Learning about shares: A grain of rice, but it's a start

How do you go about investing in the sharemarket? In a six-part series, Olympic champion and first-time investor BARBARA KENDALL offers some answers with the help of the NZ Exchange


My 2-year-old Samantha and I saw something hilarious the other day down at Stanmore Bay beach.

There were these three old guys - they must have been in their mid-70s - goofing around like 14-year-olds. One of them had a new camera and they were photographing everything that was remotely photographable on the beach. It was great - three old boys, laughing and playing on the beach and leaving a trail of smiles in their wake.

It got me started thinking about my ideal retirement. In my daydream, I'm in my own old people's home, for me and husband Shayne and our favourite friends. It's seriously dedicated to fun. Near the beach. Probably best to be beachfront. There are about four or five units - four for us and our friends, and one for a nurse-cook-cleaner who does all the boring stuff that becomes a drag when you're old. We've got lots of toys - windsurfers (maybe I'll need an outrigger by then?), boats and a camera, of course.

Sounds great, and expensive, too. Especially when I look at Samantha and think about the next 18-plus years helping her get educated and started in life.

I know I'm going to need investments if I'm going to live the life I want to in 20 years and beyond, and I know there's no time like now to get started. The best argument I've heard for stopping procrastinating about investments came from an old schoolmate who has been working in the stock market.

He tells a great story about an ancient Indian prince and a peasant who play a game of chess. The prince, thinking there's no way the peasant could win, says, "Beat me and I'll give you whatever you want - fine clothes, a feast, a palace - anything". They start playing, and in one of ancient India's great sporting upsets, the peasant beats the prince. The prince says, "What do you want?" and braces himself for the damage - only to hear the peasant ask for one grain of rice.

"Put one grain of rice on the first square of this chess board. On the second put two grains, on the third put four grains. Double the grains for each square of the board," says the peasant.

The prince laughs at the peasant and readily agrees, because, being royal and in a parable, he is also stupid.

He orders his Rice Keeper to put the rice on the chess board. Only to find he's ruined. There are 64 squares on a chess board, and if you double a grain of rice 64 times you end up with more rice than there is in all of India.

What happens next, I don't know. Realistically, I'd say the peasant was boiled in oil and the Prince learned a lesson about mixing with the lower classes.

But it's a great story, and a great analogy for investments - small amounts grow over time. The longer you leave your investment to grow, the smaller the amount you need to reach your goals.

So I know this. Investment is smart, even a small investment. Shayne and I have a small investment property. We've used bank term-deposit investments before, too. We're comfortable with property and banks. But one thing we've never really understood is the sharemarket. Lately I've been trying to find out more.

So for the next few days I'll be asking some smart minds some simple questions about investing in the sharemarket. I'm looking forward to it, because frankly, I don't know anything about shares.

My first question is, why should I invest in the sharemarket?


Dan Dividend responds: I'd like to draw inspiration from your parable of the Indian peasant and prince to answer your question:

The longer-term rice harvest

Your investment goals for retirement and Samantha's education are, technically speaking, long-term. It's logical to choose an investment class with the strongest performance over that time-frame. In this regard, nothing compares with equity investing, and historical studies have shown that equities have out-performed all other major asset classes over time.

Every so often, though, there's a bad rice-growing season

The trade-off for those strong long-term returns is short-term volatility. Equities are like any crop, you can't guarantee what you'll receive when you plant the seed. What's far more important is the long-term historical average yield of that crop. When you're many years short of retirement, a bad rice-growing season should be of little or no concern.

Get your rice on the board early

Because of the powerful long-term returns from equities, gaining the full benefit from this class of investment means getting rice on the board as early as possible. The superior returns of equities over the long term have a major compounding effect. Excluding tax for a moment, if you were to invest $10,000 for five years in term deposits with compounding annual return of 5.5 per cent, you'd end up with $13,070. If you invested the same $10,000 at the sharemarket's historical rate of return of 10.02 per cent, you'll end up with $16,126. That's a whole pile more rice. Over a longer time period the difference is even greater.

Mix your rice with other grains as you approach retirement

Your gentlemen on Stanmore Bay beach will probably be adding some other grains (like bonds and term deposits) to their rice because of their stage in life. Because they're in retirement they are likely to have lower tolerance for short-term volatility. The fact they're frolicking, though, suggests they've had many a good harvest in the past.

If you're considering your investment options this summer, you should contact an NZX broker to decide what mix of investments suits you. You'll find a list at www.nzx.com.

* Monday: Kendall looks at just what investing in the stock market really means.