To get the numbers, you need an index

By MARY HOLM

I always enjoy your columns. But I find general statements such as "$10,000 invested in 1969 in bonds would have increased to nearly $155,000; in NZ shares $340,000 and world shares to more than $580,000" misleading.

How are these figures calculated?

People who had invested in Equiticorp would not have found this, nor those in Trans Tasman, Ariadne, or even BIL and Air New Zealand.

"Misleading" is a bit strong.

When I quote numbers like that, I'm referring to the performances of market indexes.

For example, in the sentence that you have quoted:

* The bond figure comes from the Credit Suisse First Boston NZ Government Bond Index and, before 1986, Reserve Bank data.

* The New Zealand share figure is the NZSE40 gross index and, before 1986, data from the Department of Statistics, the Reserve Bank and Datex.

The NZSE40 index covers the biggest 40 companies on the New Zealand Stock Exchange, weighted according to each company's size.

* The world share figure is the MSCI World Gross Index, which covers about 1500 of the biggest companies on world share markets, also weighted.

Both the share indexes include dividend payments and rises and falls in share prices.

If I didn't give this information in the column you quote, I should have - although, as you can see, it does take up quite a bit of space.

A shortcoming in both the share indexes is that they cover only the large companies.

There are smaller company indexes, which often perform quite differently, and also more comprehensive indexes that cover a wide range of company sizes.

But they haven't been around for as long.

The long-term data is generally about the larger companies. And, in any case, the performance of markets as a whole closely follows that of the dominant companies.

Your point, that using these indexes might not be of much relevance to people who hold a few individual shares, was more valid a few years ago.

Before the later 1990s, you couldn't make an investment in the NZSE40 as such. Nor was it easy for a New Zealander to invest in the MSCI index.

The ordinary New Zealander's share portfolio might have performed much better or worse than the indexes, which simply show average performance.

These days, though, you can invest in index funds, which invest in all the shares in a particular index.

An index fund's performance closely follows that of the relevant index, although it will lag a little because of costs.

Another option is to invest in an actively managed share fund.

Many of these tend to hold shares in a particular sector of the market, and compare their performance with a market index that covers that sector.

For investors in all these funds, index data is relevant.

Even for those who still hold individual shares, quoting an index that shows how the market performs on average seems to be the most representative way. It's what researchers use.

I suppose we could also show a range. For example: $10,000 invested in some shares in 1969 would now be worth zero, and in others it would now be worth a few million dollars.

That would warn people of the dangers of concentrating on just one or a few shares. Beyond that, though, I'm not sure that it's much use.

* 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. Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.