Risks and rewards in generation game

By MARY HOLM

We are a couple in our mid 30s and for the past six months or so have invested $160 a month in the ABN Amro Craigs Start programme.

I have read somewhere that an "expert" said that once the Generation Xers get to retirement age in the next 10 to 15 years, they will liquidate their shares into cash, resulting in the sharemarket losing a lot of value for a long period.

We don't know what we'll use our Start fund proceeds for, but it could possibly go towards our daughter's tertiary education (she is nearly 2) or our retirement.

It seems that just when we want to recoup the benefit of investing, those dratted Generation Xers are going to get lucky once again, and damn the rest of us.

What are your thoughts on this? Should we pull out in 10 years, before things turn pear-shaped?

My thoughts are: you're muddling your generations, you're worrying prematurely and - worst of all - you're picking on me!

You're the ones who are Generation Xers, born roughly between 1965 and 1980.

And if you plan to retire in 10 to 15 years, you're doing very well indeed. But most Xers probably face a few more decades of toil.

I think you meant to refer to my age group, the Baby Boomers, who are, indeed, hoping to retire in the next decade or two.

Will we sell our shares then?

Yes, we probably will. But the process will be very gradual, for two reasons:

* The Baby Boom lasted a long time. Demographers say it includes those born between 1946 and 1965. That means some Boomers won't retire until around 2030.

* The smart ones among us won't sell all our shares on retirement day.

We're expecting to live 20, maybe 30, more years after that. If we want to get a good return on the money that will support us in later retirement, we should leave it in shares or a share fund in the meantime.

Only the money we will need in the first five to 10 years of retirement should go into more conservative investments, such as term deposits.

All of which means that Baby Boomer share sales will start soon and go on for a further 50 years or so.

Having said all that, there are a lot of us.

In 2010, about 12 per cent of the New Zealand population will be over 65. By 2030, that will have grown to about 18 per cent, and by 2050 it will be 20 per cent.

All those extra people selling their shares in retirement must affect prices to some extent.

Share values always have their ups and downs. But perhaps the downs will be a little more severe or last a little longer.

Still, I can't imagine average share returns over the years actually turning negative, or anywhere near it.

Most companies will still grow - perhaps especially those providing goods and services to the retired. And businesses will continue to do things ever more efficiently.

They should be able to borrow cash for expansion pretty easily. With all the Boomers converting savings into term deposits and corporate bonds, there'll be plenty of money available.

Also, market forces will still dictate that, because share investment is riskier than fixed interest, average returns on shares should be higher.

We might all have to settle for lower returns on everything. But long-term money will probably still be best left in shares or a share fund.

There are quite a few "shoulds", "mights" and "probablies" in all of this. So many factors affect share prices that forecasting is hopeless.

I wouldn't worry too much about what might happen in 10 years or so. Let's just watch how things unfold - and, meanwhile, keep our long-term money in shares.

Before I move on, I can't let you get away with calling us Boomers "lucky" and with a "damn the rest of you" attitude.

Whether we're lucky is open to debate.

I've seen pretty fancy attempts at "inter-generational accounting", which try to weigh up which generations have received more than their fair share and which less.

Some researchers look only at taxes, benefits, family support, national superannuation and the like. Others allow for such issues as service to the country in wars and the weight of numbers in setting social agendas.

It's tricky stuff. If, for example, the Government gives allowances to all parents of young children in a certain period, do we count that as a plus for the parents' generation or the children's?

In the end, given that all of us had parents and many of us have children - and in most cases we care about their welfare - how much does it all matter?

As for damning the rest of you, how could that be, when we're doing lovely things like answering Gen Xers' questions?

I read a recent column of yours with interest and enjoyed your advice. I apologise as my comment is rather pedantic.

You state as follows:

"If you invested at the end of 1974 and reinvested dividends, by the end of 1999 your money would have grown more than 16-fold. And that's after adjusting for inflation."

