Make auntie's memory richly rewarding

By MARY HOLM

Q: In 1999 I left a secure position (25 years) in mental health services, and have been self-employed since. My income has dropped markedly, but I am freer and enjoy what I do.

I own a townhouse with a government valuation of $150,000.

I saved $16,000 in a retirement fund and while it earns interest I cannot put any more into it now. I have $9000 in the bank for emergencies and so on.

I recently inherited 8000 Warehouse shares, 1000 Sky City shares and $13,000 in cash. I will pay $10,000 off my mortgage, which will leave me with $27,000. I pay $500 every four weeks, and the mortgage is on a floating interest rate.

I am very keen to keep the shares and to enjoy learning a bit about them. As well it helps to keep my aunt "alive".

This year I have upgraded some furniture and am having some work done on the house. Otherwise I have no immediate plans, other than maybe changing my car in the next six months (it's a 1995 model).

I'll be interested to read your opinion of my plans.

A: Why does the one thing I really want to change have to be the one thing you express passion about?

I think you should sell your inherited shares, or at least most of them.

Many New Zealanders own shares in just one or two companies. Sometimes they got them through an employee share scheme, sometimes from an electricity company distribution or insurance demutualisation.

Often it's an inheritance. And, for reasons like yours - that the shares remind you of the person who left them to you - they are reluctant to sell.

But let's get rational. Those shares are worth about $65,000. So the $65,000 question, for you and others who own just a few shares, is: if you had been given that amount in cash, would you have bought those shares with it? I bet the answer is no.

The logical thing to do, then, is to sell the shares and do whatever you would have done if they had been cash.

Okay, we'll make an allowance for sentiment, and also your comment that you're interested in learning about the companies. To satisfy that, keep the small parcel of Sky City shares and 1000 of the Warehouse, if you must.

That means selling 7000 Warehouse shares, which would give you around $50,000 at current prices.

The first thing I would do with that is pay off your mortgage. It's an excellent conservative "investment", in terms of getting value for money.

And it will leave you with the security of a mortgage-free home. That's a good feeling if you're self-employed and not on a big income.

Then I would set aside whatever you'll need to replace your car.

Beyond that, you might have $10,000 or $15,000 to invest. Where should that go?

It's the same old story. It depends when you're likely to need the money and your tolerance for volatile investments.

If you can tie the money up for 10 years or more and can cope with seeing its value fall sometimes I would recommend a share fund, preferably an index fund, which charges lower fees and has tax advantages.

If you want to use the money sooner, or will worry about volatility, put some or all of it into a fixed-interest investment. Your return will be much steadier, but probably lower over the long term.

In making this choice, keep in mind that if you had kept the Warehouse shares, you would almost certainly have been in for a rocky ride with them, too.

Shares in a single company are likely to fluctuate more than a share-fund investment. That's why I recommend a fund. Through it, you will own a small portion of lots of different shares. When some go down, others will go up.

By spreading your money over many different investments, you lower your risk while maintaining your expected return.

If you follow this path, you'll also have $500 every four weeks that you used to put into your mortgage.

I suggest you invest that in a share fund, too. With any luck, it will build up nicely for your retirement.

And you should regard that money as part of your legacy from your aunt. Her shares enabled you to free up the mortgage money.

Having said all this, I should add that it's quite possible you'll write to me in a few years and say, "If I'd kept my money in the Warehouse, I would have been better off".

But it's also quite possible you'll write, full of gratitude, because you would have been worse off.

If you could explain this to your aunt, surely she would approve of your selling.

Apart from all this, I think you're doing well. My only comment is that I hope that some of the $9000 for emergencies is invested in short-term deposits, rather than all in a savings account.

That will bring you higher returns. And it's rare that you would need that full amount without a bit of warning.

Even if you occasionally had to pay a penalty to break a term deposit, over the long run the higher interest should cancel that out.


* Mary Holm is a freelance journalist and author of Investing Made Simple. Send questions for her to Money Matters, Business Herald, PO Box 32, Auckland; or email: maryh@pl.net

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