Charting tactics a game for losers

Columnist·

27 Nov, 2001 03:54 AM11 mins to read

By MARY HOLM

Q. I am a former money market dealer and am contacting you over what I consider an alarming trend among share market investors.

Since the September 11 attacks I have noticed, on the share market forums I belong to, many outwardly sane adults rushing to technical analysis, or charting,

A: There seems to be an inverse relationship between market performance and gullibility.

Whenever markets are falling, desperate people start believing in all sorts of magic. If wishing could make it so!

For those who don't know, technical analysis or charting is assessing where stock prices are likely to go, based on recent patterns in prices and other data on the company.

Chartists buy and sell shares on the strength of those forecasts, hoping to make big profits.

The analysis can get pretty complicated. These days, it's usually done by computer. And some companies sell programmes that do the number-crunching for you.

I doubt if many people can follow the calculations. I certainly couldn't when I went to one "seminar" - aka a sales pitch - to see what was going on.

But that didn't matter, the seminar presenters said. "All you need to know is that when this number is above this line, and that number is below that line, you should buy," or words to that effect.

They went on to tell us about impressive returns made by others who had used their programme.

Since then, I've heard of several people who bought in. None has made impressive returns over more than short periods; some have made pretty big losses.

And I must say I'm not surprised. Why should share prices follow any pattern?

Having said that, I have to admit that academics who used to dismiss charting now say that occasionally somebody comes up with a charting technique that seems to have a little merit.

It's never amounted to much, though. By the time you pay brokerage when you buy and sell the shares, and perhaps also tax on your capital gains, you would be losing, not winning. The same goes for foreign exchange trading.

Many have tried to make money doing it. Some have succeeded brilliantly - for a while. But very few professionals, and even fewer amateurs, have profited over more than a year or two, at most.

So you're best advised to sit quietly with what investments you've got. That's the only way to win in the long term.

Q: A few thoughts on your comments in last week's column about the $600 the girl had for her university education.

Did she have any more savings likely in the immediate future, or would they arise nearer the time she goes to university? The answer to this would be important.

That's because $600 won't go far. I think you need to put it into the context of size (ie, what is practical) and significance.

From a size point of view you can't do much with $600 and, because of fees, she might be better to put it in the bank and just keep it on deposit.

But from a significance point of view you could argue that she should go for broke as university is still seven years away. With a safe 5 per cent return after tax and fees, after seven years she would have $844. At 3 per cent (more likely), it would be $738. Even if she lost a little through negative returns it would not be a major. There is not a lot of difference between $500 (ie, minus $100) and $738.

There could be advantages in her buying a single share. Not really practical at $600, but I think a share-broker would do it for her because of her age.

By buying a single share (no diversification, but at $600 diversification matters less) she will pick up dividends, gain some growth (hopefully), but more importantly, learn a lot about investing.

Let's start the education now. The issue is which share? She can obtain advice, but I would suggest a larger share in a major industry, possibly a utility (they have fewer ups and downs). Perhaps Auckland Airport? Ports of Auckland? WestpacTrust? CHH? Even Telecom at current prices?

Perhaps the answer should have been: "Well done. Now let's work out how you can save the next $600."

A: You make some good points. But I've probably got as many quibbles with your advice as you have with mine.

In last week's column, I suggested the girl put some of her money in bank term deposits and some in a share fund, with more going into the latter if she's willing to take a risk.

Like you, I reckon the main advantage of investing beyond term deposits is to learn about how the sharemarket works.

The question, then, is whether she should go with a share fund or a single share.

As you say, fees charged by share funds can be pretty crippling on such a small investment. I should have made that point last week.

But if she buys a single share, her investment is not at all diversified (which you acknowledge).

That means she's taking an unnecessary risk. There's a bigger chance she'll end up, in seven years, with less money than she started with.

That would certainly be educational. But not in the positive way that I, and I suspect you, would like. Because of that, I still favour a share fund.

I also think you're rather negative about how small her savings are. For someone her age, she's done well.

And while there might not be a lot of difference between $500 and $738 for you and me, for her it's huge.

On the other hand, I suppose when she faces tertiary fees she will realise the horrible truth. Neither $500 nor $738 will go far.

Q: Your very useful replies to questions in your column have led me to looking at investing long-term in share funds.

I looked at the Start series and the Tower Tortis International Index Fund, and decided to go with Tower Tortis through NZIJ Stockbrokers.

