BY MARY HOLM
Q. While I agree with you (in earlier columns) that it is very difficult for individual investors to have access to all the information they require for stock-picking, I don't believe it follows that index funds are the perfect answer.
I own shares directly because I enjoy following the progress of the companies concerned.
In doing so, I take note of broad market/economic trends and conditions. In my view risk can be reduced considerably by a little commonsense.
For example, three years or so ago I wrote to you suggesting that with the NZ dollar at an all-time low and international shares at an all-time high, it was sensible not to invest internationally for a while but wait for those trends to reverse.
In the meantime the benefits of diversification could be obtained by buying NZ shares with overseas exposure/income.
Your response was that attempting to time the market in this way was not a good approach. Fortunately I followed my own advice.
At present, it would appear that the NZ dollar is relatively high against the Australian.
This doesn't mean one rushes out and buys heaps of Australian shares. But if one has some cash one might look for a nice stable Australian share not paying imputation credits (which we can't use).
Then, perhaps, whatever the company does, a likely improvement in the Australian dollar will mitigate any risk.
So I guess I would advocate a middle position. Don't think you have all the information about specific companies, but don't park your brain on the mantelpiece either. Read and read more and keep an eye on the trends, and make your choices accordingly.
I am sure that risk can be significantly reduced in such a way as to make direct investing as profitable (and more fun) as using an index fund.
A. The score: You one, me nil. How about best of three, 10 or, preferably, 43?
I stand by what I said three years ago. People who try to time markets tend to lose about as often as they win. And, by the time they pay brokerage, fees, taxes and so on, they are usually worse off than those who don't bother with timing.
At the risk of sounding like a poor loser, I reckon you were lucky. If we looked at lots of market-timing attempts, by you or anybody else, I'm sure many would fail.
Even professionals frequently get share market forecasts wrong. As for currency forecasts, I've quoted BNZ chief economist Tony Alexander on this issue before.
Here he is again, in a recent newsletter: "No one gets it right. The year-ahead consensus forecast of the NZ dollar/US dollar exchange rate has been correct only four times the past six years, while the two-year ahead forecast has been correct only once."
He shows this in a graph, and adds: "The results are not encouraging for those who believe we economists know where currencies are headed."
If Alexander and his colleagues, with all their knowledge and resources, don't feel confident about predicting currency movements, should you?
There's another important factor here, though. You write about the enjoyment of investing in individual shares.
If it's a source of pleasure for you, go for it, as long as you take only moderate stands on the strength of your hunches.
You will sometimes be right and, when wrong, hopefully not too seriously wrong.
But for many people, your advice to "read and read more and keep an eye on the trends" could be a real turnoff when there are good novels awaiting their perusal.
And I'm still not convinced that they will do worse than you. But should those who don't want to do lots of homework be in index funds? Read on.
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Q. Your answer to the man last week who invests directly in shares is a little bit namby pamby.
Who gets info on shares and who reacts? Vertex is a good example. NZ managers/brokers don't have the resources to look at these issues and in many cases don't have the skills.
The best idea is to buy multiple companies in multiple industries that collectively can survive different risks, eg tourism downturn, dollar strength, dollar weakness etc.
There is nothing magical or right about an index fund. All that it has going for it is that it represents the market.
But it doesn't make the market right, and in New Zealand's case it is poorly diversified. It is only good for an investor who wants the market return.
Another point: if you accept that some people can tell a bad property from a good property, then logic says that someone can select a good share from a bad share.
Interestingly, if someone sells a good property they either think it is bad or they are selling it for another reason.
If you think that you can select good properties, then you need to be able to identify a group of people who are selling for non-investment reasons or have different tax structures, etc.
A. Okay, no more nambying! Only trouble is, I don't feel like fighting you. I sort of agree with most of what you say.
On Vertex and so on: It's true that even the New Zealand professionals - and in some cases even the world's top people - can't always tell what's going on in a company.
