Money: Share funds fine over long term

By Mary Holm

Money Matters


Q. A family member, no dependants, has invested $60,000 with an investment firm. After six months, the amount stands at $58,800, after having paid commission of $1500 and receiving $200 in interest.

Is this what one should expect? The $60,000 is supposed to double in value in 10 years. It is a sole retirement fund, apart from a part-share in a house and a small insurance endowment policy which is being added to out of income.

He hopes to retire from full-time employment in about 10 years.



A. Yes, it is what one should expect.

The fund your relative has invested in almost certainly includes some shares where prices have dropped.

You should not be at all surprised if the value of any investment in shares falls perhaps by quite a lot in any six-month period.

But there will be half-years when its value rises again, sometimes by a lot.

The volatility of the investment would have been spelt out in the investment statement he should have been given before he handed over the amount.

Most investments in share funds rise over longer periods. It is rare for that not to be the case over any 10 years. And, on average, an investment in shares will do better than other types of investments over that long a period.

You have been led to expect the money to double in a decade. I hope nobody promised that, because there is no way anyone can guarantee it will happen short of coming up with their own money if the share market does not deliver.

Still, it is not a ridiculous expectation. If an investment earns a little more than 7 per cent a year, it will double in 10 years.

And many experts would say that is a reasonable hope for a share fund investment as long as all dividends are reinvested.

In short, I think your relative has done the right thing with his money.

It is important that he sticks with the investment, even if its value continues to fall for some time yet. The people who bail out of a share fund when the going gets tough wind up losers.

They are not in the market when it rallies. And, when you have 10 years to play with, you can be pretty confident there will be a rally some time.

If it is a decent one, your relative's money might do even better than doubling.

Q. My wife and I are 70 years old and in good health, and have no outstanding debts or mortgages.

We have no family or near relatives, and we plan to leave our estate equally to animal and human welfare projects.

Our income is NZ Superannuation of $16,861; an annuity currently of $10,136 (inflation-proofed by 3 per cent annually); and investment income of $1100 tax paid.

All this gives a living wage of about $28,097, which is adequate but does not allow for extras.

We have $80,600 in various investments. We own our property, which is up for sale for $450,000.

After the sale, do we rent or buy? Currently we are asset rich and cash poor, which seems to be the wrong way about at our age.

We would welcome your ideas about our situation and the best and wisest way to go.


A. I absolutely agree with you: You need to turn some of your assets into cash to have fun with.

You are in a strong enough position financially that you can enjoy travel - or whatever is your fancy and still set yourselves up for comfortable old age.

First, looking at the rent-or-buy decision, we will allocate $300,000 for your future accommodation.

You could buy a house for that. Or you could put the money in a fixed-interest investment and pay rent with the returns.

Another alternative is to buy an annuity from a life insurance company. You have already got one of these do-it-yourself pensions, but it might be good to get another to pay your rent.

Because an annuity uses up capital, it will give you more income than in fixed interest, and a guaranteed amount which will not fluctuate with market interest rates - until you die. In your situation, this could be a good option.

A $300,000 annuity, with certain features, would give a 70-year-old couple about $18,300 a year, tax-paid, rising by 2 per cent a year to allow for inflation - about $350 a week.

Can you rent a nicer place for $350 a week, wherever you want to live, than you could buy for $300,000?

It is not quite that simple, of course. With home ownership you have to pay insurance, rates and maintenance. That could easily amount to more than $50 a week, especially if you do not want to do your own maintenance as you get older.

Perhaps, then, you should think in terms of buying a $250,000 house, plus a $50,000 annuity to bring in around $3,000 a year to cover those expenses.

If you compare a $250,000 house with a $350-a-week rental place, the latter might win.

But there are three more factors to take into account:

* Certainty. As tenants, unless you can get a long-term lease, which is not common in New Zealand, you could be forced to move in your 80s or 90s.

With your own house, you choose when to move. You also choose what colour the carpet will be.

* Hassle. Renting is usually less complicated than owning. When something goes wrong, you just ring the landlord. And it is cheaper to move.

* Inheritance. This is a big one. If you own your home, it goes into your estate. If you rent, using an annuity, after you die there will be nothing left. (Unless you both die within 10 years. In our example, the annuity has guaranteed payments for that long.)

Leaving a large estate is important for many people. But in your circumstances it may not matter much.

Where does all this leave you? Perhaps looking around at how house prices and rents stack up in your neck of the woods.

It might be, though, that the certainty, hassle or inheritance factors sway you one way or the other.

After you have used up $300,000 on accommodation, there will be around $230,000 left from the house sale and your investments. It would be good to keep maybe $30,000 to $40,000 in term deposits for emergencies.

Beyond that, you want investments that bring a higher return than you are currently making. Earning $1100 on $80,600 is only 1.4 per cent.

You could do much better by just putting the lot into long-term term deposits, or Government bonds.

Or you could put some, although certainly not all - into shares, perhaps in the form of a share index fund.

The returns will vary year by year, but are likely to average more than in fixed interest.

As long as you have enough other income to cover the basics, you might not mind fluctuations in share returns. When they are good, holiday overseas. When bad, stick to New Zealand.

The trouble with any of these investments, fixed interest or shares is that you are still not fully using the assets. You could gradually sell shares or use up term deposit principal. But then you might worry about running out before you die.

At the risk of sounding like a broken record, an annuity might be the answer.

You would know exactly how much you have to play with and I do mean "play" as much as possible for the rest of your lives.

A final thought: I reckon you can afford to use perhaps $20,000 to $30,000 of your house sale proceeds for a big trip or other treat now.

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