January 16, 2012
 Get to Know Your Investments
It is not uncommon for investors, particularly those in superannuation or retirement savings schemes, to be unfamiliar with how their money is being invested. All too often, there is disillusionment when the investment does not perform in line with the investor’s expectations. In most cases, this is not because the investment has been a poor performer, but because the investor either had unrealistic expectations of the investment or did not understand the nature of it. An investment portfolio or retirement savings scheme needs to be treated like a member of the family. It needs to be understood, nurtured and brought back to health when it isn’t doing very well. Having a stranger in your house brings about a degree of tension and discomfort, whereas with someone you know well, you know what to expect and what actions to take. Get to know your investments so you feel comfortable with them. This means giving them attention rather than putting them into the bottom drawer. Read the investment statement and the performance reports you receive. If you don’t understand them, ask questions and spend time on them so you do. If you are invested in managed funds, make sure you understand what kind of assets the funds invest in. Stay in tune with what is happening in each of the main investment sectors (fixed interest, property and shares) and the global economy. This doesn’t mean you need a degree in financial analysis or economics; it just means you need to take an interest in financial matters in the news and to have discussions with other people who are experts, such as your financial adviser, or friends with particular expertise. Each week, take time to learn something new about investing, perhaps by reading a book or going to an investing website or blog.
October 31, 2011
 Employee Share Plans
Many companies, both large and small, now have employee share plans. In theory, it is a win-win for company and employee. The company is able to reward and motivate staff without having to pay cash and the employee is given an opportunity to acquire shares on favourable terms.
There are a number of different schemes including:
- Options – a right to purchase shares in future at a fixed price
- Employee share loans – the employer provides a loan with or without interest to buy shares
- Partly paid shares – the employee acquires the shares at market value but pays only a small part of the price initially with the rest being called up by the company at a later date.
There are several factors that influence whether a share plan is a good thing to participate in. You may be liable to pay tax on the benefit you receive from the share plan, and any liability arises on the date that you acquire the shares. You may have to find cash to pay this tax. It is important to also consider the effect on your cash flow. Would it be better to receive cash instead? If you want to use your shares to pay off your mortgage or as a deposit on a house, you run the risk of the shares dropping in value at a time when you need to sell them. Another consideration is the extent of your exposure to shares in one company. By investing all your savings in the share plan you run the risk of being badly affected if the company fails or does not produce an adequate return. Employee share plans are a great idea, but you need good advice so you understand the risks and obligations as well as the potential returns.
October 10, 2011
 Prudent Investment
Investment markets have taken a pounding in recent weeks as investors grow increasingly nervous about developments in the USA and Europe. Economic growth has slowed sharply in these regions and the slow-down is more widespread than previously forecast. Adding to this are fears of an imminent default by the Greek government which could have a flow on effect on other indebted countries and the banking sector. These factors increase the risk of a return to recession, especially in America and Europe, and that would not be good for investment markets.
It has always been expected that following the Global Financial Crisis the return to growth would not be a straight line process. There will be periods of both good and bad news. Think of a person with a life threatening illness, who is on the path to recovery in intensive care but suffering the occasional medical setback. The medium term prognosis for the global economy is good but it is still in intensive care. What is needed now are strong, sensible and credible policies from politicians to bring back confidence and increase certainty. Fundamental change is required.
In amongst all this turmoil, New Zealand is not so badly off. Exports are doing well, wages have gone up, the Rubgy World Cup has given us a boost and the housing market appears to be bottoming out. However, economic recovery won’t be strong and could be held back if the rest of the world deteriorates further.
The medium term outlook for investing in growth assets remains positive, but in the short term volatility will prevail. For investors, prudence is the key word. That means having a bit more in cash than usual and waiting for signs of the next upturn. Market volatility will create opportunities to make money, but just be cautious.
August 15, 2011
 Focus on the Horizon
When I was young, I used to go fishing with my father in his boat. Not being much of a sailor, I often succumbed to the motion of the waves when there was a big swell. All I wanted to do then was to get my feet back on firm ground. I still remember the advice my father gave me to help me last the distance back to land. He would tell me to focus my eyes on the distant horizon. By looking at a steady point far away, the ups and downs became tolerable and, after plenty of practice, I didn’t even notice the movement. Now, as an investor, I find I can use the same technique when markets become volatile. The horizon on which I must stay focussed is my ultimate investment goal and if there is no good reason to change it, then the short term ups and downs should make no difference to my investment strategy.