But presumably they do better, and react faster, than the amateurs. And that's all I was trying to say.
Your "multiple companies in multiple industries" idea is great.
You're quite right; there is nothing magical about a share market index. And the New Zealand indexes, indeed the whole New Zealand market reflected in the indexes, are not well diversified.
In particular, Telecom dominates all but the middle and smaller company indexes.
This is actually worse in the new NZSE50 index, which is about 27 per cent Telecom, whereas the old NZSE40 was about 21 per cent.
I like index funds not because they are made up of the shares in a market index, but because they are passively managed. The managers don't change the shareholdings unless the index changes, which makes them cheap to run.
I would love to see a fund manager set up a well-diversified passive New Zealand share fund.
It could be based on a specially created index of 20 or 30 New Zealand shares, chosen as you suggest so that the whole portfolio won't be too badly affected by a tourism downturn, dollar rise or fall, or other cyclical factors.
The holdings would be equally weighted. Shares would be bought and sold only to keep the weightings correct.
Example: Company A's price has risen a lot, so it is now worth more than 1/20th or 1/30th of the fund. Meanwhile, Company B's price has fallen, so it is worth less than 1/20th or 1/30th. The manager would sell some of A and buy some of B.
The index would be set up so the fund gets the Inland Revenue ruling permitting it not to pay tax on capital gains, which is a huge advantage of index funds.
How about it, fund managers?
On the property issue, my point last week was that an individual can be the first one to spot a property bargain, as there are so many different properties out there.
But with shares, because every share in a company is the same as every other share in that company, and they are traded on an organised central market, an amateur will almost never beat a professional at spotting a bargain.
I take your point that it seems logical that anybody selling a property, or for that matter any other investment, thinks it is not a good buy, or why sell?
In reality, though, people get out of investments for all sorts of reasons.
We've all heard real estate agents trumpet that, "This house is going cheap because there's a matrimonial break-up", or because the owner is in financial trouble, or the family is moving away, or has bought elsewhere and can't finance two properties, or ... The list goes on and on.
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Q. I was amused by the letter last week from the couple in their seventies who have all the things that most people in the world can only wish for - a recently renovated mortgage-free home, cash assets totalling $221,000, a near-new vehicle and no debt, not to mention a nice tidy weekly income of $700.
This is to their credit, but I can't help thinking that the real reason for their letter was to make known their wealth to the rest of us.
However, if it is just reassurance they want, which indeed you gave, it wasn't overly forthcoming in other comments from you, such as "There's one big worry, though, and that is inflation", and "It would be a pity to find yourself financially insecure in your old age".
Given the fact this couple have both worked and saved hard in their former years and, as they pointed out, "have never been left anything", surely this is very unlikely.
You refer to them as being merely "fairly comfortably well off". Comparing their situation with the vast majority of New Zealanders, I would say they have nothing to worry about financially.
They should now coast along and enjoy their hard-earned wealth in the golden years they have left. It's all a state of mind, isn't it?
A. Perhaps they were skiting. But, seeing readers don't know who they are, that seems a bit pointless.
You weren't the only one to respond to what I said last week. I must have sounded overly negative. The couple certainly have done well.
I was just pointing out that, with their income (other than NZ Super) not necessarily expected to rise - it all depends on interest rates - inflation over the years could make them considerably worse off than they are now.
It's all very well for workers, whose incomes tend to rise with inflation. But, even in these low inflationary times, inflation can stealthily eat into retired people's savings.
And, if the couple starts using up their capital to counter the effects of inflation, they might find their money doesn't last as long as they do.
So, no, I don't think it's all just a state of mind. I think couples in their situation might as well set themselves up so they maintain their strong position.
On second thoughts, though, "financially insecure" was too strong a phrase. The couple are never going to wind up in the gutter.
And nor will people with a lot less than them.
Many retired people get by on NZ Super or not much more and report that they are reasonably comfortable.
I'm sorry if I alarmed people.
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