This article was published on 28 October 2006. Some information may be out of date.


  • A reader finds a flaw in my “avoid the rear-view mirror” argument. Or does he?
  • Would NZ’s tax revenue actually increase if we all invested offshore?
  • Inland Revenue says it can’t fix everything at once.

QI fully understand the point of your recent article, titled “Don’t glance in the rear-view mirror” — that it’s not a wise practice to invest in whatever did best last year.

However, the table of data that you present, showing annual returns on different types of assets, 1996–2005, does not support your point of view.

I ran a number of scenarios using your data. Each scenario assumed the investment of $1000 at 1st January 1996 with dividends / interest reinvested annually. Here is the result:

  • Starting with overseas shares and then, each year, looking in the rear view mirror and investing in the best performer in the prior year: $2989 at end of 2005.
  • Investment in property for the whole period: $2128.
  • NZ shares: $2127.
  • Overseas shares: $1799.
  • NZ bonds: $1606.
  • Cash: $1554.
  • Balanced portfolio with 20 per cent invested in each of the five asset classes: $1843.

Therefore, the “rear view strategy” is 140 per cent of the second best scenario and 162 per cent of the conventional wisdom of a portfolio spread over a number of asset classes.

AYou’re quite right. Over that particular period, rear view investing would have been best.

That’s not surprising, though. As my column said, “You might do well if you put money into last year’s best performer. But quite often you won’t.”

Looking at just one period in one country can be really misleading.

To quote from the column again, Australian researchers “assessed about 100 studies done in various countries over 20 years. About half the studies found no relationship between good past and future performance.

“In some other studies, there was some relationship, but usually only in the short term. If you invested on the strength of that knowledge, you would be moving your money around frequently.

“That would be not only time-consuming, but any gains you made from the strategy would probably be eaten up in brokerage, fees and possibly tax on capital gains.”

That’s something you didn’t allow for in your number crunching. And it makes a big difference to returns.

Over all, the Australians — and British researchers who did a similar study — concluded that past performance is not a useful guide for the future.

It’s cheaper, easier, and often more profitable to work out what is your best choice of assets for the long term and stick with it.

A couple of other points:

  • The period in question was an unusually volatile one for overseas shares. In many other periods they have outperformed property and NZ shares.
  • A balanced portfolio will always give only an average performance. Mathematically, it must.

    Many people prefer balance because the performance is much less volatile than if you concentrate on one or two types of assets, especially if they are shares and/or property.

    But those who can cope with some big negative returns will usually do better over the long term with just shares and/or property. And your “rear view” strategy almost always meant investing in shares or property.

  • The main point of including the table was to show that on four occasions in the last ten years the worst performing asset one year was best the next year, or the reverse.

    It was merely an example of what can happen, and not nearly enough data from which to draw conclusions.

Still, good on you for your challenge. There’s no predicting what readers will get up to!

QTax officials’ stated concern in your column last week over the need to ensure everyone pays for hospitals and schools is unbelievable.

Not only do we have a surplus of $11 billion in accounting terms (or $3 billion in cash, whichever you prefer), but, if extra tax revenue is the objective, then tax can actually be increased by encouraging New Zealanders to invest offshore.

How does this work?

If New Zealanders sold all their investments in New Zealand shares to foreign investors and invested all the money into international shares in Grey List countries, the government would still get all of the company tax paid by the New Zealand companies, as well as extra tax on the dividends received by New Zealand investors from the international shares.

This is a fact that officials have failed to grasp.

Finally, the apparent decision to limit submissions on the latest proposals to a privileged few shows an arrogance and disregard for democratic process only matched by the use of urgency in parliament to put right illegal election spending by retrospective legislation. Normal tax policy formation and legislative processes should be followed.

AStop! Let’s not get into election spending in this column. But I agree with you about the limited submissions.

And I like your argument that encouraging offshore investment would boost tax revenue.

David Carrigan of Inland Revenue doesn’t argue vehemently against it either. “He has a good point,” he says, but adds “in a make-believe world he’s right. But it only holds if we make unrealistic assumptions.”

Those assumptions are:

  • That foreigners invest in New Zealand companies via owning shares (called equity investing) rather than via lending the company money (debt investing).
  • That New Zealand companies earn all their income in New Zealand.

On the first assumption, the fact is that “around 70 per cent of the capital from offshore to fund our companies is debt rather than equity,” says Carrigan. Foreign investors receive tax advantages from doing it that way.

And when a New Zealand company pays interest on that debt, it can deduct the interest for tax purposes. In many cases, then, foreign investment in a New Zealand company reduces the company’s tax. So the government has less for hospitals and schools.

On the second assumption, some New Zealand companies, of course, earn money offshore. In that case, tax on the company’s foreign income is reduced to the extent the company is owned by foreigners.

Again, the more foreign investors there are, the less money there is for schools and hospitals.

This is a simplification of a complex argument, which economists frequently debate, says Carrigan. I should probably scatter the word “generally” throughout, to keep at bay those who will write to say, “Paragraph x is not always correct.”

Suffice to say that these things are often not as simple as they seem.

Speaking of which, another reader wrote about my statement, last week, that the UK doesn’t have dividend imputation.

“Most UK dividends do carry a tax credit of 10 per cent,” he said, adding that this credit used to be accepted in the same way as a New Zealand imputation credit, but no longer.

He added some fighting words: “This is further evidence that this Government’s tax policy I believe is driven more by spite and outdated socialist ideology than common sense. Witness for example the immediate introduction of a 39 per cent rate on principle rather than need.”

QYour commentator at the IRD, David Carrigan, contends a rationale for the tax is that there is no corporate tax benefit to New Zealand from an overseas share.

That is so, but many other categories of investment do not add to Government coffers at all (with offshore shares there is at least a tax on dividends) — ie holiday homes in the Gold Coast, investments in art/collectibles etc.

The real issue is the inequity of having one investment class singled out for special treatment, whether by a capital gains tax, taxed on a deemed return method or whatever. If it is deemed necessary to tax, then tax all assets on the same basis, not just shares.

There is a further issue and that is the exemption for those who own more than 10 per cent of an offshore company. That means that very wealthy investors owning a larger than 10 per cent holding in a Grey List country (and residing in New Zealand) will only be taxed on the actual dividends received.

This proposed tax is discriminatory. It is important for the country that all are seen to be equal under the law and that is not the case in this proposal.

A“It’s true that we don’t tax all income comprehensively,” says Carrigan. “I don’t know of anywhere in the world that does.

“But if we’re looking at investments that are broadly substitutable, New Zealanders could lend money to an offshore company, and they would then be taxed very comprehensively. If instead they buy shares in it, it seems reasonable to levy a reasonable level of tax on that.”

On Gold Coast property, he notes, rental income is taxable. “People may argue that the depreciation rate is still too high — although the rate has recently been reduced — but the income is still taxed.”

More generally, he says, “We can’t fix everything at the same time.”

Fair enough. But — in the interests of encouraging New Zealanders to diversify their investments — I do hope the government moves on quickly to look at such issues as the application of capital gains rules to rental properties.

On the 10 per cent issue, Carrigan says Inland Revenue is at the moment reviewing the taxation of controlled foreign companies, “which may have flow-on implications for those with corporate holdings bigger than 10 per cent. A discussion document is expected to come out later in the year.”

Who knows? The very wealthy might end up worse off than the rest of us.

No paywalls or ads — just generous people like you. All Kiwis deserve accurate, unbiased financial guidance. So let’s keep it free. Can you help? Every bit makes a difference.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.