Markets move in cycles and as surely as the sun will rise every morning, markets that have dropped will rise again. The value of a diversified investment portfolio will move in waves that fluctuate within a band on either side of a long term trend line; never reaching either infinity or zero.
Share prices are driven by two major forces; market sentiment (fear and greed) and market fundamentals (economic and financial performance). Market fundamentals set the upper and lower limits of value, while market sentiment is the driving force between the upper and lower limits. When the market drops, it is time to look for bargains. There are opportunities to make long term gains by investing in markets and companies that have solid economic and financial prospects, and which will experience a rise in price when the market sentiment changes.
July 22, 2011
 Investment Portfolio Design
The last ten years in investment markets has been a rough ride what with the dot com bubble, the Twin Towers disaster and the Global Financial Crisis amongst other things. The investment recommendations of financial advisers have been under close scrutiny and some have found themselves in court. Good advisers use a thorough process for making investment recommendations, starting with a comprehensive interview with prospective investors, leading to analysis and research, portfolio design and finally product recommendations. Failure to understand an investor’s attitudes towards risk and return and failure to understand product risk have been the two primary causes of complaint against advisers. Recommending products from the thousands available in the market requires extensive research. For small advising firms this is simply not cost-effective and many purchase research from specialist research companies. Increasingly, advisers are using what are called ‘model portfolios’. These are portfolios researched and designed by experts to fit a range of investment profiles from conservative through to aggressive. With any investment portfolio, the key decision to be made is how the portfolio is split between the four asset classes of cash, fixed interest, property and shares. The adviser’s principal responsibility is to recommend the most appropriate split based on their understanding of the investor and to then select a fully researched portfolio of investment products based on that split. There are several advantages of using model portfolios for both investors and advisers. For investors, there is the confidence of knowing that the portfolio has been extensively researched and is constantly monitored for performance. Adviser time is spent with investors, understanding their needs, keeping them up to date with market information and answering their questions. For advisers, the risk of recommending inappropriate products is considerably reduced. Model portfolios make good sense and their use is bound to increase.
May 9, 2011
 Invest Offshore
Global influences in investment markets have become more powerful over the last decade, due to the effects of technology, globalization of businesses and economic union between countries. The Global Financial Crisis is a powerful example of how interconnected world investment markets are now. This is not necessarily something to be afraid of and in fact there are many opportunities as well as threats. There are five good reasons why it makes sense to invest offshore right now:
- New Zealand is a very small part of the global economy and investing in one, very tiny market makes little sense when you take a global view. Diversification is a good reason to invest offshore. The impacts of natural disasters and adverse economic events can be lessened by spreading investments far and wide across the globe.
- In the medium term, it is known that global growth will be driven by emerging economies such as China and India and not by the developed world. Leave these countries out of your investment portfolio and you will miss out on opportunities for good returns.
- The New Zealand economic outlook is uncertain following the Christchurch earthquake. In the short term at least, the earthquake is likely to have a negative impact. Economic growth will be dependent on exports and business investment.
- Our exchange rate is at a historic high point in relation to currencies of our major trading partners. Investors placing funds offshore now will not only get more for their money, but they will stand to gain again when the exchange rate drops as it inevitably will.
- It is easy to invest offshore through managed funds, using the expertise of fund managers who understand the markets they invest in.
Overall, investing offshore opens up opportunities for increased returns and reduced risk.
May 2, 2011
 Bank and Lose
Investors who retreated to bank deposits after the Global Financial Crisis now find themselves caught between a rock and a hard place. Do they stay in bank deposits for peace of mind but poor returns or do they venture back into investment markets? It is sensible to batten down the hatches when a storm blows over, but at some point, life has to return to normal. So how do you know when it is time to come out of your safe place?
People generally only change the way they do things to avoid an unpleasant situation or because they are attracted by something which is better. Over the last year, the consumer price index rose by 4.5%, thanks to GST and commodity price increases. Bank interest rates for 12 months are currently around 4.5%. However, after paying income tax of 17.5%, the net interest rate is around 3.7%. Invest $100,000 for a year at 3.7% after tax and at the end of the year, even after receiving interest, with 4.5% inflation your money will buy you the equivalent of only just over $99,000 worth of goods. This is not a pleasant situation! Rates, power, and petrol prices continue to rise and with low interest rates, bank investors will continue to lose wealth.
