It's what you pick to put in your investment basket that counts

Q. A recent item in your column discussed the benefits of picking a few stocks versus a basket of shares. Your reader advocated picking, while you advocated the basket. I think you're both wrong or both right, depending on how you look at it.

I tried the pure basket approach (pun intended, as you'll see) by going to the financial adviser industry to invest my redundancy at the end of 1999.

They invested in property, equities and cash, with growth and value focus, with many managers - all to reduce risk. In the four years since, they turned my $53,000 into $42,000. So in my view, the pure basket approach is clearly not useful.

I also tried the pure picking approach. I bought some Brierley Investments. Solid, paid dividends and all that jazz. Unfortunately, it was about six months before the 1987 crash and those $5 shares ended up at 33 cents. Clearly, the picking approach didn't work.

At the start of this year, I bought a subscription to a private securities analyst. I then cashed in the "basket" - making a loss - and bought the suggested stocks.

To show it's not all been roses, of the 16 companies I have bought into, four have made losses of between 1 per cent and 14 per cent while the other 12 have made profits of between 1 per cent and 56 per cent. Overall, I have made around a 19 per cent gain of about $8500 in capital and dividend payments. In my view, this has been achieved through stock picking AND diversification.

The lesson is that while your reader is probably not wise in picking only a few stocks, neither is a shotgun approach to diversification wise. You need to apply knowledge (I bought mine) to pick the stocks and common sense to fill the basket.

A. I hope the analyst's subscription wasn't too expensive. His or her suggestions haven't done as well as the New Zealand sharemarket as a whole.

The NZSX50 index, of the biggest 50 shares including dividends, has risen 21.5 per cent since the start of the year, compared with your 19 per cent. So a shotgun approach would actually have been better - especially after costs.

But wait - how many times have I told off others for judging share or property performance over just one or a few years?

With these up-and-down investments, you need at least 10 years of data, preferably more. Shorter periods are frequently abnormally good or abnormally bad.

If, after 10 or preferably 20 years, your analyst's picks have significantly outperformed the market, that's the time for congratulations.

The same applies to your "basket investment". While four years is much better than one, it's still not long enough.

It's true that managed funds, via financial advisers, are too often hit hard by high fees. But it's also true that, during the four years of your investment, international shares had an unusually bad run.

As for your Brierley experience, while I am no fan of picking shares, judging the whole thing by what happened to one stock is clearly unfair.

But that's not all. As a Jewish proverb says: "'For example' is not proof". Even if you gave us longer-term data and included many of your own stock picks, you wouldn't convince me.

Individuals are sometimes extremely lucky with one investment and extremely unlucky with another.

I'm sticking with the data on many thousands of investments over many different periods.

That shows me that a shotgun approach - with the whole market as a target - is as good as any, especially after taking costs and taxes into account.

By the way, at the risk of being a party pooper at Christmas time, I must point out that 2004 has been an exceptionally good year for New Zealand shares.

You won't continue to get 19 per cent returns year after year. If you stick with your choices, which you probably should now that you've made them, you can be almost certain there will be years when your portfolio goes down. Forewarned is forearmed.

Q. Well thanks for your advice in the Herald.

I found myself a two-bedroom unit for $146,000 not far from where I am. It is great and I managed to borrow $80,000 over 13 years with comfortable repayments.

Thanks for the confidence booster and I know I will enjoy this place.

And yes, I am looking at retraining. Going to do an introduction certificate in adult teaching as I love working with the youth and young families.

The only thing is that the cartoon did not do me justice. Just as well it wasn't a Dear Mary page, "I am looking for a husband", as that would have got me no replies.

A. One more reason for keeping letters anonymous!

Other readers might remember this correspondent, a 53-year-old cafe worker wondering whether to buy a home with her $70,000 marriage settlement or continue to rent.

I offered some advice, and so did another reader, who suggested she buy a two-bedroom unit and take in a flatmate.

And that's typical of the wonderful readers of this column. Many correspondents aren't asking questions, but are offering advice or additional information.

This year, for instance, there were heaps of letters about personal finance computer programmes and heaps more about how much money is needed in retirement. There were also lots of letters disagreeing with me, which is always stimulating.

I appreciate all those contributions, as well as the questions. It's just a pity that we can't publish more. To the vast majority of letter writers, who didn't get published, keep trying.

Thanks, too, for all your kind comments, which lift my spirits before they are edited out. My favourite this year: "Thank you for a great column each week. You keep my hopes up."

But not everyone loves this column. I have it on good authority that a share brokerage was thinking of making a wax Mary doll to stick pins into. And I gather sentiments are similar in quite a few real estate firms and the office of at least one high-profile property investor.

At least a few spleens have been vented. And here's hoping we've all emerged a little wiser.

Have a great Christmas break. See you on January 15.

* Mary Holm is a seminar presenter, author and publisher.