By MARY HOLM
Q. An article alongside yours in last week's paper quotes the widely accepted view that, as one ages in retirement, you should reduce shares and move more into fixed interest.
As an adviser with many retired clients, I am conscious of their nervousness in volatile times and mostly operate suitably cautious investment strategies for them.
Personally, however (and I am several years into my 60s), I do not accept this is the right policy and keep a fairly decent exposure to shares - local ones in particular - which provide me with an overall dividend yield of 10 per cent a year or thereabouts, almost fully imputed.
The question I think most advisers and their clients do not give enough time to is: What is most important to me in retirement? The stability of capital or the income from it?
I've seen too many cases where the investor is chasing high fixed-income returns without realising the risk that attaches to them - more than from a good share portfolio.
A. I agree that a fixed interest investment with high returns might well be riskier than in a widely diversified share portfolio.
But that's partly just because of diversification.
If you put $5000 in each of 10 fixed-interest investments, even relatively high-return ones, it wouldn't necessarily be riskier than $5000 in each of 10 shares.
In both cases, some of the investments could become worthless, but almost certainly not all of them.
And, as long as the companies don't get into financial trouble, dividends on shares are not as certain as interest payments on fixed interest. Companies can change dividends at will. Some might rise, but others might fall. Just look back a few years at Telecom.
The same with share prices versus capital in fixed interest. All going well, you know exactly how much you'll get back at the end of a fixed-interest term. With shares, who knows?
Over time, we expect average share prices to rise, so the chances are good that you'll get back more than you put in. But not always.
Because of those two uncertainties, it's hardly surprising if you receive a somewhat higher return on a share portfolio than on a fixed-interest portfolio of investments in companies of similar quality.
Having said that, what you're doing makes good sense to me.
As an adviser, you understand better than most the ups and downs of the share market. You, and others who can cope with market volatility, would be silly not to keep some shares or share fund investments for at least the first decade or so of retirement.
Despite recent history, I still think shares have better prospects of long-term growth than fixed-interest investments.
But shares for the retired have got to be icing on the cake. Only the wealthy and big risk-takers could afford not to have a solid fixed-interest cake underneath.
This is based on the sound idea that you shouldn't put money in shares unless you expect to keep them for, say, seven to 10 years, depending on your risk tolerance. Over shorter periods, there's a fairly big chance you will lose money.
Let's say you are 55 and 10 years from retirement. You should think about how much of your savings you are likely to spend in the first five years of retirement.
This will, of course, be an approximation. There are so many unknowns. But if you plan to travel lots, for instance, you might expect to go through a quarter or a third of your savings from 65 to 70.
Is that money currently in sound fixed-interest investments? If not, I suggest you set up a plan to gradually move your savings, or at least put all your new savings into fixed interest.
At age 60, you could make a similar plan for funding your retirement from 70 to 75. And, at 65, make a plan for 75 to 80, and so on.
If this all sounds too complicated, and you haven't got vast amounts of savings anyway, just stick to the basic idea, which is to gradually transfer into fixed interest.
And, if you find volatile markets make you just too uncomfortable, you should perhaps go entirely with fixed interest in retirement.
Cake with no icing might be stodgy, but it will sustain you much better than icing with no cake.
Before doing so, though, read on.
Q. My wife and I have, over the years, managed to purchase our own home plus two commercial units, which are mortgage-free, plus approximately $150,000 in shares. We also have around $75,000 on call in a bank account, returning 4.5 per cent.
As we are now both retired, we would like to invest this for maximum return on medium term, low risk, and are faced with the problem of sorting out the risks versus rates of interest offered.
Rates from 6 per cent to over 10 per cent are on offer. However, one radio talkback investor found that although one investment offered a good rate of return on fully secured first-ranking stock, the money was for a proposed project that had at least initially little or no security.
Is there an independent rating body like Standard & Poor's showing investment risk, or will we have to go to a money/investment manager for advice?
