NZ Herald 6 July 2019

AA sad story. And there’s not much you can do except sell the shares. Then perhaps use some of the money for a family dinner acknowledging your Mum’s good intentions.

You could of course keep the shares and hope their value will grow. But that’s just continuing a pretty risky strategy — investing in a single company.

Sometimes such a strategy works brilliantly. NZX says, for example, that if your mother had invested the same amount in Tourism Holdings — listed on the stock market in 1986 — it would now be worth close to $1 million with dividends reinvested. But you don’t want to know that!

Back in the 80s, there was no way to predict which shares would zoom and which would slump. And that’s still the case.

CDL has actually had a good run over the last ten years. With dividends reinvested, it has performed well ahead of the average top 50 share, says NZX — despite declining in the last 17 months.

But before 2009, it’s not a pretty picture. Last century, the company changed its name from Apex to Kupe Group to CDL. We won’t go into the whys and wherefores. But it’s interesting to see the journey of the share price.

The first available price the stock exchange has is $3.50 in June 1986. No doubt caught up in the mid 1980s craziness, the price rose to its highest ever, at $4.25, in the following couple of months.

But then came the 1987 crash and the long struggle back for many New Zealand shares. NZX says CDL shares were worth just 2 cents in August 1990.

By May 1997, there was a huge gain from that low base to 46 cents, but in September 1998 the price was back down at 14 cents. CDL took another hit in the global financial crisis of 2008, says NZX.

Through all that, your mother’s investment soared and dived — quite possibly without her realising. At least it didn’t disappear in 1990.

It sounds as if she got into the investment through an employee share ownership plan, with the shares probably offered at a below-market price.

It’s usually worth taking up those offers, even though typically you can’t turn around and sell the shares at a profit the next day because there’s a minimum holding period. The employer wants their employees to keep a stake in the company.

After the holding period ends, though, it’s wise to move the money to, say, a share fund — in or out of KiwiSaver. That investment will also fluctuate, but not nearly as much as a single share, because one share’s fall will be offset by another’s share’s rise. Your money won’t grow as fast as Tourism Holdings, but nor will it become worthless unless there’s an apocalypse. In the long run it will grow pretty strongly.

Unfortunately, it seems, nobody told your mother how risky a single-share investment is. If it had been just a small portion of her savings, it wouldn’t really matter. But it seems your Mum hoped it would turn into a significant legacy.

That didn’t work, but she has left you something else — a lesson about the importance of diversification. Raise a glass to her at the dinner!

AYou sound content, and justifiably. The truth is that you could have a pretty good retirement if you simply put your savings in bank term deposits and withdrew spending money whenever you wanted to.

But let’s do better than that. Apart from anything else, it would be great if you can leave some money to your charity.

The easiest way to organise retirement money is with managed funds. As of July 1, people over 65 have been allowed to join KiwiSaver, so you can use funds within KiwiSaver or outside it. But KiwiSaver funds tend to have lower fees and better communications.

First you should divide up your money, depending on when you expect to spend it:

• If it’s within the next three years, use a cash fund. I’ve written about these in recent columns. They have low volatility.
• If it’s in three to ten years, use a bond fund. This will usually deliver higher returns than cash funds, but there is some volatility.
• If it’s in more than ten years, use a share fund. The returns will be more volatile, but if you don’t plan to spend the money for a decade or more there’s time to recover from a share market crash. And the higher average return will give you some protection against inflation.

Every year or so, consider transferring some money from the bond fund to the cash fund, so you always have roughly three years of spending money in the cash fund.

However, your balance will sometimes fall in a bond fund. If that happens, perhaps wait a while to see if it rises again. This is why you have three years of money in cash — so you can be patient and flexible! But if all that is too confusing, just transfer some money each year.

You also need to gradually transfer money from the share fund to the bond fund. But again, I suggest you review the situation each year. If your balance has fallen over the past 12 months, wait. The next year, or the year after, your balance will probably grow. So catch up with your transfers then.

With this system, you’re not forced to cash in an investment that has recently slumped.

Another point: You can also gradually move money out of your share fund by not reinvesting dividends, but instead taking them as cash — as part of your spending fund. Some share funds will let you do this.

To choose a cash, bond or share fund, use the Compare tool on Sorted’s Smart Investor. I suggest you sort by lowest fees rather than returns — which change all the time.

To find cash and bond funds, look at Defensive funds and then “Mix Details”. Choose funds largely invested in cash or in bonds. Similarly go to Growth and Aggressive funds to look for funds largely invested in shares.

The topic of handling money in retirement is a big one. We’ll look at other aspects — including working out how much to spend each year — in the next couple of weeks.

Oh, and good on you for doing the charity work. I’m sure you would agree that it’s good for you as well as the charity.

AThe worry is not so much that the bankers weren’t in touch when the market dipped, but that they didn’t make it clear to you, from the start, that balances in growth funds fall every now and then.

In recent years these funds — which mainly invest in shares — have almost all done really well. But it’s bad news when investors don’t understand their volatility, and transfer to a lower-risk option when the balance drops, as you have done. That makes the loss real.

Anyone who realises they can’t cope with growth fund volatility is better to gradually transfer their money out. Move, say, a quarter now, a quarter in three months and so on — regardless of what’s happening in the markets. That way you don’t move the lot when prices turn out to be at their lowest.

It’s better still, though, to leave the retirement money you plan to spend in ten years or more in a growth fund, as explained above — if you can learn to accept the downturns. The funds always recover over time.

A couple more things:

• Don’t expect a conservative-plus account to grow at 9 or 10 per cent a year. The average is more like 3 to 5 per cent before fees. The recent return was unusual.
• It’s not wise to keep a close eye on returns. Whatever has happened lately will often not continue. If you set up your retirement savings as suggested above, you don’t need to watch closely.

Sorry to be negative, and thanks for writing.

AYes they do. And they include Warren Buffett, who became one of the world’s richest people through share investing. His advice: “Only buy something that you’d be perfectly happy to hold if the market shut down for ten years.”

The correspondent above would have done better if she had ignored market moves. Her growth fund has almost certainly risen since she bailed out.

Just make sure, though, that:

• You own lots of different shares, or a share fund investment, so you avoid what happened to the mother in our first Q&A.
• This is not money you want to cash up and spend in the short term.