You Can't Have Everything

By Mary Holm

Monday 11th June 2001

A Hawkes Bay reader writes to say she wants to invest for "security, income and growth". Sorry, but that's not the way the world works.

She might as well seek an inner city house, where all the action is, that is also be peaceful when she's not out on the town, and low-priced to boot. The more you get of any one of those qualities, the less you'll get of the others.

Still, she could probably find a compromise. And that's true of investments, too.

Consider a balanced managed fund, that invests in fixed interest, property and local and international shares.

You get a certain amount of security. The fund's value may fall when property or shares have a bad year. But if there's a strong fixed interest component - and the fund is run by a reputable company - it's highly unlikely that you'll lose money in a medium to long-term investment.

You'll also get some income, from interest and dividends, and perhaps rent. And, with any luck, the property and shares will bring long-term growth.

But a balanced fund won't provide as much security as a bank term deposit, as much income as a high-yielding bond, or as much growth as a property or share fund.

It's trade-off time.

The more secure an investment, the less its providers need to offer high income or growth to security-hungry investors.

Conversely, the higher the income or growth potential of an investment, the less likely it is to be secure.

You don't have to have been around long to see higher-paying corporate or property bonds turn to custard. And the hi-tech boom and bust showed what can happen to shares with apparently big growth potential.

Look suspiciously at anyone who offers a high return, whether it's income or capital growth, and also strong security.

There's also a trade-off between income and growth.

Some investments, such as shares, offer both. But the prices of shares that pay low dividends tend to grow more quickly than those that pay higher dividends.

This is logical. A company that gives away less of its profits in dividends has more to reinvest in the business.

Which reminds me: I was recently talking to a friend who invested in a world index share fund, at my suggestion.

"All my dividends got wiped out by management fees," she said. "Some investment!"

This happens not because the management fees are particularly high. Fees on index funds are, in fact, lower than on other share funds.

It's because dividends on international shares are unusually low for people used to New Zealand shares.

But - and here's the crunch - because international companies hold on to more of their profits, they have more cash for development. That means their share prices are more likely to grow faster.

"Not this last year, they didn't", said my friend. And she's right. The past 12 months have seen the value of world index funds fall.

But in the couple of years before that, they grew fast. And they will again, although nobody knows when, exactly.

I still think they are a great long-term investment - and a good example of a product that is weak on income, but strong on growth.

The Hawkes Bay reader also asks if I can give her investment advice, or recommend somebody. Sorry, but I don't do that sort of work. Nor can I recommend anyone, as I've never hired an adviser.

I can, though, pass on some tips on how to find a good adviser, from someone who knows. More on that in my next column, in two weeks.

Mary Holm, a freelance journalist and author of "Investing Made Simple", is 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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