Do or Die Time for Share Fund Investors

By Mary Holm

Monday 19th February 2001

It's character testing time if you're gloomy about the returns on your share fund investments last year. Are you woman or man enough to take the rough with the smooth? Or will you bail out - right at the time when, if anything, you should be buying?

There's no denying that 2000 was awful for shares. The NZSE40 capital index, the New Zealand small companies capital index and the MSCI world index all dropped 13 to 14 per cent.

True, when you look at the gross New Zealand indexes, which include dividends, things weren't quite so bad. The NZSE40 gross index dropped 8 per cent, and the small companies gross index dropped 3 per cent. Still, they're hardly happy returns.

It's enough to put off anyone with a short-term view.

But people who have watched the markets for longer know that single bad years are fairly common. It's not even all that uncommon for one bad year to be followed by another.

Suddenly, though, there'll be a good year, or even a boom year. And in the long run, investments in share funds tend to do better than other investments - for those who have hung in through the lean times.

There's plenty of research to show this. I like one study in particular because it covers an unusually long period, from 1926 to 1994. It includes not just the 1987 crash, but also the 1929 one.

The researcher looked at returns on American shares versus bonds. He found that, over single months, shares perform better than bonds 57 per cent of the time. That's barely more than half.

Over single years, it's still only 64 per cent. In more than one in three years, fixed interest will outperform shares.

Over five years, though, shares beat bonds 77 per cent of the time. At ten years it's 82 per cent; and at 20 years it's 98 per cent.

You can be pretty certain, then, that over a decade you're better off in shares, and almost completely certain over 20 years.

What's more, over many of the 10 and 20 years under study, shares would have won convincingly.

The same researcher also compared the fortunes of two types of investors:

- Ms Disciplined Investor stuck with her 60 per cent shares and 40 per cent bonds, right through from 1928 to 1994. (Clearly a long-lived and patient person!)

- Mr Bailer moved his money into mainly bonds whenever they significantly outperformed shares for two years, and back to mainly shares whenever that was no longer the case. (A long lived and busy person!)

Mr Bailer benefited when shares were falling. But, to a greater extent, he missed out when shares soared.

If he had put in $1000 in 1928, he would have ended up with $134,000. Ms Disciplined Investor would have ended up with $224,000. That's a huge 67 per cent more.

Note, too, that to maintain her 60:40 ratio, Ms DI would have rebalanced her portfolio every now and then, buying more shares when the market fell and selling some when it rose.

It's a good idea to set yourself a ratio like Ms DI's. Your numbers will depend on your tolerance for risk.

Regardless of your ratio, if it was right for you at the start of 2000, you will probably now be too light on shares. That means buying more now. At least they'll be cheap, by recent standards!

Footnote: The genders I gave the two investor types are not accidental. Women are more likely to buy and hold shares; men are more likely to trade.

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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