My point is on the use of "16-fold".

My understanding on "fold" is that it means "to double".

Accordingly, if I invested a paltry $1000 at the end of 1974, then by the end of 1999 my investment would be worth in excess of $65 million.

I am happy to be corrected.

Be happy!

I've consulted the Oxford and Webster's dictionaries and a few learned mates. And they all agree that if something increases 16-fold, you multiply it by 16.

Webster's says the noun "fold" means "a doubling or folding over", which is presumably where you get your idea of doubling.

But that doesn't mean you keep doubling when you put a number in front of "fold" and use it as an adverb.

I'm afraid your paltry $1000 would have grown to only $16,000. Still, that's not bad.

I am 19 years old. I achieved my goal of saving $20,000 by the end of last year, reaching my goal in October.

I have worked hard (two jobs) and have sacrificed luxuries, while my living expenses have obviously been low.

I had a pay rise in March, giving me a salary of $24,000 a year before tax, plus bonuses. I plan to leave my second job.

I picked up an investment pack from the bank. I personally don't have the expertise to trade or look after my investments myself, so a managed fund could be a good option.

But I don't know whether I would be willing to sign off all my money for at least a few years, giving it a decent opportunity to make me a return.

I have also seen people successfully buy run-down property, apply some basic cosmetic surgery, and less than two months later substantially increase the value of the property.

I am not really looking at buying my own house at this stage.

Do you have any suggestions on my thoughts or what I should do? I know this first investment could potentially set me up for life.

I would say you're already set up for life, given your attitudes and achievements. Good on you!

Your two options - investing in a managed fund or doing up a house - are quite different. The first requires little time or effort; the second requires lots.

If all goes well, you should end up better off with the house option, simply because you should be rewarded for that effort.

So what makes things go well when you buy a "do-up", as the real estate agents euphemistically call dumps?

Take note of the following:

* The "location, location, location" catch-cry is true.

If you make a dump look beautiful but it's in a neighbourhood that nobody wants to live in, you'll lose. Try to get the worst house in a good street in a popular suburb.

* You should buy a bargain, paying well under valuation. The house might be in a mortgagee sale, or the owners might be in a hurry to sell.

Houses that have been on the market for a long time are often also good buys. But be careful. Why has the house not sold? Could the same thing happen to you, even after the do-up?

* You need to know what improvements will be cheap but boost the house value a lot.

Painting is usually one. And you might make dramatic changes by putting in new but cheap light fittings, curtains and so on. If you want to put in more time and money, adding a deck can make a big difference.

Seek ideas from friends with an eye for interior decor.

* It's better if you can do most of the work yourself. And that's not just because it saves money. Trying to get various tradespeople to work when you want them to and the way you want them to isn't always easy.

Are you a handyman?

* As important as anything else: Will you enjoy doing it?

Some people love this sort of project. They make thousands of dollars from their hobby.

For others it's a huge drag, when they could be at the beach. Even at 19, life's too short to take on a do-up, as well as your job, if you won't get some joy from it.

It would be a good idea to talk to someone who has succeeded in the do-up game.

And I'm not talking about those who did it in the 70s, 80s or even the mid 90s, when prices zoomed and you couldn't go wrong. I'm talking about the clever ones who have made a buck in sometimes falling markets.

If, after weighing up all of this, you decide against taking on a do-up, it's back to investing in a managed fund.

And there's not much wrong with that. Low-tax, low-fee share funds are the best long-term investments for most people.

The trouble is that you must be prepared to leave your money in it for at least 10 years or so, regardless of what the market does.

And you've said you're not sure if you could take a hands-on attitude. I suggest you make yourself!

You've proven you have lots of willpower. Apply it to your investments.

Or, if you really think that's too much to ask, put some of your money in term-deposits and some in a share fund.

Then, if you get itchy-fingered, play with the term deposit money only.

* Send questions for Mary Holm to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@pl.net. Letters should not exceed 200 words.