Don't Bring It All Back Home

By Mary Holm

Monday 1st October 2001

Thinking of bringing your share investments back home in this time of turmoil? Think again.

As I said in my last column, those who bail out of world shares when prices have dropped fast often miss out on the big recoveries that tend to happen soon afterwards.

In this column, I want to concentrate specifically on how world and New Zealand shares have performed since 1970.

Obvious differences are:

- New Zealand shares are more volatile.

New Zealand's highest returns in the period, including dividends, were 132 per cent in pre-Crash 1986 and 121 per cent in 1983.

For world markets, the highest returns were a much more modest 45 per cent in 1984 and 41 per cent in 1997.

But, in New Zealand's worst year, in 1987, the return was minus 41 per cent. And the gloom continued into the next year, at minus 13 per cent.

That compares with the world's worst year, minus 30 per cent in 1974, which was followed by plus 7 per cent the next year.

Perhaps more importantly, there were nine years of negative returns for New Zealand, but only five years for world shares.

It might seem that the superb New Zealand highs more than make up for the lower lows.

But research shows that most investors get more upset over negative returns than they get thrilled by unusually high returns.

- New Zealand's higher volatility is partly because our market is much less diversified than the world market.

While a world share fund holds stocks in many different economies and hundreds of industries, a New Zealand fund typically holds a disproportionate number of commodity and resource stocks and too few banking, drugs and technology stocks.

The under-exposure to technology has been good in the last year or so. But it hurt our performance in the late 1990s, and could well do so again.

To get maximum return for minimum risk, it's best to spread your share investments over as wide a range of industries as possible.

- If you invested $10,000 into New Zealand shares in 1969 and reinvested dividends, you would have $325,000 at the end of 2000.

The same investment in world shares would have totalled $656,000 - twice as much.

Admittedly, that gap isn't quite so big today. Admittedly, too, the difference is all the result of the world bull market of the late 1990s.

Before then, New Zealand and world shares were neck and neck.

The fact is, though, that the bull run did happen. And it could happen again. You wouldn't want to miss out on it.

But what about foreign exchange? With your money offshore, don't movements in the value of the dollar make the investment riskier?

Probably not. It depends on what you plan to do, eventually, with the money you've invested.

If you plan to spend it on travel, a car or other items priced overseas, it's actually less risky to invest offshore.

If the value of the New Zealand dollar rises between now and the time you spend the money, your investment won't do as well as the same investment in New Zealand.

But the price of travel, cars and so on will have fallen, or at least not risen as much as if there had been no foreign exchange movement.

And if the value of the Kiwi dollar falls, your offshore investment will do extra well. Just ask anyone with money overseas in the late 1990s.

The price of travel, cars and so on will be higher than otherwise. But so will your ability to buy them.

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 at maryh@pl.net. Sorry, but she cannot respond directly to readers.

Comments from our readers

No comments yet