By Mary Holm
Monday 6th November 2000
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Generally - especially if you're in a managed fund invested in lots of assets - you'll have more good years than bad. But you can count on some gloom sometimes.
I recently received the following letter from a Hawkes Bay reader: "A friend has invested $10,000 with a company called (name not published), for a 25% clear return per annum. Is this firm a share fund? Is this investment safe?"
I don't know of the company, but that doesn't really matter. What does matter is that either the company or a financial adviser has apparently led the reader's friend to expect a 25 per cent return each year.
That makes me cross. Even knowing nothing about the investment, I can assure the reader that's not going to happen year after year.
If this is a fixed interest investment - which seems unlikely - you've got to wonder who is paying such a high rate to use your money?
It must be someone who can't get a cheaper loan from any bank or reputable finance company. Why not? Because those financial institutions reckon the borrower may not pay them back. You should reckon that, too.
At 25 per cent, though, it seems more likely the investment is - as our reader suspects - in a share fund.
In the last few years, many funds that invest in international shares have made returns of 25 per cent or more.
That's great for those who were in them. But it's also worrying.
Let me quote from a column I wrote early this year, which is reprinted in my new book, "Investing Made Simple".
"International share index funds - one of my favourite investments - have done so well that I'm almost reluctant to recommend them. Readers might expect their recent growth to continue, and be disappointed if it doesn't."
I went on to say that the value of units in AMP's WiNZ fund grew more than 37 percent in 1998, and 29 per cent in 1999.
This year? So far growth has been at about half the pace of last year. No doubt there is some disappointment around.
But it could well have been much worse. If you're in for the long haul - which you should be in any investment in shares - there will be long periods of single-digit or even negative returns.
It doesn't sound as if the Hawkes Bay reader's friend was told that.
I would be surprised - shocked, in fact - if the friend was promised 25 per cent a year. But some advisers wave around fantastic recent returns, while only mumbling something about the downside.
The would-be investor gets too positive an impression, and the adviser doesn't do anything to prevent that. Grrrr!
Here, HB reader, is what your friend should have been told, if the investment is in an international share fund:
- You won't get 25 per cent a year. You could get even more in some years, but your average return over the years is sure to be much lower.
- Even so, this is probably a good long-term investment. Stick with it through the ups and downs and there's a good chance you'll do better than in any other type of investment.
- As long as the people running the fund aren't crooks - go with a reputable company - you won't lose all your money unless the entire capitalist system collapses.
If that happens, we'll all have more to worry about than our savings.
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 email@example.com. Sorry, but she cannot respond directly to readers.
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