Mary’s Q&A column appears in the Business section of the Weekend Herald. Mary was a finalist for the "Best Columnist – General" award for this column in the 2014 Canon Media Awards.
NZ Herald February 4 2006
Q&As: Man who has made $3 million from shares.
How much risk for a 53-year-old?
How good is advice from banks?
Question: When reading some of the letters in your column, and in my normal dealing with people, I find the general lack of financial knowledge quite disconcerting.
I work in the finance industry, am a very keen investor, and can see the benefits of a diversified investment portfolio. I started investing in 1999, and now have a portfolio in excess of $3 million, which is approximately 5 per cent cash/term deposits, 15 per cent property, 25 per cent NZ shares/funds, 45 per cent international shares and 10 per cent hedge funds.
Because of the financial security this portfolio has given me, and the amount of dividends and capital growth it generates, I was able last year, upon turning 40, to drop to a 4-day working week.
People often ask how I can afford to do that at my age, and when I tell them it is due to investing, predominantly in sharemarkets, the general response is that I am mad, it is much too risky, and I should have more investment properties.
One of the recent letters in your column was a case in point. The correspondent questioned the logic of buying Vector shares, which had given a return of 33 per cent over a couple of days, and made the statement that shares had been losing money hand over fist recently.
This appears to be a very common way of thinking, which is to ignore the facts and rather continue with a preconceived notion that shares are bad, and term deposits and property are good.
While I would never use an example such as buying one share and selling it after a few days at a profit as a way to justify share investment, I certainly find the statement that shares lose money hard to fathom.
Looking at the FundSource managed funds tables in the Herald, the NZ equity active unit trusts show 5-year returns ranging from 7.6 per cent to 12.1 per cent. These are after-tax figures, so the equivalent term deposit rates to generate these returns (at 33 per cent tax) are in the range 11.3 per cent to 18 per cent.
Even when this information is shown in newspapers, the general population still think term deposits offer a better return, and that people investing in shares are losing money.
How can we better educate people, because I am sure many people are doing themselves a disservice, and probably limiting their retirement options, by continuing with the notion that share investment is to be avoided? I would still be working a five-day week if I had just stuck to properties and term deposits!
Answer: It is indeed worrying to see how little some people know. And even more worrying, sometimes, to see where they go to learn.
I'm not saying that all financial institutions, property promoters and seminar presenters bias their education towards the products and services they - or their sometimes undisclosed associates - provide. But many do.
There are good alternatives, though. The Retirement Commission is unbiased, and its website, www.sorted.org.nz, offers heaps of good info, calculators and so on for adults and children.
And it doesn't stop there. "Through the Personal Financial Education in Schools project the commission is working with the Ministry of Education to embed financial education into the curriculum by 2009," says commissioner Diana Crossan. "In 2006 a curriculum document will be completed and we will also audit existing financial education resources."
She adds, "As well as schools we are taking steps to see education in the workplace developed." That's all excellent news.
What else? High schools and universities often offer brief adult education courses on financial subjects. There are also books and other publications, of varying quality. I agree that more is needed, but it's a good start.
I should add, though, that I don't fully go along with your last sentence. While you've done superbly, so have some property investors.
For some reason, though, share investors seem less inclined than their property counterparts to tell the world about their success. So good on you for coming out of the shareholder closet.
Question: In response to your article dated 14th January regarding the 53-year-old contemplating a property investment, I'd first like to point out that at 53 this person could well have time to consider such an investment!
My concern is with your advice. If the person is 53 and they still have a $15,000 mortgage to pay off, with your suggestion to pay this off and then contribute to a low risk savings scheme, how could you possibly think that this person would be able to save enough for a comfortable retirement?
It seems too often that New Zealanders are conditioned to be conservative and settle for mediocrity where nobody wins. Your suggestion would probably mean that in retirement this person would need to rely on the state, possibly struggling and depressed, and funded by you and me.
New Zealanders should be investing more in self improvement and financial education (such as the seminars you knock in your article!). I'm a firm believer in that if you think you can or can't, either way you're probably right.
Answer: You, the previous correspondent and I all agree on two points: New Zealanders need more financial education, and conservatism leads many people to end up with less in retirement than they might otherwise have.
I also appreciate your point that it's not stupid for a 53-year-old to take on risk. But there's risk and risk. Given the property outlook and this man's trepidation and lack of experience, I think he could end up deeply regretting buying a rental.
Note, though, that I didn't recommend low-risk alternatives for him. I suggested a low-fee index share fund - quite a risky investment, but one that requires no experience, only the ability to cope with volatility.
As I said to him, "stick with it and you will almost certainly have more by your mid-sixties than if you concentrate only on, say, term deposits or investment grade bonds."
On financial seminars, see my comments above. I've seen too many people get caught up in hype and end up losing a fortune.
Believing "you can" no doubt helps people lose weight, get a better job or run marathons. But confidence in financial issues - unless it's backed up by solid knowledge from unbiased sources and a tolerance for ups and downs - can lead to disaster.
Question: Thank goodness you gave the advice on January 14, warning against taking the advice of a bank manager (who suggested the 53-year-old invest in rental property).
As one who has suffered from such advice, I think there should be a health warning posted outside banks letting people know of the dangers that lurk within their walls.
Answer: Sorry about what happened to you. But I'm going to do something really unpopular here, and that is to stick up for bank managers - at least sort of.
They have been receiving a lot of flack lately for - wait for it - trying to sell their services to their customers. Gasp.
To add to the horror, they often encourage people to borrow against the equity in their homes. The Reserve Bank is trying to discourage such borrowing. And admittedly I was shocked to read this week that household debt relative to incomes has almost trebled since 1990. That's scarey growth.
But just because the average person has an uncomfortably high level of debt, that doesn't mean every individual has too much. For some people, borrowing to invest is a smart move. A suggestion from their banker might be really helpful.
I'm not saying that, if I were a bank employee, I would like to be under pressure to sell. That's a whole separate issue for the banks and employees to work out.
Nor am I saying that a banker shouldn't tell customers of the risks they run when they borrow.
I also acknowledge that over the years customers have tended to trust their bankers as people who are concerned about their financial welfare, just as their doctors are concerned about their health.
But doctors charge the same fee whether they tell you that you are well or sick. Bankers make money only if they do business with you.
Surely every customer realises that, and weighs up their banker's advice with that in mind. If you haven't been doing so, start now!
Before you make any investment decision, it's always wise to seek advice from people with no financial interest. As the Romans used to say, caveat emptor - let the buyer beware.
Question: Why don't you just come clean and admit that you just don't like property investment rather than going to a charade of appearing to give an honest and balanced assessment???
Answer: Because I do like property investment.
Despite a few flops, including a 30 per cent loss on a house in a blue chip suburb, the values of most of the eight properties I've owned have grown fast, some very fast. And I know of many others with similar experiences.
My message is simply that property investment is riskier than many people seem to think.
Unfortunately, some of those people read these comments through property investor glasses. They don't want to acknowledge the risks. Ostrich pie, anyone?
* Mary Holm's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following her advice. Send questions to firstname.lastname@example.org or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.