By MARY HOLM
Q.I think all the hype about investing in investment schemes for one's retirement is a scam perpetuated by financial gnomes.
The dollar you save today always has more buying power than the dollar you get when your scheme matures.
Forty years ago, £10,000 was an awesome amount as a goal to be achieved by saving and investing in insurance schemes. It represented 10 years' salary.
Today, the equivalent of that £10,000, $20,000, which you would now receive on the maturity of your investment, is chicken feed as a retirement goal.
I fear that 40 years from now, the same will apply. The $400,000, $500,000 or even $600,000 figure being touted as a retirement goal will also pale into insignificance by then.
We paid $6000 (in pounds) for our first home. Today you need at least $150,000, or 25 times as much.
On these figures, in 40 years' time, $500,000 will be worth $20,000 of today's money. Hard to believe, but them's the figures!
The adding of interest and profits (if any) on your investment as you go through doesn't negate the fact that when you get there, what you get is worth a pittance.
The answer must be in investing in the purchase of things that appreciate, not depreciate like money.
A.Didn't anybody tell you that inflation has plunged? That makes a huge difference.
Through much of the 1970s and 1980s, inflation was above 10 per cent a year, and at times above 18 per cent.
Since the early 1990s, though, it has mostly been below 3 per cent.
At present it is 2.5 per cent, and experts expect it drop even further. A recent Aon Consulting survey found economists expect inflation to be around 2.2 per cent in seven years.
After that, who knows? But the western world certainly seems to have learned how to control inflation and seems keen to do so - partly for the reason you express, that high inflation erodes the value of savings.
There's no denying that $500,000 in 40 years won't go as far as it does now. But for it to buy only as much as $20,000 does today, as you suggest, inflation would have to average more than 8 per cent over the next 40 years.
If inflation stays at 2 per cent, $500,000 in 40 years would buy what $226,000 buys today. If inflation stays at 3 per cent, it would buy what $153,000 buys today.
That's not nearly as grim.
Just as important as the plunge in inflation has been the trend in investment returns relative to inflation.
Many of us remember interest on term deposits of well over 10 per cent in the 1980s.
What we may not have realised, though, was that for all the 1970s and much of the 1980s, those interest rates were lower than inflation.
People's savings, plus interest, bought less at the end of each year than at the beginning of that year. The situation was even worse after the interest was taxed.
At that time, you would have been justified in saying that saving for retirement was, if not a scam, at least of dubious merit.
But since the late 1980s, interest on term deposits has been a few percentage points higher than inflation, even after tax.
And that's what you need to concentrate on if you are worried about the buying power of your savings.
As long as, over the years, the average after-tax return is above inflation, saving makes sense.
And the bigger the return / inflation gap, the better off you will be.
That's why, as you say, it's best to go into "things that appreciate". These include shares and property which, in the long term, should reap higher returns than term deposits.
One more point: It can be misleading to compare a house price 40 years ago with a current price.
Houses now are much bigger.
In just the past 10 years the average Auckland dwelling has increased by 40 sq m, to more than 200 sq m. "This is despite the fact that four out of 10 new dwellings are either a flat, apartment or a townhouse," says mortgage provider Cairns Lockie.
What's more, we now want many more features, such as second bathrooms and fancier kitchens with built-in dishwashers and so on.
Admittedly, you may have been conservative in using $150,000 as a current price, given that the national median price is now $200,000. It depends what part of the country you are talking about.
Still, I think you would find the price of the same-sized house with the same features would not have risen as much as 25-fold in 40 years.
Q.My wife and I are in our mid-thirties. We've just paid off the mortgage, have some cash and managed funds (balanced and growth), already invested for super and the short term.
We've recently spoken with some financial advisers and, surprise, surprise, they love our current situation but only suggest managed funds (I assume for personal commissions)!
We are considering direct property investment, but in the short term are just putting cash surplus in the bank and compounding it.
Five per cent gross interest is hard to better at the moment, but seems very conservative.
Any wisdom for us, beyond building on current investments? Independent advice is not easy to find.
