Money Matters - Take stock by all means, but broaden the portfolio

By MARY HOLM

Q. I'm a 35-year-old investor with a few problems. About 15 years ago I bought my first house after taking a large loan from the bank.

I spent all my spare time doing the house up, and after 12 months sold it at a modest profit.

For 10 years after this initial foray I continued dabbling in property and eventually ended up with $500,000 in equity.

A few years ago, after the likes of Don Brash and yourself said property was a bad investment, I sold up and started to invest in the stock market.

A friend who knew a few things about stocks said to steer clear of the NZ market as it was unregulated and a lot of morally corrupt things happened on it. So I moved all my money into overseas stocks, focusing on internet stocks.

I have now lost $276,000 of my initial $500,000, and especially took a hammering on a Japanese stock, Softbank.

Do you have any further advice? Should I stay in stocks or move to something else? I follow your column and would really appreciate your opinion.


A. After all this, you're still listening to me? Good on you.

First of all, I want to clear up this "property is a bad investment" thing. I have never said that (and I don't think Don Brash has, either).

You've certainly proved that property used to be great, if you were clever/lucky. And some people still do well in it.

What I have said is: property isn't as good a bet as it used to be. And it's riskier than many people realise. These days, some people lose a fair bit in property.

Shares, though, can also be a bad investment. Again, you're a case in point. (And your $276,000 loss was before last week's events. I shudder to think what the total is now.)

The trouble is you've ignored what, to me, is one of the basic rules of share investment. You haven't diversified. Not only have you concentrated on one industry, but it's an extremely volatile one - as nobody can now deny.

What's more, it sounds as if you've invested in just a few companies. Otherwise, the downfall of one particular company wouldn't affect you much.

You would have been far better off in a share fund that holds lots of shares in many industries, preferably in many countries.

There isn't the same potential to make huge profits as when you pick a few shares. But nor is there the risk of bombing out. And you can still do pretty well.

If, for instance, you had put your $500,000 in AMP's WiNZ international share fund at the start of 1998, it would have been worth close to $1 million now.

WiNZ and similar funds are highly unlikely to continue to grow at that pace. In fact, their value will probably drop in some years. But if you invest in one of these funds and stay in it for, say, 10 years, your money will almost certainly grow.

Which brings me to another point about share investing: it's generally not a good idea to change your strategy every year or two. Better to stick with your choices, regardless of what happens. What goes down often comes back up again, if you give it time.

It could be argued, then, that you should stick with your holdings for a while. But you're so scarily undiversified that I think a shift is justified.

A couple more things: first, your friend has been a bit tough on NZ companies. Most aren't that bad. You certainly wouldn't have halved your money in a diversified fund of local shares.

Finally, congratulations on starting to invest so young, and working hard at it. I'm sure you'll recover from your recent setbacks and continue to do well. Just remember, when you retire with your trillions, who helped you along the way.

Q. I'm very interested in your articles on WiNZ shares.

As you can see from the enclosed contract notes, I tried to buy 1000 about this time last year. Because it was only 1000, AMP wouldn't register acceptance. I think I had to buy 3000 minimum. Caveat emptor.

A. You're right. WiNZ does have a high minimum entry, of 3000 units, or shares. Using a recent price of $2.29, that's close to $7000 worth.

The minimum is much higher than on most shares, says Valerie Wenk, of Access Brokerage, where you tried to buy your WiNZ.

Generally, if a share price is less than 25c, you have to buy at least 2000 shares. If it's 26c to 50c, you have to buy at least 1000. Then it ranges on up to a share price of more than $10, in which case you have to buy at least 25 shares.

In other words, you can have holdings worth just a few hundred dollars.

The main exceptions are the listed index funds, including TeNZ, TORTIS-Ozzy and WiNZ, all of which have higher thresholds. But WiNZ seems to have the highest of all.

The WiNZ managers set this minimum to keep costs down. "If you go below a certain level, it's not economically viable to do it," says AMP's Simon Urquhart-Hay.

WiNZ does charge a lower management fee than other international share funds. So perhaps the high entry level is a trade-off.

Mr Urquhart-Hay says the minimum was recently dropped from 4000 units because of the rising value of WiNZ units. Still, given that WiNZ first traded at around $1.07, in 1997, the minimum investment then was less than $4300.

It might be about time AMP dropped the level to 2000 units.

Meanwhile, if you want to get into a similar fund with a relatively small sum, one option is Tower's TORTIS-International, an unlisted fund. Its minimum entry is $1000.


Q. A few years ago we lent money to one of our children, through legal channels, to start a business.

After about five years it appeared that no return was realised and the loan repayments started to get in arrears. We approached the accountant and were told the money had simply disappeared.

The business has been sold and many debts had to be paid with the money from the sale, leaving very little to repay the loan.

The person concerned has told the solicitor: "There is no money. Sue me if you want it."

Part of the loan was in the form of a mortgage on our house from the BNZ. This still has to be paid. As we both receive a pension we find it very hard to meet payments, and are under threat of a mortgagee sale of the house. After legal and other costs, there might not be enough to buy another, even smaller home.

Over the years we've lent money to our children, which has been honoured and paid back. We did what we thought was right at the time. Is there any way or any organisation we can approach for advice as our savings are almost depleted?


A. This is yet another sad example of what can go wrong with a business transaction between family members.

We should not conclude that nobody should ever lend to a relative. And it can be tricky if you help, say, one reliable child and then another less reliable one asks for the same favour - which might be what's happened in your case.

You set up the loan legally, with professionals involved, so you can't be faulted there. I guess the lesson for us all is we should first consider whether we could cope with an inter-family loan not being repaid. If not, lend less.

Just now, though, the last thing you need is someone telling you what you shouldn't have done. There's one clear course of action: talk to your bank manager right away - preferably on Monday.

If you've already tried that, try again, and this time explain the whole situation. You might want to take this clipping in with you.

BNZ mobile mortgage manager Ian Bourgeois says what every bank says: "We don't like to see this sort of thing happening to people. We do everything we can to avoid a mortgagee sale."

That's not just because the bank wants to be a good guy. A foreclosure is also an expensive hassle for a bank.

The BNZ says it's flexible and willing to look at options. It might, for instance, change the term of the loan or the repayments. Bank officials also suggest you take legal and budgeting advice, which could lead to a proposal for the bank to consider. You're probably reluctant to pay legal fees, but an hour with a lawyer might be money well spent.

From what you've said, though, chasing the loan legally could well cost you a lot - to say nothing of energy - and gain you nothing.

Free confidential budgeting advice, from trained advisers, is available through Budget Advice Services (listed in all the new phone books being distributed nationwide). The service is partly funded by Work and Income money, with contributions from charitable trusts and so on.

An alternative is the Citizens Advice Bureau, with branches throughout New Zealand. These are also listed in phone books.

One idea to consider: borrow from your other children, on the understanding they will get the money back, with interest, when your house is eventually sold, perhaps after you die.

Use that money to make lump-sum payments off the mortgage, and arrange with the bank to reduce your regular payments.

It seems odd to suggest more family involvement after what's happened. But surely your children can trust you not to leave them in the lurch.

If all else fails and a mortgagee sale seems inevitable, Mr Bourgeois advises you to sell the house yourself first.

You're likely to get a better price and have control over the situation. Chances are, though, that can be avoided. Good luck.

* Got a question about money? Send it 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.