A. You're far from the only ones asking about such investments.
As another reader said, "While low interest rates are great for those wanting to borrow, there must be thousands of elderly folk out there, like ourselves, wondering how risky the types of investments returning about 8 per cent actually are."
Very broadly speaking, the higher the return, the higher the risk. Nobody will pay you a high rate unless they can't raise money at a low rate - and that must be because lenders regard them as risky.
For more precise information, go to a website called www.bondwatch.co.nz, which rates many fixed-interest investments.
Grosvenor, which runs the service, uses only publicly available information. It doesn't do any audits or check that the info is accurate. Still, it's a good start.
You'll notice that the website also rates New Zealand corporate bonds and capital notes. For many retired people, these might be a better bet than some of the debenture stock frequently advertised.
If you choose highly rated bonds and capital notes, they are extremely unlikely to go wobbly. And, if you need your money earlier than expected, it's easy to sell bonds and notes that are listed on the stock exchange.
If you do sell early, you won't get the same amount as you originally paid. It might be more but it might be less, depending on how interest rates have moved in the meantime.
But you can remove the risk of getting less, simply by holding until maturity.
For further info on ratings, maturity dates, minimum investments and returns on bonds and similar products, see www.interest.co.nz and click on "money market".
As I said above, it's best to diversify across several different issues. With $75,000, you can certainly do that.
By the way, the interest website also lists interest rates on bank accounts, term deposits, mortgages and other loans.
Q. I read your column weekly and enjoy it, although I don't follow your advice much as I am a share trader and too old to wait 20 years for results.
But you might care to publish the following in response to a number of seekers of specific information on online trading.
I trade online as a short-term trader. My trades last for a few hours to a few days, occasionally a few weeks.
Past New Zealand and Australian share prices are available free at many places, firstly from the Herald site www.stockwatch.co.nz, also from my brokers www.accessbrokerage.co.nz. You don't have to join anything to get quotes and see the charts.
My US broker is www.ameritrade.com who charge US$10.99 per trade each way, no extras. They give full access to all US share prices going back for yonks, and you can view the live action every night as it happens with streaming prices and streaming charts, all for free, you don't have to join. Scottrade (www.scottrade.com) charges only US$7. Another great free site to view charts is www.bigcharts.com. The market opens at 1.30am our time.
The internet is the way to trade. Pencil and paper brokers rate alongside bullock wagons.
But a word of caution to your beer swilling beefhead: In the sharemarkets there's a loser standing beside every winner. Spend at least a year learning before buying any shares. For learning try www.stanz.co.nz and check out the books at www.traderslibrary.com, then relearn with real money by buying just a few thousand dollars worth of one company.
Forget the $100,000 and diversification stuff, you wouldn't know what to buy, or how to look after them just yet. You'll just lose your shirt.
A. Thanks. I don't agree with everything you say, but I appreciate your generosity.
An obvious difference of opinion is over share trading. I said above that you should hold shares for seven to 10 years. That's a tiny bit different from a few hours.
As I've said many times, most people don't benefit from frequent trading. After transaction costs, they do worse than those who buy and hold.
You acknowledge that there's a loser for every winner. But you seem to think that, by studying the markets, you can put yourself on the winner's side.
Having watched lots of people try to do that over the years, I'm yet to be convinced that those who do well for a while aren't just lucky.
Or perhaps you just enjoy whiling away the wee hours watching US market moves, while you win some and lose some. If that's your idea of entertainment, and you can afford it, good on you!
Others should note, though, that you obviously put lots of time into share trading. So even if you do come out on top, in a sense you work for your profits.
As far as the websites you mention are concerned, I've checked that all of them seem to do what you say. Beyond that, though, I can't vouch for their accuracy or the quality of their info - although I would like to think the Herald site is pretty spot on!
The last two websites you list seem to go in for what some people call technical analysis and others call chartism. Suffice to say here - I've said much more before - that stuff does not impress me.
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