Forum Archive Index - May 2004

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Dean,

> 
>>As a consequence I think you need to reassess whether using a 
figure
>>some 5 percentage points higher than the 15 year trend figure is
>>going to give you realistic results.
> 
>Like I explained earlier I did obtain the risk premium of 7.5% for NZ
>from the Price waterhouse coopers website - so admittedly it was not
>calculated by me.  However I did reconcile it against the long run
>historical geometric risk premium from the US market between 1926 -
>2001 of 6% (from a study by Ibbotson-Sinquefield) and considered 
that
>it was a reasonable assumption that our market was more risky than
>theirs, and thus 7.5% seemed fair enough to me.  
>

There seems to be a conundrum in thinking here.    

If we take it that the US market has been more 'successful' than New 
Zealand in the period 1926-2001 there is an argument that you should 
be looking for a higher return from your individual New Zealand 
investments to compensate for that lack of success of the New  
Zealand market.     However, the New Zealand sharemarket is only the 
sum of market performance of the individual companies that make it.
If you accept that the New Zealand market is 'inferior' then over the 
long term, then your quest to always find higher performing 
investments to compensate is ultimately doomed.

Therefore you should always invest in the US and never New Zealand 
:-).  My conclusion about 'that conclusion' is that it creates some doubt 
over the assumptions that spawned it.

Your second point is that my assumed risk premium on equities vs 
bonds in general is too low.   I'll address that in another post.

SNOOPY

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