The reasons for that are:

* Minimum investment can be $100, but has to be a regular investment and total $1000 at the end of 12 months. I can stop putting any money in after that.

* There is no entry fee, unlike Start, which charges 5 per cent. This is because I applied through a form supplied by NZIJ (www.nzij.co.nz).

* As you say, capital gains are not taxable.

* Management fees are the lowest I can find in any share fund.

I am not recommending any of those and am just a private investor with no affiliation with any of the abovementioned. I wonder if the information above may be worth mentioning in your article.

I thought that saving 5 per cent on entry fees and low regular payments were great ways to start in a share fund.

A: Indeed they are. And you've done well. Your comparison isn't entirely valid, though.

I assume that, when you were looking at ABN AMRO Craigs' Start programme, you were thinking of using it to invest in AMP's WiNZ fund.

As I said last week, that and the Tower Tortis International fund are similar. Both are index funds, investing in the shares that make up indexes of the world's biggest companies. If you invest in either fund, the value of your investment will sometimes fall, but it will almost certainly rise over the long term. You should stay in these funds for at least five years, preferably 10.

Going through the reasons you chose the Tortis fund through NZIJ Stockbrokers: on the first point you may have actually been better off with WiNZ through Start.

In Start, you can invest as little as $100 once, or irregularly, or monthly. So there's more flexibility. But perhaps you like the discipline of having to put in the $1000 over the year.

Your third point applies to both funds. All New Zealand index funds have binding rulings from Inland Revenue that state they don't have to pay tax on capital gains. This means they are likely to grow faster than non-index funds.

On your fourth point, the annual before-tax management fee on Tortis International is 1.02 per cent plus a small variable amount. In the year ending last March, the total was 1.16 per cent.

The WiNZ annual before-tax management fee is 0.8 per cent for investments of $500,000 or less. But it will drop to 0.7 per cent next month.

Both charge quite a lot less than many other international share funds.

I've saved your second point for last, as it's the most complicated.

Start's entry fee is not 5 per cent, but 2.5 per cent. It does, however, also charge a 2.5 per cent exit fee.

NZIJ charges neither. It offers free entry to most managed funds that aren't listed on the Stock Exchange, says NZIJ's Liam McBride.

But NZIJ does get what's called a trail fee, of 0.25 per cent of the value of your investment every year.

You don't directly see that money coming out. But it's reflected in the fund's unit prices.

With Start, "we don't use funds that attract a trail fee", says ABN AMRO Craigs' Roger McDowell. But the firm charges 0.5 per cent a year to cover the costs of running Start.

So where are we with fees?

* Tortis International through NZIJ: nil on entry; nil on exit. Annual fees of around 1.16 per cent, which include the 0.25 per cent trail fee to NZIJ.

* WiNZ through Start: 2.5 per cent entry; 2.5 per cent exit. Annual WiNZ management fees (from December on) of 0.7 per cent, plus 0.5 per cent to Start, totalling around 1.2 per cent.

On total fees, then, Tortis is better.

There are a couple of other points to consider, though. Start's flexibility on minimum amounts applies not only to WiNZ.

You can put as little as $100 into any of several managed funds through Start. ABN AMRO Craigs pools investors' money to reach the minimums set by the funds.

At NZIJ, the minimum is whatever the fund specifies.

Also - and this is important to many people - if you use NZIJ's free entry, the firm won't give you any investment advice. It simply provides you with the documents required to make your investment.

But in the Start programme, you can talk to an adviser about how much risk you should take and which funds would best suit you.

So if you don't need advice, and the minimum investment rules aren't an issue for you, investing in Tortis International through NZIJ is better. Otherwise, Start has the edge.

Another alternative, if you've got a bit more money to invest, is to buy WiNZ directly through a stockbroker. The minimum is 1000 units, which at current prices would cost around $1700.

There's also a minimum annual management fee of $3 a month. That means that unless you keep your investment above about $5200, you'll be paying more than 0.7 per cent a year - although this would not apply if you invested through Start.

The advantages of a direct investment in WiNZ are that you'll avoid Start's fees. You will have to pay brokerage. But your brokerage will be lower.

Confused? I hope not. The main point is that all three are good ways for small investors to get into international share funds.

* Send questions to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail to maryh@pl.net. Letters should not exceed 200 words.

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