Keeping It Simple

By Mary Holm

Monday 9th October 2000

There are hundreds of investments out there, and heaps of issues surrounding them. How can investing possibly be simple?

That question has been shot at me more than once lately, since my book "Investing Made Simple" came out.

When you look beyond the claims and counterclaims, though, there are some basic rules for investors. If you've got money to invest, consider the following questions:

Do you have credit card loans, hire purchase, a mortgage or other debts?

If yes, use the money to pay them off, concentrating first on high-interest debt. If no.

When are you likely to need the money?

If it's within three years, put it in a bank term deposit. If you're sure you won't need the money until a certain time, get a deposit for the whole period. If you're unsure, go for three or six months deposits, and reinvest as they mature.

If you'll probably need the money within, say, three to five years, and you don't like the value of your investments fluctuating, also go with a term deposit.

For people really fearful about fluctuations, this might even apply for ten years or more. I urge you, though, to consider going beyond term deposits for really long investments.

People who are willing to put up with some falls in value - knowing that over long periods they are likely to end up with more money - should invest at least some of their longer term money in a share fund.

This could be a unit trust, investment trust or similar that owns shares in lots of companies.

By using a share fund, rather than investing in individual shares, you get a much wider spread, which lowers your risk. It's also less paper work.

How much should go into the share fund?

This depends largely on any other investments you own.

If you're conservative, perhaps half of all your long-term investments could be in a share fund, with the other half in long-term deposits.

If you don't mind risk [dash] and particularly if you've got a few decades up your sleeve - you could put three quarters or even all your money in a share fund.

What type of share fund?

Choose one run by a reputable company, and favour funds with lower fees and lower taxes. Examples are index funds or listed investment trusts.

Funds holding international shares are generally lower risk than funds holding New Zealand shares. But you might like to put, perhaps, 75 per cent in international and 25 per cent in New Zealand.

Once you've made your choice of funds, stick with them, even if they perform badly. Usually they will rise again after a while. Switching funds is costly and often gains you nothing.

What about rental property?

I think share funds are generally better. This is mainly because, if you own your own home, you're more diversified in a share fund. Also, long-term returns on shares tend to be higher than on property.

But if you enjoy being a landlord and choose the right property, you might be better off going that route.

"Right" properties are often purpose-built for renting. They tend to bring in high rent per dollar spent on the building, and to be in areas favoured by tenants, such as near downtown.

Are there exceptions to these rules?

Of course there will be situations when you would be better off doing something else.

But, if you want to keep things simple, follow these rules and you can't go far wrong.

Mary Holm is a freelance journalist and author of "Investing Made Simple", commissioned by the New Zealand Stock Exchange to write an independent personal investment column. She can be reached by E-mail at maryh@journalist.com. Sorry, but she cannot respond directly to readers.

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