A. By direct property investment, I assume you mean buying a house or apartment to rent out.
It's a pretty popular idea right now, as property values have risen fast in the past few years.
That, in itself, is a good reason to be wary, though. Nobody knows whether property will keep rising or whether it's done its dash for a while.
Without wanting to reopen the property-versus-shares debate that dominates this column every now and then, I also have other reservations about rental property.
Basically, property is less volatile and hence less risky than shares.
But because of the way most people invest in property, it often ends up being riskier than a share fund or broadly diversified portfolio of shares.
Firstly, people usually borrow to invest in property, and not in shares. If you borrow to invest in anything, you will do better if the investment goes well, but worse if it goes badly.
I know of more than one couple who couldn't cover the mortgage and other expenses on their rental when they had no tenants for a while, and were forced to sell for a low price in a down market.
They ended up not only losing the money they had put into the house, but also owing the bank more than the proceeds on the house sale.
Secondly, most people who invest in rentals are, like you, home owners. What's more, they often buy a rental quite near their home. This leaves them badly undiversified. If prices in that area fall, they lose lots.
In your case, you already have other investments, so this isn't such a big problem. But still, you would have lots of eggs in one basket.
If you want to boost the property portion of your portfolio, you'll get much better diversification by investing in several shares in property companies.
Each of those companies owns several properties, so you would own a small portion of many different types of properties in different parts of the country.
It's much easier to sell part or all of your investment than if you own a rental. And you won't have to chase up late rental payments, or take 3am phone calls about plumbing woes.
For more on property shares, see the next Q&A.
But if you want broader diversification - and it's an excellent goal - well-selected managed funds are the answer for the smallish investor.
You're quite right to be sceptical about financial advisers' recommendations of managed funds, if they are paid on a commission basis. It's better if you can find an adviser who charges a flat fee, or by the hour.
Still, a managed fund that charges relatively low fees and pays low taxes - such as an index fund or British investment trust - is a good parking place for long-term savings.
In the recent past, funds that include international shares have indeed done much worse than money in the bank.
But over the long run that won't continue. I still expect international share funds to be among the best long-term earners.
If you keep your money in the bank until the market rises, you may miss out on some great gains.
It's not uncommon for sharemarkets to zoom up rather suddenly, especially after long down periods.
Once you are convinced that an upturn really is an upturn, as opposed to a quick blip, you may be too late.
Q.I am new to New Zealand and its investment environment.
I have funds that I would like to invest in property, and I have decided to do this via the stockmarket in property companies with quality commercial portfolios.
I have studied the investment columns of the Herald but, as companies are not classified by activity, I find it difficult to identify which potential companies I should be looking at.
I have been accustomed to using execution-only stockbrokers, as I prefer to find things out for myself.
Can you recommend a source of information or redirect my thoughts if you prefer?
A.Why property?
If you already have substantial investments in other industries and asset types, and feel you are under-invested in property, fine.
But if you're not well diversified, and simply fancy property because you think it has particularly good prospects, be warned.
People who concentrate on just one sector of the economy are taking a pretty big risk.
If that sector soars, great. But if it does poorly - and there have been quite long periods when property and property shares have done worse than many other investments - you will be hit hard.
I recommend investing in shares in a wide range of industries.
Assuming, though, that you have good reason to concentrate on property, here is a list of the shares in the Stock Exchange's Property Index: Apple Fields, Australasian Property Holdings, AMP New Zealand Office Trust, CDL Investments, Calan Healthcare Properties Trust, Capital Properties, Colonial First State Property Trust, Kiwi Income Property Trust, National Property Trust, Property for Industry, Paramount Property Trust, Southern Capital, and Trans Tasman Properties.
For the benefit of people interested in other industries, the exchange has several industry indexes.
It is at present revamping its website, www.nzse.co.nz, and is looking at including lists of all the companies in each industry on the site by early next month.
In the meantime, you can get lists for some industries on www.accessbrokerage.co.nz. Click on "Market Info", then "Indices", then on the code after the industry you want.
* Mary Holm is a freelance journalist and author of Investing Made Simple.
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Nicholls was reported missing from Riccarton on 4 June.