months. But then came the 1987 crash and the long struggle back for many New Zealand shares. CDL shares were worth just 2c in August 1990. By May 1997, there was a huge gain from that low base to 46c, but in September 1998 the price was back down at 14c. And CDL took another hit in the global financial crisis of 2008, says NZX.

Through all that, your mother's investment soared and dived — quite possibly without her realising. At least it didn't disappear in 1990.

It sounds as if she got into the investment through an employee share ownership plan, with the shares probably offered at a below-market price. It's usually worth taking up those offers, even though typically there's a minimum holding period. The employer wants their employees to keep a stake in the company.

After the holding period ends, though, it's wise to move the money to, say, a share fund — in or out of KiwiSaver. That investment will also fluctuate, but not nearly as much as a single share, because one share's fall will be offset by another share's rise. Your money won't grow as fast as Tourism Holdings, but nor will it become worthless unless there's an apocalypse. In the long run, it will grow pretty strongly.

Unfortunately, it seems, nobody told your mother how risky a single-share investment is. If it had been just a small portion of her savings, it wouldn't really matter. But it seems your mum hoped it would turn into a significant legacy.

That didn't work, but she has left you something else — a lesson about the importance of diversification. Raise a glass to her at the dinner!

Two postscripts:

• The company, CDL, wrote the next week to say it is now doing well. Fair enough.
• The reader emailed a month later: "I just wanted to say thank you very much for your very kind answer to my question about Mum's investment! I felt you really understood her and am deeply grateful for that. And yes, we are going to go out together for my brother's 70th and raise a glass to our wonderful mum! Thank you."

The only free lunch

This question is from April 2020.

Q: I saw in the news that Auckland Airport is issuing a release of shares and that they are likely to be the first of many companies trying to raise capital in this economic climate.

We have around $100,000 sitting in the bank left over from a sale of a property. We are mortgage-free and in our mid-50s, with reasonably secure jobs. Apart from our KiwiSaver funds, we have no shares and have no idea about how to go about buying some.

I know that you usually recommend buying into a fund with a balance of shares. But this seems to be a unique opportunity to both support the recovery of our country and buy into an established company at the same time. Can you please give some advice?

A: Sorry, but you're not eligible to buy the shares. Only current shareholders can take part in the share purchase plan.

But that's probably a good thing. I applaud your desire to help New Zealand companies cope with Covid-19 — and few companies will be harder hit than Auckland Airport.

But you're right — I always recommend starting in shares by investing in a share fund. Why? There's a saying in financial circles that there's no such thing as a free lunch. If you want to reduce your risk, you have to accept a lower average return.

But there's one exception, which applies if you invest in a wide range of shares, either directly or in a share fund. You could, for example, go into an index fund that invests in all the shares in a market index. You reduce your risk because not all the shares will fall, or go out of business, together.

But you get the same average return as you would if you bought just one share.
I'm not saying that eligible people who own a wide range of shares shouldn't buy the Auckland Airport shares, especially as they are being offered at a discount.

But for you starting out in shares, I think drip-feeding into a low-fee non-KiwiSaver index fund over a few months would work best.

- A Richer You, by Mary Holm. Published by HarperCollins NZ

• Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions 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. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.