Heart set on leav­ing the big city

Keen on a move to Whanganui? Now might be the right time

Weekend Herald - - MARY HOLM - All NZ shares beat big­gest 50 shares

them­selves. Still, I doubt if such a tax would ap­ply to prop­er­ties al­ready owned when the new regime started — or if it did, it would be at a pretty low rate. I wouldn’t let this worry you. Would you be bet­ter off just con­tin­u­ing to save? This is an­other “no­body knows” sit­u­a­tion. But it feels to me, read­ing be­tween the lines, that you would like to buy in Whanganui. It would give you a grand plan. If you’ve got enough in­come — see the first bul­let point above — go for it!

I think you’ve got “sur­vivor bias” wrong.

The term usu­ally ap­plies when a re­searcher looks at, for ex­am­ple, ac­tively man­aged share funds ver­sus in­dex funds over the past 10 years.

The ac­tive funds ex­clude those closed down dur­ing the pe­riod be­cause they per­formed badly. So the av­er­age per­for­mance of the ac­tive funds is bi­ased up­wards.

This is some­thing ev­ery­one should watch out for. When an ac­tive fund man­ager — in­clud­ing many Ki­wiSaver providers — points to their great per­for­mance over time, they of­ten for­get to men­tion their dog funds ( no of­fence to ca­nines) that qui­etly dis­ap­peared. In­dex funds, on the other hand, don’t close be­cause of bad per­for­mance.

In the con­text you’re us­ing “sur­vivor bias”, though, the drop­ping of de­clin­ing com­pa­nies from a share in­dex is matched by the ab­sence of ris­ing com­pa­nies be­fore they are big enough to get into the in­dex.

For ex­am­ple, in the graph two weeks ago, we used the S& P NZX50 gross in­dex, which ba­si­cally cov­ers the big­gest 50 com­pa­nies. If De­clin­ing Co’s share value drops so it’s no longer in the top 50, and then it keeps drop­ping — per­haps to zero — you’re cor­rect that the sec­ond phase of that fall isn’t re­flected in the in­dex.

But, mean­while, the small Ris­ing Co has been listed on the mar­ket. Its share price has to climb a long way be­fore it en­ters the in­dex. And that spec­tac­u­lar rise isn’t re­flected ei­ther.

Our graph to­day proves my point. It com­pares the growth of the S& P NZX50 gross with the S& P NZX ALL gross in­dex, which in­cludes all the or­di­nary shares on the main stock ex­change.

The two move closely to­gether, be­cause the big shares dom­i­nate the All in­dex. But note the dif­fer­ence be­tween the two lines. In most pe­ri­ods the All in­dex grows faster than the NZX50. This is be­cause the smaller shares that it in­cludes tend to be higher risk and usu­ally bring higher re­turns.

The ab­sence of Ris­ing Co in the NZX50 un­til it’s big enough more than off­sets the ab­sence of De­clin­ing Co once it has dropped out of the NZX50.

Con­trary to what you say, the NZX50 doesn’t “look far bet­ter than the mar­ket re­ally is”. The NZX50 ac­tu­ally un­der­states to­tal mar­ket per­for­mance. On your other points: If mu­mand dad in­vestors don’t fol­low the mar­kets closely — if that’s a wise strat­egy any­way, which is de­bat­able — they can in­vest in an in­dex fund. They will ben­e­fit from broad di­ver­si­fi­ca­tion and low fees, and none of their hold­ings will go to zero. I’ve said over and over how im­por­tant it is for share in­vest­ments to be di­ver­si­fied and for 10 years or more. That way you don’t get burnt badly by a crash, as the mar­ket al­ways re­cov­ers. The first share bro­kers’ say­ing, about time in the mar­ket, is cor­rect. What’s more, it works much bet­ter to drip feed money into shares rather than try­ing to pick when to buy. But the sec­ond say­ing, about mak­ing the trend your friend, is dan­ger­ous. A trend can change at any time.

Where did this in­cor­rect no­tion come from — that has caught both you and our pre­vi­ous cor­re­spon­dent — about how good and bad per­form­ers af­fect the S& P NZX50 in­dex?

Any­way, I agree it would have been bet­ter to use the S& P NZX ALL gross in­dex in our graph two weeks ago, but we don’t have data go­ing back far enough. In­ter­est­ingly, as stated above, that would have made share per­for­mance look bet­ter.

You’re right that if we were do­ing a rig­or­ous anal­y­sis of rentals ver­sus shares, we should look at fees and tax. But, as I’ve said be­fore, there’s no good data on a typ­i­cal rental in­vest­ment.

Your men­tion of neg­a­tive gear­ing il­lus­trates that point. Some land­lords neg­a­tively gear — with rent not cov­er­ing all ex­penses — but oth­ers don’t. And some do it in a much big­ger way than oth­ers. Which is typ­i­cal?

Then you say “You just have to find the one ( or two) out­liers that had much bet­ter re­turn at a given risk.” If only that worked! In­vest­ing in funds with a great past per­for­mance is highly risky. Past top per­form­ers are quite of­ten poor fu­ture per­form­ers.

I like your idea of the $ 20,000 com­par­i­son — if we could all agree on as­sump­tions. But as I said last week, the re­sults would de­pend so much on which set of rea­son­able as­sump­tions are used.

More let­ters on shares ver­sus rentals next week.

Mary Holm is a free­lance jour­nal­ist, a di­rec­tor of the Fi­nan­cial Mar­kets Author­ity and Fi­nan­cial Ser­vices Com­plaints Ltd ( FSCL), a sem­i­nar pre­sen­ter and a best­selling au­thor on per­sonal fi­nance. Her web­site is www. mary­holm. com. 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. Send ques­tions to mary@ mary­holm. com or Money Col­umn, Pri­vate Bag 92198 Vic­to­ria St West, Auck­land 1142. Let­ters should not ex­ceed 200 words. We won't pub­lish your name. Please pro­vide a ( prefer­ably day­time) phone num­ber. Sorry, but Mary can­not an­swer all ques­tions, cor­re­spond di­rectly with read­ers, or give fi­nan­cial ad­vice.

Pic­ture / Wan­ganui Chron­i­cle

I am a 55- year- old teacher, but would re­ally like to do some­thing else and work part- time.

I live in an ex- coun­cil flat that, due to its cen­tral Auck­land lo­ca­tion, is worth $ 750,000. I have paid off my mort­gage.

Some friends are sell­ing up and mov­ing to Whanganui, and I am con­sid­er­ing it in the longer term.

I see a house to buy near the sea in Whanganui at $ 170,000. I have a $ 40,000 de­posit, and rented out it will bring $ 250 a week. I could af­ford to do this now.

I want to travel more and would look at mov­ing to Whanganui in about five to 10 years. I have some health is­sues — hip re­place­ments that will need re­do­ing — and I ex­pect that I will need to fund these my­self as the health sys­tem is un­der so much pres­sure.

Is it best to just save money and not buy a house?

Also, if a cap­i­tal gains tax comes in — which I ac­tu­ally sup­port — and I sold my Auck­land flat, that would im­pact on it I think.

Any­way, your thoughts would be ap­pre­ci­ated. I want to live my life fully now as I ex­pect my health to not be great as I age. Whanganui house prices av­er­age only $ 230,000, ac­cord­ing to QV statis­tics. of­ten than not, right. But some­times they can be badly wrong and the in­vestor loses. It is for the share in­vestor to ex­er­cise rea­son­able judg­ment and ques­tion their bro­ker about ways to min­imise their risks.

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