Money matters: No time like the present to go overseas

By MARY HOLM

Q. In common with other advisers - and well justified by recent history - your recommendations are still strongly slanted towards investing overseas.

But surely there is "a time for every season."

The USA Goldilocks economy, with its enormous influence worldwide, has had an unprecedented rise in asset values. Sooner or later, like Japan's bubble of the 80s, there will be a return to normal values.

Undervalued assets, like those in New Zealand, may expect to be least affected.

Buying overseas now, with the low (but forecast to rise) New Zealand dollar, would give a double whammy loss to investors.

Also, it seems the Government is about to make changes to super savings, which will have the effect of putting more money into - and thus boosting - our own sharemarket.

In my opinion it could be hard pickings to find a less advantageous time to spend our dollars to invest outside New Zealand.

Mary, you've brought up all these points at different times. I agree with you entirely about the need for diversification.

But why don't the risks as well as the rewards of overseas investment get fair coverage by financial advisers?

A. I can't answer for financial advisers; I'm not one.

As for what I've said, I might be guilty of not mentioning often enough that there is foreign exchange risk in any investment overseas.

But it's easy to make too much of that risk. Sure, if our dollar rises, the value of our foreign investments falls, and vice versa.

Research shows, though, that if you invest overseas, the diversification lowers your risk more than the foreign exchange exposure increases your risk. This is especially true if you invest in lots of countries.

Of course, there is also always the risk that overseas share prices will fall. But I'm not as confident as you that there's a bubble waiting to burst.

The US sharemarket has certainly boomed. But there are more logical explanations for that than there were for, say, the New Zealand boom of the mid-1980s.

And even if there was a US crash, or a worldwide one, history shows that if you ride it out you should be okay. Our 1987 crash was unusual. Sharemarkets usually rebound within a year or two.

Your comments about the New Zealand market sound reasonable. But I don't feel any more confident about our dollar rising than falling. Some experts predict a rise, some a fall. Nobody knows.

It's also not certain that Government moves will boost our sharemarket. To the extent that the experts think this will happen, it will already have pushed up our share prices to a higher level than they otherwise would have been.

The New Zealand market does have some merits - imputation of dividends, for one. It's probably foolish to abandon it completely.

It's also foolish, though, to try to time your market moves. It's too easy to get it wrong.

If you think that, over the long haul, you would like half or three-quarters of your shares to be overseas, you might as well set that up now as at any other time.

You could hedge your bets by making half the move now and half in, say, six months. But beyond that, I wouldn't muck around.

After all, you could have made much the same arguments against going overseas a couple of years ago.

Since then, our dollar has dropped further and the US market has risen further. Those who decided to stick with New Zealand then must be ruing the day.

It's risky to go overseas. It's also risky - in terms of lost opportunities - not to.

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Q. In Money Matters of August 19, a letter from a mid-60s couple requests your advice on their plan to sell their house, valued at $200,000, and replace it with a rented house.

They had budgeted $7000 a year in rent.

They wanted to invest the house money to finance overseas holidays and luxuries budgeted at $10,000 a year.

My eye was immediately caught by the estimate for rent. They do not say they expect to rent a $200,000 house for $7000 a year ($140 a week), but the inference is there.

Note that $7000 is 3.5 per cent of $200,000, and a landlord would have to pay rates, insurance and repairs and maintenance. His net return would be no more than 2 per cent before tax.

New Zealand landlords are renowned for their generosity, but I don't see them falling over one another to buy a $200,000 asset to lease for a return of 2 per cent.

Wherever this couple live, they face a drastic downgrading of their accommodation on the figures provided. You indeed advise them to be sure they could rent suitable accommodation for $7000.

In Auckland, $200,000 represents a sound three-bedroom house with garage in an average suburb.

But $140 a week rents maybe a one-bedroom or two-bedroom unit with carport, sharing a section with two or three similar units, each valued at $80,000 to $90,000.

That may be what they have in mind. But if so I suggest they should buy it rather than renting.

This would give them security of tenure and remove the risk of possible rent rises.

It would free $110,000 to $120,000 which, added to the $40,000 they already have invested, would provide much of the additional income they crave.

I must say, however, that I personally would elect to stay in the existing home they occupy for 50 weeks in the year and restrict the annual "overseas" holidays to two weeks on Waiheke Island!

A. Boring old you! Still, you make a good point - although not quite as good as you might think.

The couple do not live in Auckland, but in a provincial city.

That doesn't alter the fact that - as your numbers show - they would have to move to lower-quality accommodation if they rent.

But it does mean that the step down might not be drastic. They can probably rent quite a pleasant house for $7000, even though it won't be as posh as their $200,000 home.

It's worth noting, too, that we're assuming landlords wouldn't accept a 2 per cent return.

While I'm sure they would rather not, I've heard that some landlords are making rather paltry returns these days - perhaps hoping that a capital gain when they sell will salvage the investment.

It's possible, then, that our couple could rent a place almost as nice as their home for just $7000.

They need to be warned, though, that such a situation won't last.

If property investors are getting low returns, after a while some of them will get out of the barely profitable game.

That would lower the supply of rental property, which would push rents up.

Follow-up to last week's Money Matters column: Because of space restrictions, a couple of rather important points in my responses to the first and second letters didn't make it into the paper.

The first letter was from a couple wondering whether to mortgage two rental properties they plan to buy, even though they could pay cash.

If they did get a mortgage, the cash could be invested elsewhere, probably in shares or a share fund.

The second letter was from a woman wondering whether to put spare money into extra mortgage repayments or into a share fund.

Both cases boil down to a comparison between mortgage interest rates and returns on investments.

I said that the couple should get the mortgage and invest elsewhere - and the woman should go into the share fund - only if they can make higher returns than the mortgage interest rate.

To do so would mean taking on a fair bit of risk. Many experts would advise against it.

On the other hand, as I said to both, they are more diversified if they have some money in shares or a share fund.

What didn't make it into the column was my suggestion to the couple that they buy one rental property with cash, rather than two, and put the rest of the money into a share fund.

That way they would diversify with no risky borrowing. I think it is clearly their best option.

I also wanted to explain further to the woman why a share fund might be her best choice.

If she goes into a fund she can learn how such investments work, and take an interest in market trends.

That would give her a good knowledge base for further investment when she's paid off her mortgage, in about 10 years.

She and her partner are in their 30s, so they have time on their side for long-term share investment. And they're willing to take some risk.

What's more, she's talking about $200 a month, a relatively small amount.

For all these reasons, perhaps she should give a share fund a go.

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