Two Sad Tales Don't Tell The Whole Story

By Mary Holm

Monday 15th October 2001

Two readers who recently wrote to me have missed the bus, as far as investing in New Zealand shares goes.

"I have read the oft-repeated edict that share value always improves over time, relative to alternative investments," says one.

"But in the light of the following examples, we have to ask ourselves, 'Where have we gone wrong?'"

In his portfolio he has Brierleys, Tranz Rail and Calan Healthcare. "At the time of purchase, all these shares were highly recommended.

"But regrettably, even with variable time frames of 20, 5 and 3 years, they all exhibit the same poor returns."

Another reader says I rubbed salt in her wounds in my last column.

"You say 'If you invested $10,000 into NZ shares in 1969 and reinvested dividends, you would have $325,000 at the end of 2000.'

"I am sure that this is a misleading simplification.

"It would depend entirely on what shares you had, and what you were able to buy with the dividends you reinvested, and whether you had the knowledge to buy and sell to your advantage."

She says she inherited some shares in 1986, and then bought some recommended shares, "and lost a substantial amount in the next couple of years.

"The shares I retained barely maintained their value over the next ten years or so."

She suggests I should emphasise "the lack of certainty in the market, and the need for knowledge and luck."

I'm happy to oblige on the lack of certainty. And there's no doubt luck plays its part.

Knowledge? Not really, if you're talking about knowledge of companies. But yes, if you're talking about knowledge of diversification.

The basic mistake you seem to have made was to hold only a few shares. There's too big a chance they will perform badly.
If you own many shares, though, you take much less risk.

The value of all of them could fall in a short-term market downturn. But you can be pretty sure that, over ten years or more, some will rise more than others will fall. Your total investment will be good - perhaps very good.

So how many different shares do you need to own? Some say at least 10, some 20, others even more.

The easiest way for smaller investors to get into many shares is through a managed fund, such as a unit trust, which pools many investors' money to make widespread purchases.

Apart from diversification, an advantage is that you don't need to know about the companies you're investing in.

The fund manager will select them. Or, if you invest in an index fund, which holds the shares in a sharemarket index, the selection is automatic.

If you had been able to get into an NZSE40 index fund back in 1969, and reinvested all dividends, you would have got pretty much the returns I mentioned in my last column.

Until relatively recently, nobody compiled a New Zealand share index that included dividends. But researchers have dug up old figures to create what are called gross indexes.

I used one of those to get my numbers - the $10,000 growing to $325,000.

Such broad indexes show how the market as a whole performed. They represent a sort of average. So, while you two haven't done so well, other investors must have done better than the index.

Note, too, that the period you're discussing for the most part - from just before the 1987 Crash - hasn't been a good one for the New Zealand market.

But the market made huge gains in the early and mid 1980s, giving my $10,000 "investment" a big boost.

Some time, there'll be another boom. It's just that we don't know when.

Diversify. And then hang in there.

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 or by mail care of this newspaper. Sorry, but she cannot respond directly to readers.

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