Don't let investments make you run scared

Q: In August last year I invested a large sum in a unit trust.

By December, the fund was $1160 behind my normal conservative term deposit investments, at the 33 per cent tax rate.

I am starting to run scared, as I feel they will be struggling to catch up if they slip any more, but of course they might have bottomed out.

The bank that runs the trust goes on winning with administration charges.

Should I stick with it or jump? I'm 70, and so am not really into long-term growth.

The fund is WestpacTrust's Diversified Trust.


A: Don't panic. You've been unlucky with your timing but that's no big deal.

My first reaction to your letter was, "Who talked this person into this investment?"

It's not necessarily wrong for you, but it clearly hasn't been explained well to you.

Then again, you might have made the decision yourself to go into the unit trust.

Either way, you should always read the investment statement on any new investment. They are fairly short and designed to be easily read.

Under the heading "What are my risks?," the investment statement for the WestpacTrust's Diversified Trust says: "The returns will vary and could be low or negative at times."

That's because while 43 per cent of the trust is invested in bonds and cash, the other 57 per cent is in international and New Zealand shares and local property. And the value of those investments can fluctuate a lot.

The effect of fluctuations is dampened down by the bonds and cash. A fund invested purely in shares would fluctuate more.

But last August to December was a particularly bad period for local and international shares.

In that time - from mid-August to mid-December - the MSCI index of world shares dropped almost 9 per cent. In the same period, the NZSE-40 capital index (excluding dividends) dropped more than 9 per cent, and the NZSE-40 gross index (including dividends) dropped almost 7 per cent.

The value of the shares in your unit trust almost certainly fell, too.

It's hardly surprising, then, that the fund as a whole didn't do as well as term deposits.

So what? You should never read much into the performance of a share or a fund holding shares over such a short period.

Give them several years, if not 10 or more. Then you can see a long-term trend.

Usually, over five or so years, the value of a fund that holds shares will rise considerably more than an investment in term deposits. Over 10 years, that's even more likely.

But as you say, you're not a long-term investor.

You do, however, have some other money in term deposits.

Could you live on the term deposit money - perhaps principal as well as interest - over the next five or 10 years, and then use the unit trust money after that?

If so, consider leaving the unit trust investment as is, and be brave about short-term fluctuations.

By the time you start using that money, there's a good chance it will have grown quite nicely, giving you a more luxurious old age.

But if you think you'll need the unit trust money sooner, you could move some or all of it now.

One quite good possibility would be to transfer it to WestpacTrust's Income Plus Trust. That has just 34 per cent in shares and property, and so will be much less volatile - although it is likely to grow more slowly over the long-term. There's no charge for switching from one of the bank's funds to another.

If you want to be really conservative, you could put the money back into term deposits.

A compromise - if you need the money soonish - would be to move some of it now, some in six months and some in a year.

As you say, the fund may have bottomed out recently. Who knows? If you bail out gradually, at least you won't get the worst price for all your units.

One more quote from WestpacTrust's investment statement: "You need to be comfortable about your investments - they should not cause you to lose sleep."

While I think many New Zealanders are overly cautious investors, it's too exhausting to be running scared at 70.

Q: I read your article about owning your own home, and wondered what you think of our situation?

Our joint income is $900 a week. We will have a child in three months, and our income will drop to $450 a week. Our rent is $220 a week .

We have a $60,000 deposit. Are we in a position to buy?


A: Yes. Your income is about to drop to a pretty low level for home ownership. But you're saved by your large deposit.

As a rough rule, you can get a mortgage of at least 2.8 times your gross income, if you have no other debts or financial commitments.

When your babe is born, your income will drop to about $23,400 a year, so you should be able to borrow around $65,500 (or more if your income numbers are after-tax rather than gross). Add your deposit and you've got $125,500. That should get you a unit or maybe a modest house in Auckland, or a reasonable house elsewhere.

What about the mortgage payments? If you borrow $65,500 for 25 years at 8.25 per cent, your monthly payments will be $516.

That's a lot less than the $953 a month you're paying now in rent.

And, of course, the extra $100-plus a week would be useful after your income drops.

If, however, you could manage to keep the mortgage payments at your current rent level, that would be a great long-term move.

You would repay the loan in less than eight years. And your total interest payments over the years would drop from nearly $90,000 to only about $23,500 - a huge saving.

Or you could try some payment level in between. Play around with different scenarios on the mortgage calculators that are available on the internet.

I often use www.emortgage.co.nz. If you use it, and you're keying in numbers in the thousands, leave out the commas.

* Mary Holm is a freelance journalist and author of Investing Made Simple.

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

We won't publish your name, but please provide it and a (preferably daytime) phone number in case we need more information. Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.

Links


emortgage