NZ Herald 15 June 2013

AI like your conclusion, but I’m not happy with how you got there.

It is, indeed, a great idea to head off over the horizon with some of your investment dollars — and not just to Australia and the US, but to the whole world.

The clear advantage of this is diversification. As our table shows, when one stock market is not performing well, that will usually be offset by another market.

There are some years, such as 2008, when there’s no good news anywhere. But look what happened the following year — with Japan’s respectable 9 per cent performance the worst of the pack.

A couple of other things to note about the table — which includes all the big share markets plus Australia and New Zealand:

• New Zealand recorded the highest best returns, in the early1980s, and among the ugliest worst returns, in the 1987 crash. This suggests that our market might be more volatile than many others — at least back then.
• Sometimes a country stays “best” or “worst” for two or three years. But then we find a country switching from one extreme to the other, such as India from 2008 to 2009 and the Australia/China swap from 2003 to 2004. There’s no predicting share market trends.

The obvious worry about investing offshore is foreign exchange risk. But that can be controlled. See the next Q&A.

Okay, now for my concerns about your comments. It’s unfair to compare anybody’s investment performance with what turns out, looking backwards, to be a winning performance. It’s much harder to pick future winners.

Berkshire Hathaway shares have done brilliantly over much of the company’s history. But — and this is a key point — that doesn’t mean it will continue to be a good investment.

Because of Berkshire Hathaway’s great performance, many people have wanted to buy the stock, which has pushed prices up to around $114 for the B stock and an astonishing $170,000-plus per share for the A stock. Those prices reflect all the positive feelings about the shares.

But will they rise further? Or have investors over-reacted, and pushed the prices higher than they should be, so they languish for a while, or even fall? Just because Berkshire Hathaway is a great company doesn’t mean it’s not over-priced. Your extrapolation of recent performance over the next five or ten years is seriously misleading.

You seem to be also implying that the “better class of US stocks” will outperform New Zealand stocks. Sometimes they will and sometimes they won’t. When we compare New Zealand and US — or world — share performance over long periods, it’s actually remarkably similar.

It’s best, then, to have some money in offshore shares, but also some in local shares — partly to take advantage of dividend imputation.

The easiest way to invest offshore is in a diversified low-fee New Zealand-based fund that holds international shares. There are plenty of KiwiSaver and non-KiwiSaver funds that do that. The fund managers take care of tax. And if you die with money in the fund, it will be a lot less complicated for your estate than if you invest offshore directly.

AThe experts would debate the plausibility of the two scenarios — especially the first one. I can’t imagine the Reserve Bank or the Fed making such sudden drastic moves. But that aside, it’s always possible our dollar could fall quite fast for one reason or another.

First, though, we need to explain hedging.

In a hedged international share fund, the value of your investment is protected from fluctuations in the kiwi dollar. If the dollar falls — which makes the value of offshore investments rise — you miss out on that gain. But if our dollar rises — which means your offshore investments fall — you don’t suffer that loss.

However, in an unhedged fund like yours, investments rise or fall with currency changes. Sometimes this has a modifying effect. The currency movements might offset positive or negative investment returns. But if returns and currency changes both go the same way, you can do really badly or really well.

It seems that you realise that a plunge in the kiwi dollar would be great for you. Our dollar would be cheaper to buy, so if you cashed in your investment — bringing your savings back into New Zealand — you would get a lot more kiwi dollars.

On the other hand, if the kiwi dollar soared, you would end up with much less money. And it would be a big mistake to assume that won’t happen. Foreign exchange movements are even harder to predict than shares.

In a hedged investment, neither would happen. So your unhedged situation is not lower risk I’m afraid.

All of which leads to the question: Is it good to hedge international investments? I recommend hedging half your savings. Then whatever happens to our dollar, you’ll be half happy. It’s not as good as really happy, but it beats really sad.

By the way, I wouldn’t want other readers to take from your letter that I recommend that everyone saves in an international share fund.

Such funds often work well, but only if you don’t expect to spend the money for at least ten years, preferably longer, and if you know you won’t bail out when prices drop a lot — which will happen sometimes.

AAnyone can join KiwiSaver and get the $1000 kick-start, even if they’re in another super scheme.

Often — as in your case — the employer doesn’t have to contribute to KiwiSaver because they are contributing to your other scheme. But as an employee, you’ll have to put in 3 per cent for the first year, and you’ll receive a tax credit.

After the first year, however, you can easily take a contributions holiday, and renew that every five years. While on a holiday, you can contribute $20 a week and get the $521 tax credit. It’s a good idea. For more, see tinyurl.com/gsf-kiwisaver.