This article was published on 22 February 2005. Some information may be out of date.

Research shows how to invest in shares

Pictures may speak louder than words, but numbers speak loudly too at times. Some recent research shows, numerically, why it makes sense to:

  • Stick with share investments when they lose value.
  • Invest in both New Zealand and international shares.

The research covered the 120 quarters of the last 30 years, spanning several share booms and busts.

Looking first at international shares, as represented by the MSCI hedged index, share values fell in 34 of the 120 quarters. Putting your money in shares for just three months is highly risky.

And while most of the losses were less than 10 per cent, nine were bigger than that.

“When a quarterly return of minus 10 per cent or more occurs, we should not be surprised. It will happen, but not often,” says SuperLife, the Auckland super scheme and financial services company that did the research,

Negative returns “are part of the investing process for an investor who wants a return better than that available from cash over the long term.”

The good news, though, is that more than half the negative quarterly returns were followed by positive returns the next quarter. Things often turned around fast.

And only once in the 30 years were there more than two negative quarters in a row.

The findings were similar for unhedged international shares, which had negative returns in 32 of the quarters.

New Zealand shares — measured by the NZSX40 — fared a little worse. There were negative returns in 39 quarters. And it was quite common for shares to fall for two quarters in a row.

Again, though, only once in the whole period did New Zealand share values fall for more than two consecutive quarters.

The message is loud and clear: If your investment in a share fund or diversified share portfolio loses value during a quarter, hang about. It’s quite likely to turn around in the following quarter, and highly likely in the following six months.

SuperLife also looked at the degree to which the New Zealand and international markets move together.

It found that both markets reported gains in 65 of the quarters — a bit more than half the time.

But the number of times they both reported losses was a surprisingly small 18 out of 120 quarters. An investor in both markets suffered quarterly losses in both investments only 15 per cent of the time.

In the remaining 37 quarters, when one market fell the other one rose.

The common “wisdom”, that the direction of the New Zealand share market is largely affected by what happens in global markets, seems not to be so wise.

And that’s great news. By investing in both New Zealand and international shares or share funds, you can considerably reduce the chances that the value of your total portfolio will fall. And when it does, the fall will be less dramatic.

You’re reducing risk without reducing your expected return. That’s the beauty of diversification.

Enough on losses! After all, the quarterly gains vastly outnumbered the losses. And when it comes to big gains, New Zealand shares shone.

In 17 of the 120 quarters, local shares gained more than 15 per cent — a super jump over just three months.

For hedged international shares, that happened in 8 of the quarters and for unhedged it happened in 13 of the quarters.

SuperLife notes that these conclusions are based on history, and nobody knows what the future holds.

“However, we see few reasons why positive and negative returns will not occur with the same sort of frequency in the future that they have in the past.”

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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.