Mark Twain said people should invest in land because they've stopped making it, but he wasn't an economist. Photo / Supplied
Q: Recent debate in your column about property versus shares has concentrated on returns and taxation and ignored the c-word, control. Since seeing what happened in 1987 we have been determined not to let anyone else get their hands on our hard-earned savings. Hence the bulk of our investments are in property.
Property may have its risks but it does not disappear completely like cancelled shares in a failed company. Property could drop in value, but provided one is not overcommitted or based in a dying town it is still possible to continue earning rents and sitting tight until prices recover.
The economic wisdom is that we should invest in innovative industries to generate growth in the economy. When the cowboy nature of the New Zealand sharemarket is sorted we might think about it.
Meanwhile, if one is security- minded then in the words of Mark Twain one should invest in land because they've stopped making it. And maybe in a managed fund for diversity. If you like high rewards at high risk then go for it. We won't.
A: Fair enough. But unfortunately not every property investor follows your advice about over-commitment.
As I said last week, property investors are far more likely to borrow to invest than share investors. And if they borrow lots and then have to sell when prices are down - perhaps because they can't cope with rising interest rates or they've lost their job - they can end up losing their entire investment and still owing the bank money. That's worse than a share investment disappearing completely.
Furthermore, while it's certainly possible for a single share to become worthless, that won't happen if you hold a wide range of shares or invest in a share fund, as I always suggest. Neither property nor shares have to be highly risky if you do it right, and over a longish period.
Mark Twain was a superb writer, but he wasn't an economist. Sure, land is a scarce resource. But whatever you invest in, a key issue is how much you pay for it. Things can go badly wrong with a property investment if you pay what turns out later to be a high price. And there's no way of knowing where the prices of property - or shares for that matter - will go.
One more point, on your comment about the "cowboy" New Zealand sharemarket. I haven't heard that term used for several years, and for good reason. Our markets are now much better regulated.
Measuring success
Q: Mary Holm writes an excellent column. I try to read it every time for her pertinent comments. But like many who believe in her enthusiasm for shares, she carefully avoids stating the obvious downsides of her preferred investment type compared with rental properties.
1. When she compares the growth of shares and rental properties over the decades: How are the share indexes she quotes actually measured? Do they take account of company collapses? Are they only computed from the performances of the top 10 or top 50 companies? A company with declining share prices probably drops off the top register, before the company collapses.
Very few people can afford to have a portfolio as wide and as extensive as the share index. I maintain it is a false recording for small personal investors.
2. Share prices can have a habit of dropping rapidly. Unless one lives very close to the rumour mill, or has contacts, those of us in the provinces find the share prices have dropped before we hear the gossip.
3. Shares can drop precipitously when a company declares bankruptcy. Who foresaw the Mainzeal collapse? Witness the recent finance company problems. A couple of these in your portfolio creates havoc. Rental property values can drop ... but they don't disappear. If they do, you can be insured.
4. One can buy insurance to cover most eventualities, including deliberate damage by tenants in rental properties, and loss of income while repairs are being effected. You are on your own with shares.
5. I can drive past my investment and check on it. If it burns down I am insured. I can terminate a tenancy. I can do neither with shares, except sell at the prevailing price.
6. I can raise a mortgage on my rental property if I need money. My bank manager does not want to lend on my shares portfolio.
7. I can take a bad tenant, or an errant car driver to court for redress. I cannot sue the CEO or directors if the share prices drop.
A: Let's take your points in order.
1. Good share indexes fairly represent share performance. Plenty of unbiased academics have studied them in depth.
The most quoted New Zealand indexes look at the biggest 50 companies. If a company collapses, the fall in its share price will pull down the index until it drops off the bottom. After that, it's not counted. But by the same token, a new company that rises fast from small beginnings is also not counted until it makes the top 50. The two effects offset one another.
Small investors can easily invest in all the companies in the index via an index fund that holds all those shares. I often recommend index funds, partly because of the wide diversification but also because the fees are low.