So what are the alternatives? In a nutshell, bonds, property and shares. That is not to say, however, that investors should move entirely out of bank deposits and invest elsewhere. Diversification is still the best investment strategy, but having at least a small part of a portfolio invested in shares will help protect against inflation. Over the last year, US, Australian and New Zealand share market indices have risen by around 13%, 14% and 7% respectively. These returns will surely entice bank investors out of their safe place.
December 27, 2010
 Where to Invest in 2011
Investors with cash on their hands face a huge dilemma. Should they leave their money in the bank at a low rate of interest, or take a risk and go back into the investment markets that have left many with a much reduced level of wealth? Investor confidence has been left shattered by the Global Financial Crisis but will return. As we move into 2011, we should reflect on some of the lessons learned in the last few years, such as:
- The importance of investment liquidity; that is, the ease and speed with which investments can be converted to cash.
- The importance of diversification; that is, not having all your investments in one asset class or one geographic location
- Return doesn’t necessarily reflect the level of risk
- Markets don’t stay down forever.
Investors have a choice of four asset classes; cash, bonds, property and shares. They can also choose to invest in New Zealand or offshore. Cash is safe and liquid, but unlikely to produce a good return in the short term. As interest rates rise, bond values will fall and already investors are moving away from this asset class. There are bargains to be had in property but with low projected growth, this asset class is for those with a long term investment horizon. For shares, the outlook is much more promising. In particular, emerging markets such as China, India and Brazil are expected to outperform developed markets over the medium term. There are also opportunities in what are referred to as ‘alternative’ investments, for example investments based on commodities such as mineral resources, precious metals, water and agricultural products.
Investing in 2011 will be no different than investing in any other year. There will be good opportunities for those who use sound investment principles.
October 18, 2010
 Low Risk Investments
Many investors are understandably reviewing their attitudes towards investment risk and return following the Global Financial Crisis. However, with interest rates low, it is not easy to achieve competitive, low risk, low volatility returns.
Traded Endowment Policies (known as TEPs) offer these attributes, yet are not widely known or understood. A TEP is simply an endowment policy that has been sold by its original owner through a trading platform such as the Life Insurance Policy Exchange (LIPE).
Typically, endowment policies have been used for long term savings. Policyholders may choose, however, to sell their policies before the agreed maturity date. Rather than surrendering the policy back to insurance company from which it was purchased, in which case the policy is cancelled, a policy holder can choose to sell the policy to LIPE. The policy remains in effect, albeit with a different owner, and the benefit of accumulated bonuses is not lost. Policy holders can receive a significantly better return for their policy by selling to LIPE rather than surrendering.
The appeal of this type of investment is that in most cases the value of the investment is already guaranteed by the bonus structure of the underlying policy. In addition, because it is an insurance policy, any gains are tax paid. This is particularly beneficial for investors on a high marginal tax rate. Currently, TEPs are offering a projected yield of 5.36% to 5.95% tax paid.
One of the quirks of traded endowment policies is that the original life insured by the policy remains the life insured. In the event, therefore, that the original life insured dies before the policy matures, the owner of the policy is entitled to an early payout, thus further increasing the yield. For obvious reasons, the name of the life insured is not revealed to the investor!
September 20, 2010
Retirement Savings
Spring is in the air and it is a good time to take a fresh look at your retirement savings plans. There have been many changes in retirement savings in recent times that mean you should review any schemes you signed up for prior to the introduction of KiwiSaver in October, 2007. At that time, a new type of savings and investment product was introduced, called a Portfolio Investment Entity (or PIE). There are significant tax benefits to be gained from switching from an old-style product to a PIE.
Before you pull out of an old-style product, you need to check a couple of things. Check whether there are any penalties for early withdrawal and whether there is any insurance cover attached to your savings plan. You will need to make sure you can replace this cover, if still needed, before you stop your policy. There may also be additional bonuses you might be eligible for by staying with your old plan. With most of these old products, even if your funds are locked in until you reach a certain age, you will have an option of suspending your contributions indefinitely, so that you can keep them going to maintain your insurance cover, get your bonuses or avoid paying huge withdrawal penalties, while putting your new savings into a more modern product.
Your first choice for a new retirement savings product should be KiwiSaver, but only put in the minimum contribution to get the maximum matched tax credit ($1,040 per year) as your funds will be locked in until you reach retirement age. Your next choice is a diversified Portfolio Investment Entity. Over a long period of time, the difference between a good retirement savings plan and a bad one can make a huge difference to your retirement nest egg.
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