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Take Courage, You'll Do Better

By Mary Holm

Monday 6th August 2001

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It's not clever to be too scared of risk, as a Te Puke reader may find if she continues on her current course.

"I have saved $50,000-plus, and have it on term deposit in the bank," she writes. "It seems unwise to have it all in one place.

"I am a very timid investor, having in the past lost money on an insurance policy and on the share market. Some sound advice would be much appreciated."

Well, Te Pukean (is that what you people are called?), having all your money in term deposits isn't nearly as unwise as having it all in one share or high-risk bond.

There's virtually no chance you'll lose your money. And its value won't fluctuate.

You might, though, want to spread out the terms, putting some into six-month deposits and some into two- or three-year deposits.

Then, if interest rates go up, you won't be caught with all your money in relatively low long-term rates. And if rates go down, you won't be caught with all your money in the new lower rates.

Beyond that, whether you should stick only with term deposits depends on your time horizon.

If you expect to use the money in the next few years, what you're doing is fine. That's too short a period to go into something like shares or property. There's too big a chance their value could drop over the short term.

I suspect, though, that you're writing about longer term savings, perhaps for retirement.

Even then, you could leave some of your money where it is, given your timidity.

These days, returns on term deposits are around two to four percentage points above inflation. As long as they remain well above inflation, the buying power of your savings is growing.

You could, though, earn higher returns - perhaps much higher - if you put a portion of your savings elsewhere.

I don't mean in an investment that pays higher interest. Anyone offering you much more interest than the banks is doing so only because they can't raise money cheaply.

Why would that be? Because banks and other lenders have judged them to be risky. They're not your cup of tea, Te Puke reader.

What I had in mind is an investment in either a balanced fund, that invests in fixed interest, cash, property and shares, or a share fund.

I know you've already been burnt in shares. But if you do two things, I can almost promise that won't happen again over the long term.

The first is to go into a fund that holds a wide variety of shares. If some lose value, that will tend to be balanced by others gaining value.

The second is to promise yourself that you'll stay in the fund come hell or high water.

There will be times when hell does seem to have come, and virtually all shares lose value at once.

But those who stay in share funds - sometimes through several years of down markets - always see their investment come right, and often soar.

If a share fund sounds too scary, go with a balanced fund. Its returns won't fluctuate as much.

On average, though, the long-term returns probably won't be as high as in a share fund.

Can you find the courage to put, say, $20,000 or $30,000 into one or other type of fund? If you stick with it for ten years or more, it's highly unlikely that you'll be disappointed.

Which share fund? My favourite type, an international index fund, would give you a really wide spread of shares, with low taxes and relatively low fees.

Good luck!


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 maryh@journalist.com. Sorry, but she cannot respond directly to readers.

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