2. You don't need to hear gossip if you invest in a share fund. You can go to the beach with your novel - something a landlord may not find so easy, what with maintenance, tenant problems and so on.
3. The value of a rental property can drop drastically, too, if you discover it was used as a P lab, or it's leaky. Meanwhile, the bankruptcy of one or even a few companies is not a big deal if your shares are widely diversified. And let's not include finance companies in this. They are entirely different from shares.
4. and 5. Yes, and you have to pay plenty for insurance. But more to the point, those sorts of problems just don't happen with shares. The only thing that can go wrong is that they lose value. And if you are diversified and in for the long haul, they'll come right.
6. That's largely true. However, if you need money urgently you can sell shares much faster, and sell just part of your portfolio. It's much more flexible. And selling some assets is a safer response than boosting your borrowing in an emergency.
7. Another example of the sort of problem shareholders don't have. A lot of your points are about control of your investment - as the previous correspondent noted. A landlord has much more control than a shareholder. Then again, you need more control, as many more things can go wrong.
And neither a landlord nor a shareholder has control over price falls. True, you can't sue the CEO if the share price drops, but who do you sue if the property price drops?
After your kind comment at the start, my reply might seem a bit churlish. I do want to acknowledge that rental property suits some people better than shares, especially "hands-on" types.
It just seems that many New Zealanders exaggerate the riskiness of shares and underplay the riskiness of rental property, so I try to restore the balance.
A happy KiwiSaver muppet
Q: My KiwiSaver sounds similar to yours, in that I have contributed approximately only half of the current value. I'm more than happy to be considered a "muppet" if after five years I've got approximately a 100 per cent return on my investment, despite the global financial crisis.
I'd be interested in your correspondent last week suggesting an equivalent investment that isn't a Ponzi scheme or an outright gamble - for example, gold or silver.
It's also highly amusing, as you've pointed out, that despite not being a muppet he confuses KiwiSaver and the NZ Super Fund. It's definitely preferable to remain a muppet methinks.
Q: Yes, I'm happy with muppet status too. For those who missed it, last week's correspondent called KiwiSavers muppets "who will be lucky to end up receiving $1.05 to their dollar after 20 years of investing".
I've been in KiwiSaver from day one, July 1, 2007. So I'm coming up for six years in the scheme. Under the very useful Rule of 72, if your money has doubled in X years, divide X into 72 and you get an approximate annual average return. So my average return is about 12 per cent.
In your case, with your money doubling over five years, your average return is more than 14 per cent. As you say, that's pretty hard to match in something reasonably secure.
It's important to note the 12 and 14 per cent are not the returns the KiwiSaver funds have made. They are quite a lot lower. But our returns are greatly boosted by government contributions, and in some cases employer contributions.
KiwiSaver holidays
I am on KiwiSaver holiday because I chose to join the company pension scheme at my new job.
Am I still able to make lump sum contributions?
I was thinking that I would make the $1043 contribution (before the end of June) so I would get the $521 subsidy from the Government.
I actually went on KiwiSaver holiday in January this year. So I have already had six months of subsidy from the Government. Maybe then I should just contribute $521 and get $260 subsidy?
If it is possible, then I will look up the actual date that I went on holiday and do a proper calculation.
A: Anyone can put a lump sum into KiwiSaver at any time. But it may not make any difference to your tax credit.
To get the maximum $521 tax credit, you have to contribute at least $1043 between July 1 and June 30. If you had already contributed that much before you took your contributions holiday, there's no particular point in contributing more - other than adding to your retirement savings.
But if you had put in less than that, the amount you should contribute before June 30 is whatever it takes to get you to $1043. The date you went on holiday is irrelevant.
This is a good opportunity to point out to others who are either on a contributions holiday or are non-employees to try to get $1043 into KiwiSaver before June 30 to get the maximum tax credit.
Also, any employee earning less than about $47,000 will find that their contributions will total less than $1043 from last July 1 to June 30 this year. You, too, might want to top up your contributions to maximise your tax credit.
• 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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