This article was published on 26 March 2011. Some information may be out of date.

Why a dollar in the hand is worth more

The recent attempt by Bernard Whimp to buy shares in half a dozen companies cheaply — and the Securities Commission’s response to it — is a good illustration of how a dollar now is worth more than a dollar later.

The big print in the offers, made by limited partnerships associated with Whimp, told shareholders they would receive more than the current price for their shares. But the small print said they wouldn’t receive full payment for up to ten years, and nor would they receive dividends in the meantime.

“This means that the offers are worth significantly less than may appear at first sight,” says the Securities Commission, which is taking action against the offers because they are misleading.

The commission points out that investors may never receive the full payment “if the offeror is unable or unwilling to pay at any time in the future.”

But its main concern is about what is sometimes called the time value of money. Let’s look at a simple example, of why receiving $1000 in ten years is worth much less to you than receiving $1000 now. There are two reasons:

  • Inflation. According to the Reserve Bank’s inflation calculator, on www.rbnz.govt.nz, what cost $1000 in late 2000 would have cost $1310 ten years later, in late 2010.

    That means that just to maintain your purchasing power, you would want at least $1310 in 2021. And given that inflation in the next ten years could be above the average annual 2.7 per cent of the last decade, you would probably want more as a buffer.

  • Use of money. Even if you knew inflation would stay at zero throughout the period, you should still want compensation for getting the money later. With $1000 now, you have the options of spending or saving — and it’s always good to have a couple of options.

    If you chose to save the money, you would expect to earn a return — a reward for giving somebody else the use of your money. The return might be compounding interest or, in the case of shareholders, dividends and a gain in the share price.

How much the two factors — inflation and use of money — add up to depends on your assumptions about the rate of inflation, interest, dividends and the growth in share prices. But it wouldn’t be unreasonable to ask for $2000 in ten years instead of $1000 now. That assumes a 7.2 per cent return each year, including inflation — which sounds about right for an optimistic shareholder.

FOLLOW-UP

In my last column, I said that in the US you can donate tiny, nuisance-value shareholdings to charity. But “nobody has done this here, to my knowledge.” Wrong!

A reader emailed that when his father’s estate ended up with 166 shares in a company, “the sharebroker advised there was no market for them.” But somebody suggested Shares for Good.

Run by sharebrokers JBWere, Shares for Good accepts donations of small — or large — shareholdings. To give New Zealand listed shares, fill out the online form on www.sharesforgood.co.nz. There is also a link for donating Australian shares.

The proceeds from selling the shares are distributed to several charities listed on the website, and donors are invited to suggest other charities. JBWere covers the selling costs, so the full proceeds are donated.

“Similar overseas experience has shown substantial amounts of small parcels of shares are out there,” says Jim Whineray, head of JBWere’s philanthropic services. “and many of those holders have donated via similar mechanisms.”

Donations to Shares for Good are generally tax deductible, says Whineray. You will be issued a receipt.

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.