Learning about shares: Keeping control of investment

In the third of a six-part series, BARBARA KENDALL, with the help of the NZ Exchange, considers the risks involved in the sharemarket.

Today I have a confession to make. There's one fear I can't shake about investing in the share market - it's about risk.

I've never really followed the sharemarket news closely, but my impression is that prices go up and down a lot. There are big winners, but big losers too.

My husband, Shayne, and I are thinking about the future of our 2 1/2-year-old daughter and our retirement. The last thing we want is to lose our money in a sharemarket crash or to see it locked up going nowhere in a bad investment when the market turns down.

The fear of losing hasn't ever stopped me doing anything in windsurfing. It never stopped me asking my sponsors to invest their money in my dreams when there was no guarantee of success.

Yesterday, I recalled how hard I worked to find my first sponsors when I was an Olympic hopeful back in 1988.

Backing me was a risky proposition. Windsurfing was a minority sport that didn't get on TV unless you won an Olympic medal, and the next Olympics were another four years away. I certainly intended to be an Olympic contender, but there was no guarantee that I'd deliver.

In the 14 years since then I'd like to think I delivered on my original sponsorship pitch. I've had some great years and won some hotly contested trophies. I've also had some pretty average seasons, and raced some downright diabolical regattas.

I guess one thing I've learned over the years is that consistent performance is everything.

That's especially true in sailing, where regattas are made up of several races. You don't have to win every race to win the gold medal. In fact, it's possible to win a regatta without winning a single race, as long as you're always among the top finishers.

If that's my attitude to my sailing, then I suppose it's natural that I'm not looking for risky get-rich-quick investments.

What I want is an investment that gives us a good long-term return and that we're in control of.

So my question for Dan Dividend today is, given my attitude, should I be investing in the sharemarket at all?

Dan Dividend responds:

You've made some interesting observations about risk and price volatility in stock markets.

To answer your question, I'd like to draw upon a sporting metaphor.

Even the top-performing athletes have bad days - but career performance is what's important.

Your concerns about price volatility in stock markets are valid, but you shouldn't confuse short-term changes with long-term trends.

Just like any top-performing athlete, all shares have periods of strong performance mixed with temporary dips in form.

But if you're in the market for the long term, the impact of the ups and downs get smoothed out.

History shows that when the dips and peaks are smoothed, equities show the strongest long-term return of any investment class. As the sporting cliche goes, form is temporary, class is permanent.

The New Zealand stock market has been a consistent long-term performer that's going through a great patch of form.

Like Barbara, the New Zealand stock market was a consistent performer through the 1990s that had price movements far less volatile than the dotcom-fuelled US and European markets.

Right now our market is experiencing a purple patch of strong returns that put us among the top performers in the world.

Over the past five years, the New Zealand stock market has returned an average of 10.02 per cent a year, better than Britain, Hong Kong and Japan and on par with the US and Australia. Over the past 12 months the New Zealand stock market has returned an impressive 24.69 per cent, which makes it among the stars of global markets.

If you can't afford to risk it, sail a conservative course. Like the tactical choices in a sailing race, no investment is without risk. Understanding your personal risk profile is the most important first step in equity investing.

Generally speaking, the more risk you take, the greater your chance of higher returns - as the bold decision to back Barbara made by her first sponsors will attest.

Are you an investor who sails conservatively with the main fleet and is satisfied with returns around the market average? Or do you prefer to leave the fleet on a risky tack in search of a stronger wind and above-average returns? An investment adviser will help you answer these questions based on your investment goals and then help you select a portfolio of stocks to fit your profile.

Your criterion for control over your investment fits with equity investment. Unlike other investment classes, such as property or cash on term deposits, equities are generally an easy and fast investment to exit should you wish to.

By calling your broker with a "sell" order you can generally exit your investment in a matter of minutes.

* Tomorrow: the human side to investment decisions.

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