By MARY HOLM
Q: I have recently retrained from life as a lonely construction worker to graduating as a qualified health professional.
I always thought of myself as being somewhat entrepreneurial and resourceful, and in my 20s had fantastic aspirations of making millions through property. But my newly acquired use of once dormant grey matter has led me to believe this may have largely been the result of ignorance.
I bought into the residential market at the end of 1995 with a four-bedroom, bottom-of-the-market rental.
An OE, property and rental crashes and interest increases have posed many challenges to someone who was looking for financial freedom, not endless nights of worry and days of overtime.
I found myself living in the property when studying. My motivation was to struggle through, as selling up would have depleted any equity. So here I am, a new man, new profession and about to do my second OE.
After studying I have aimed to increase what author Robert Kiyosaki refers to as financial literacy. Although I did not always morally agree with many of Kiyosaki's tactics, I liked his teachings of the psychology or emotional aspects of money (or spending).
This led me to want to educate myself on investing within New Zealand. I am three-quarters of my way through your book Investing Made Simple, which has only highlighted how complex it can be.
I fly out of the country in four months, and plan to sell up and pay off student, Visa and personal loans, leaving between $25,000 and $40,000. Fortunately the housing market is now doing well.
I attended a seminar on these matters and followed through with an appointment with financial planners (who were the lecturers, surprise, surprise) and came out more confused.
Your advocacy toward managed funds such as TeNZ, and MIDnZ is obvious, and I have learned a lot from your book. But your book was published a few years ago now. Are the recommendations still valid?
The money in question I plan to invest long-term, while hoping to add to this while overseas.
I am open to any investments, the only prerequisite being that they do not need the constant attention, maintenance and hassle that property provides.
A: Congratulations on the new you. As a special treat, I let your letter run considerably over the 200-word limit.
Investing Made Simple has just been reprinted, so I'd better stand by what I said in it. And I do.
I first got keen on index funds - of which TeNZ and MidNZ are New Zealand examples - around 1980, when I was studying finance at the University of Chicago, and I have put money in them since then.
They invest in the shares in a sharemarket index. TeNZ, for instance, invests proportionately in the shares in the NZSE10 index of New Zealand's 10 biggest listed companies.
The holdings change only when the index changes. So there's no need to hire people to decide which shares to buy and sell. Hence, the fees are considerably lower than in actively managed share funds.
In New Zealand, too, index funds save lots by not having to pay tax on capital gains, unlike active funds.
And while in any given year many active funds will do better than an index fund, which will always put in an average performance, over the years few active funds consistently beat index funds - especially after fees and taxes. And it's impossible to predict which ones will be the winners.
Going with an index fund, then, is like going with something that will probably come, say, third or fourth in a race of 10 share funds.
If you go with an active fund, it might come first or second. But there's a good chance it will come somewhere in the bottom half.
But, you might be saying, recommending a share fund of any type seems questionable when they have performed so badly lately - especially the international ones.
And I must admit it isn't as easy to sing the virtues of international index funds as it was when my book was first published a couple of years ago, and annual returns had been around 30 per cent for a few years.
But I did say back then that such returns wouldn't last, and there would be losses in some years.
When you look at the data on 10-year returns on international shares, in the answer above, they still look like a good long-term investment to me.
As for TeNZ, MidNZ and other index funds that invest in New Zealand shares, I still think they are the best way for most people to invest in local shares.
With you overseas, a strong argument against investing in New Zealand shares - that you already have your home, job and other assets here so it's best to put your savings elsewhere - doesn't apply.
You might, then, put half your money in an index fund of New Zealand shares and half in an international one.
A few other quick points:
* I agree with you that Kiyosaki, author of Rich Dad, Poor Dad , makes some morally questionable suggestions. My response to some passages was, if that's what you need to do to get rich, I'd rather stay a bit poorer.
* I fully approve of your paying off loans before investing. It's an excellent first step to financial health.
* Financial seminars are often run by people with something to sell, including financial planning.
For some reason, it seems to be mainly the less trustworthy companies who use this method to find clients.
If you got out only confused - as opposed to signed up to some inappropriate investments - you did well.
* Sorry, landlords, but I can't resist pointing out that this correspondent's experience with rental property is not all that uncommon. Please don't deluge me with letters. Some of you have done brilliantly, especially lately. But not everyone.
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PO Box 32, Auckland