An exceptionally unlucky reader
International index funds, a favourite long-term investment of mine, don’t look good to one reader.
“I bought about $2000 worth of WiNZ in 2000,” he writes. “They are now 27 per cent lower (have been for quite a while). Fortunately for me it was not a huge amount.
“Twenty years is a long time to wait for the fund to claw its way back up. Hopefully all the investors in index funds can wait that long!”
Index funds invest in the shares in a sharemarket index. For WiNZ, which is run by AMP Capital Investors, the index covers 985 of the world’s largest companies.
And that index — and any other international share index expressed in New Zealand dollars — had an extraordinarily bad run from August 2000 until February 2003. In that period:
- Global share prices plunged, sending the WiNZ index, including dividends and expressed in the local currencies of the different shares, down about 47 per cent.
- The New Zealand dollar rose 12 per cent. And whenever the Kiwi dollar rises, international investments expressed in New Zealand dollars fall.
- As a result, the value of WiNZ units, including dividends, fell 59 per cent (or 30 per cent a year).
The saddest part is that our reader and some other New Zealanders had presumably watched from the sidelines while the opposite happened in the late 1990s.
From the WiNZ launch in August 1997 to August 2000, international shares soared and the Kiwi dollar fell, boosting WiNZ units a stunning 35 per cent a year.
When the dream run turned into a nightmare, some WiNZ investors committed one of the deadly sins of share investing. They bailed out when the going got tough.
I’m glad our reader isn’t one of them. If he has been watching closely, he will have noticed that, since the 2003 trough, the value of his WiNZ units including divis has climbed again, by 59 per cent (14 per cent a year).
So he’s been through a 59 per cent fall, then a 59 per cent rise. Unfortunately, though, that doesn’t bring him back even, because the rise started from a lower base.
To explain this, let’s look at a simple example. If the value of a $100 investment falls 50 per cent, it drops to $50. If it then rises 50 per cent, it will grow to just $75.
Nevertheless, WiNZ’ recent growth has been healthy. And over the whole period since 1997, the unit value has grown 5 per cent a year — not too terrible given the 2000–03 plunge.
Nobody knows where it will go from here. Forecasting share returns is a fool’s game. But I would be very surprised if it takes 20 years to recover.
Generally speaking, it’s unusual for a share fund investment to lose money over ten years. Because our reader bought at a peak, he might be unusually unlucky. I would still recommend that he sticks with his investment.
His experience, by the way, underlines the advantage of drip feeding a regular amount into a share fund. Sometimes you buy expensive units; sometimes cheap ones. And you get more units when they are cheap, lowering your average price.
I’m not saying that, if you have a lump sum, it’s a good idea to drip feed it. As long as you’re prepared to hang in for the long haul, you might as well invest the lump sum right away.
But if it suits you to drip feed out of your income, you won’t be hit as hard when the market falls.
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.