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Are you happy with your asset spread?

By Mary Holm

Monday 8th July 2002

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Now, after an unusually long decline in world share prices, is a good time to look at what the experts call your asset allocation.

This is how you have spread your investments over different types of assets - New Zealand and international shares, property, fixed interest and so on.

As I've said many times, you can reduce your risk without lowering your expected returns by diversifying over different assets.

Beyond that, though, people have differing requirements as to how much of their savings should be in riskier versus safer assets.

Your choice will depend mainly on:

- When you expect to use the money.

If it's within the next few years, concentrate on fixed interest. There's too big a chance that the value of share or property investments will fall over that time.

If you don't need the money for ten years or more, put more into shares and/or property. It's highly likely long-term investments will grow faster in these assets.

- How much volatility you can cope with.

Research by ABN Amro Craigs shows that:

- If you invest only in shares, expect a negative return once every three years. Your annual returns are likely to range from 45 per cent to minus 47 per cent.

- If you have half shares and half fixed interest, expect a negative return once every five years. The annual return range is 25 per cent to minus 21 per cent.

- If you invest only in fixed interest, expect a negative return once every 15 years. The annual return range is 12 per cent to minus 4 per cent.

Some people, who are comfortable taking risk and who have a long-term perspective on market performance, cope well with share volatility.

They shrug off share market falls, confident prices will rise again.

Others toss and turn at night.

It's particularly hard on newcomers to a share investment who see its value fall before it has risen much. That has happened to many in the last few years.

My advice to the worriers is to hang in there. History shows that those who do are rewarded.

If you really can't cope, consider moving some [dash] but not all - of your share money into steadier fixed interest investments.

It's best to sell gradually. If you want to halve your share investments, perhaps sell 10 per cent a month for the next five months.

That way, you won't end up selling the lot at bottom prices.

Note, though, that you should make such moves only if you plan to stick with your new asset allocation until your circumstances change, such as on retirement.

Those who resist the temptation to chop and change with each new market trend usually do better, over the long term.

That's why now seems a good time to set a long-term allocation.

When share markets are roaring away, as the international ones did a few years ago, people tend to put more in shares than they find they can tolerate when markets slump.

These days, in the opposite situation, you may err on the conservative side. And that may make your choices easier to stick with, whatever the future holds.

Don't get too conservative, though. You'll miss out on the superior long-term returns shares have always delivered in the past, and surely will again - we just don't know when.

In my next column, in two weeks, we'll look at how you should make adjustments when market movements alter your asset allocation.

Through the adjustment process, you often end up buying low and selling high - the investor's ideal - without having to think about it.

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. Sorry, but she cannot respond directly to readers.

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