But I am wondering when and how indexes that passive funds such as AMP WiNZ base their allocation on catch up with changing economic realities.
My gut feeling is that American shares are overpriced, but that the Asian market has a lot more growth potential.
A. You - and I suspect many others - are rather behind the times.
Western markets did perform dismally in the three years ending last March.
But since then, the MSCI world index, which is dominated by America and other Western countries (although Japan makes up 10 per cent), has risen a truly impressive 36 per cent.
That's an annual rate of more than 60 per cent - and it does not include dividends.
In just seven months, the MSCI has regained a third of what it lost since 2000.
It makes recent house price rises look a bit pathetic.
The MSCI index is pretty similar to the ones on which WiNZ and other New Zealand-based international passive, or index, funds are based.
Their indexes exclude some countries, for tax reasons, but they are only minor players. If you look at a graph of the MSCI and the indexes used by the international funds, they move more or less together.
As for when those indexes "catch up with changing economic realities", the answer is almost immediately.
The indexes are made up of the prices of hundreds of shares in the world's biggest companies.
And as soon as any economic news breaks that could affect how those shares perform, the share prices change.
If it's good news for a company, many big financial institutions will want to buy its shares right away, while they are still cheap. That pushes up the share price, sometimes in minutes.
If it's bad news, the institutions sell, pushing down the price.
This is called market efficiency. And because of it, a share investor doesn't necessarily do any better in a buoyant economy than in a depressed one. Only if the economy performs better than predicted will share prices tend to rise across the board.
Simply knowing that Asian economies are likely to grow, then, doesn't give you an advantage in share investing.
If India and China grow more than everyone expects, you will probably indeed do well in the two funds. But if they disappoint - even while still growing - you could lose money.
Certainly investors who saw great promise in Japan several years ago have lived to regret that.
I was recently looking at the performances of nine sharemarkets: Australia, Canada, France, Germany, Italy, Japan, New Zealand, Britain and the US.
Over the last 15 years, every country but Britain has been the best performer for at least one year. And every country has been the worst performer at least once.
The best in 15 years was Italy in 1998, with a 70 per cent gain. The worst was Germany in 2002, with a 44 per cent loss.
New Zealand's showing is interesting. We came last in 1989 with 4 per cent, and first in 2002 with just 1 per cent. Some years are much better, worldwide, than others.
While China and India weren't included, this data shows how each country has its day in the sharemarket sunshine - and its day in the shadows.
If you concentrate on just a couple of countries, you might be lucky. But you could easily miss out on bigger gains elsewhere.
The lower-risk way to invest internationally, and the way I recommend, is via a worldwide fund.
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Q. I am a moderate investor and mostly pretty conservative because, like many others, I did get burned in the 1987 sharemarket crash. Ariadne and all that type of sharemarket speculation caused some pain.
However, I did return modestly to the international sharemarket via ANZ Bank's Gateway World Share Fund in February 2000, as per the attached enclosures.
I accept my own responsibility for the investment and its results to date, but I find it hard to accept the figures provided to show the performance of the fund.
As a 73-year-old with a reasonable amount of business involvement, I didn't consider myself naive - but perhaps I am.
Would you care to comment on ING Investment Services' response to my inquiry?
I invested $40,000 in February 2000, worth $41,491 on June 30, 2000 and now worth $28,307 as at July 31.
That sure seems like a three-year result of minus 31.7 per cent to me, not minus 11.5 per cent as shown in their results. Their reporting seems misleading.
A. You've overlooked the writing under the fund performance table, which reads: "All returns greater than one year are annualised."
The value of your investment dropped 11.5 per cent a year, for three years, which comes to around 31 per cent for the whole period.
I agree with you that the fund should make that clearer, perhaps by writing "% per year" at the top of their table, under the "3 Yrs" heading.
But I don't think they were trying to mislead.
It's standard practice to use annualised returns. If we didn't, it would be quite difficult to compare the performance of a one-year investment in A, a three-year one in B and a 10-year one in C.
You might think the fund is trying to diminish its terrible performance - which, by the way, happened to every international share fund over the period.
But it will use the same format when things are going well, which happens more often than not.
If the fund had been around in the mid to late 1990s, when international share returns were in the 26 to 37 per cent range, it could have reported a return over three years of more than 100 per cent.
But that would have been regarded as misleading. Everyone would have called for an annualised return then.
In good and bad markets, annualised returns - albeit more clearly labelled than in this case - are the way to go.
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Q. What financial advice can you give a couple (late 40s) who have spent their life savings on travelling etc for the last few years and seeing the world in all its wonder, but who now need to buckle down and rebuild.
Spare the lectures please. We do have some wonderful memories and understood the risks.
However, your opinion would be appreciated, as we require sound practical advice now, which your column seems to espouse.
Obviously we are aware that it will be a challenge.
We are both experienced in our chosen professions and, once established back in the job market (having only just returned to New Zealand), we expect a combined annual income of $100,000 to $120,000 before tax.
Thanks in anticipation. "Embarrassed."
A. Rather than lecture you, I'm inclined to envy you. You've had the courage to get out there and live life to the full.
As long as people do these things fully aware of the risks and the tradeoffs, as you apparently are, they should go for it.
Your big plus is your healthy earnings capacity.
Your big worry is whether you can get jobs.
In some professions, people in their late 40s who may not be right up with the play might not be welcomed with open arms.
Let's assume, though, that you do land good jobs, and together earn around $110,000. That should leave you with roughly $85,000 after tax.
I suggest you tell yourselves, from the word go, that you are making only $50,000 or $60,000 after tax.
Many couples get by on less than that and, if you've been travelling for years, you probably know how to manage on a pittance.
What should you do with the excess $25,000 or $35,000?
Your first goal should probably be a modest mortgage-free house. That will make your retirement much more secure.
I suggest you aim to achieve that in 11 years.
In the first year, save the $25,000 or $35,000 for a deposit.
Then, if you buy a home with a 10-year, $180,000 mortgage at 7 per cent, your monthly payments would be $2090, or just over $25,000 a year.
Or, if you are saving $35,000 a year, you could go for a $250,000 mortgage, with monthly payments of $2900. Mortgage rates might rise, of course. If so, it's one less meal out a month.
By the time you've paid off the house, you will be close to 60. At that stage your savings should go into a retirement nest egg.
Obviously, its size will depend on your savings rate and retirement age. But, all going well, you may be able to retire with $100,000 to $200,000. That's a lot more than many have.
And you can cover the walls of your modest mortgage-free home with pictures of your wonderful adventures.
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