This article was published on 25 April 2006. Some information may be out of date.

Shares easier than reader thinks

It’s like a red rag to a bull. A paragraph in a reader’s email started, “Without getting into the share v property argument…” But why not get into it? After all, it’s at the very heart of most New Zealanders’ thinking about long-term investment.

The reader, a mortgage broker, goes on to say, “I believe it is good for people to have a dabble in shares with spare cash but use property as their main retirement plan, even if they go hard out paying off just one rental property.

“It’s all very well saying shares have increased in value over a long period in time. But there would have been plenty of stocks that went down, whereas most if not all property has risen in value.

“Your shares will only increase in value if you buy the right ones, something most people won’t have the money or know-how to do.”

He’s right, of course, that shares are more likely to lose value than properties — although house prices in some parts of the country they have fallen over the long term.

What he ignores, though, is a key advantage of shares: It’s much easier to invest in many shares than many rental properties.

And that diversification reduces risk. When some shares fall, others rise. What’s more, over time many more shares rise than fall, pushing up the value of portfolios faster than property, on average.

But what about the emailer’s next point, that you need to know which shares to buy?

You don’t! That’s another beauty of shares.

Broadly speaking, shares are priced about right, given what is known about each company at the time. If the experts — who trade shares for the big institutions — think a share is cheap, they will rush to buy it. That demand will push the price up. If they think it is over-priced, they will rush to sell it, pushing the price down.

The rest of us can bludge off their work. Theoretically, at least, we can buy any share chosen at random, knowing it has as good a chance of doing well as any other share.

In practice, this doesn’t work perfectly. The market is not completely efficient. But if you buy a wide range of shares the under-priced ones should offset the over-priced ones.

And there’s an easy way to buy that wide range, without worrying about which companies to invest in. Use a share fund.

The funds I like best are index funds, which hold all the shares in a sharemarket index. They are cheap to run, so their fees are lower than other share funds. And over most periods their after-fee performance is above that of the average share fund.

Our emailer writes about people being short of money and know-how. Well, an index fund investment requires a lot less of either than a property investment.

Finally, I disagree with his opening statement, that it’s best to concentrate mainly on property. Most New Zealanders own their own home, and that already puts them too heavily into that sector.

Continuing house price rises have made everyone complacent. But many other countries have seen sustained house price declines, and there’s no magic reason why we should be different. The day could well come when those with most of their savings in property are hit hard.

With shares, not only are you in a different type of asset from your home, but you can spread your money over different industries and different economies, making it much less likely the whole lot will plunge at once.

All that and higher average returns, too!

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.