Spread your money — but not that far

Investing in a few funds is good, but juggling 30 of them is plain crazy

Q: I recently sought some financial advice for an $800,000 investment from a fees-based adviser who did ask all the right questions.

Her suggested portfolio covers all the asset classes — international equities, property, shares etc — but within each asset class she has suggested six to seven funds, none of which are index funds. There would be roughly 30 different funds to spread the investment around.

Is there such a thing as too much diversification? And does this mean that I would be paying fees to 30 different fund managers?

A: Talk about “from the sublime to the ridiculous”. This is diversificraziness!

Let’s give the adviser some brownie points for charging you fees. I think that’s the best way to operate. Advisers who offer a free service are usually rewarded instead with commissions from the investment managers they place your money with. Will they put your money in the best place for you, or where the commission is highest for them?

Mind you, some advisers receive both fees and commissions. Always ask for a commitment, in writing, that an adviser’s only payment comes from you.

Even if your adviser is “fees-only”, I wonder if she is trying to justify a higher fee by making an unnecessarily complicated plan for you.

If you were investing, say, $10 million, it would be hard to justify using more than four or five funds. With your amount, I would suggest a single broad-based share fund — with shares in many countries and industries — for the money you don’t expect to spend within 10 years.

For money you want to spend sooner, a diversified bond fund would be good. And for short-term money, a cash fund. You can get all the diversification you need by making sure each of the funds invests widely.

On fees, yes, you would be paying 30 different managers. And if their fee structures include a flat fee as well as a percentage fee, you would pay more in total than if you are in just two or three funds.

And that’s not all. Just keeping track of 30 funds could be nightmare. Maybe your adviser plans to do that for you, to “justify” considerable ongoing fees.

Then there’s the absence of index funds. These almost always charge lower fees than actively managed funds, and research shows that on average their long-term returns are as good or better — especially after you take their lower fees into account.

You might want to ask the adviser about that absence. Then again, you might want to just give her a miss. I certainly would.

Feeling cynical

Q: In earlier years my late husband and I employed a financial adviser who I held in high esteem and continue to do so, though I no longer employ him.

Each time we met he was anxious to discover the amount we were holding in cash — at the time about $400,000. Being somewhat cynical, I often felt that he wanted that amount to be available for investment — thus increasing his annual fees.

We were happy to have that amount available in bank deposits. My husband was 13 years older than me and I did not want all our funds tied up. I wanted money available to indulge his hobby, and as years rolled on some fairly lumpy amounts were expended to cover such costs.

I felt an earlier adviser (female) often recommended moving funds around more to justify her fee than because it was a smart move.

As an aside, when we had our meeting with her she addressed any questions to my love, who would immediately turn and ask me. Sheer stupidity — needless to say our relationship with her was of a temporary nature.

A: It sounds as if your cynicism is justified with both advisers.

Building on what I said above about adviser fees, I think it works best to have an adviser who charges an hourly rate, like an accountant or lawyer, rather than a percentage of your investments. That removes their incentive to bring more of your money under their control.

On your earlier adviser trying to justify her fees by moving money around, the adviser in the above Q&A may well be planning to do that too. If your money is invested properly to start with, it shouldn’t need to be moved much at all, except to reduce risk as you approach spending time.

If an adviser suggests you move your money in response to market trends, I suggest you sack them. Your investments should be able to weather downturns.

That’s shocking that your adviser addressed only your husband. From a woman too! If you had been less knowledgeable about money — which it seems was not the case — that would actually have been all the more reason she should have been addressing you more, not less. While we’re discussing sexism, read on.

Does sexism pay?

Q: Interesting comment last week about DGL.

Mr Henry’s comments about Nadia Lim were appalling, but I am afraid I take a more materialistic view.

The share price has plunged, it is still a sound company, when the moralising has subsided the price will recover so I may as well take advantage of an opportunity.

I realise that many will be disturbed by such a cynical and materialistic view, but buying and selling DGL shares will have no effect on Mr Henry.

A: First, other people’s trading of DGL shares will indeed affect CEO Simon Henry. He owns 57 per cent of the Australian chemicals company. Your purchases will help push up the value of that holding, even if only minutely.

Second, research shows that companies that get their culture “right” tend to be more profitable.

It’s intuitive really. If a CEO is sexist he — it would rarely be she — is likely to miss out on the contributions women could make to the company. Many won’t work there, and those who do are less likely to be highly productive and forthcoming with ideas. Add racism to the mix and the CEO is missing out on the contributions of perhaps two-thirds of the population.

You’ve also got to question the judgment of someone who makes unwise comments to a reporter. How clever are they in their other decisions?

And depending on what the company does, it could lose customers, and possibly even suppliers, if the boss makes unsavoury comments.

Finally, there’s the question of your standards. If you are happy to profit from an incident like this, that’s your choice. Consider yourself told off!

Landlords v owners

Q: I just loved every word of your response to the landlord last week. Among your many wonderful points I particularly like the one that highlighted that some landlords think they are doing the world a huge favour by buying up and renting out houses when, as you said, if they sold, a first home buyer might be able to afford it and no longer need to rent. And in any event the house would still be there.

We have many friends who own rental properties and feel that they are doing people a favour. Yet if they hadn’t overbid that person at auction, inflating the price, that person would have their own house by now. A: Glad you liked last week’s Q&A — to which I’ve had no responses from landlords, to my surprise.

The role of auctions in all this is interesting. Read on.

Pumped-up property

Q: Economists like to cite interest rates, new house builds and immigration to explain the insane run-up in NZ house prices in the past few years. While these are important, I think

economists underestimate the influence of “bad actors”. In my opinion, the recent NZ housing market had all the hallmarks of a classic “pump and dump” scheme. For example, if you were an investor who owned say, 20 properties, there’s an incentive at auction to bid the price up past any realistic value, since the value of your whole portfolio will commensurately increase. I contend that the overwhelming prevalence of auction sales in New Zealand compared to overseas supports this observation.

Well now it appears we’re into the “dump” stage of this cycle, and I predict the crash in home values during the next few years will exceed the experts’ already alarming predictions.

Are there mechanisms to prevent manipulation of our housing market like we’ve just seen? I would presume similar behaviour in the stock market would be severely punished.

A: For the sake of other readers, pump and dumpers buy into a share, say, and then strongly recommend it to others using false information. Other people’s purchases then pump up the price. The P&D brigade then dump at the higher price. This is unlawful market manipulation.

But is it happening in the housing market?

“There are two key problems with this person’s argument,” says independent economist Tony Alexander. “If an asset is pumped then dumped its price collapses and stays down. House prices have risen 7 per cent on average per annum since 1992, and falling prices now are a simple correction to a pandemic surge driven since April last year by owner-occupiers, not investors.

“Second, there is no dumping by investors. My monthly survey of existing property investors shows 65 per cent plan holding for at least 10 years or never selling. Twenty per cent of investors in April said they plan selling in the coming year, down from 27 per cent in January.”

He backs this up with results from two other surveys, which also show decreasing numbers of property investors planning to sell.

“No dumping is occurring — not with rents soaring, and construction costs escalating still (new insulation costs now). The alternatives of shares (down 20 per cent for some indices), commercial property (very low yields, specialised) and bank deposits (strongly negative returns after inflation and tax) are unattractive for most.

“House prices are falling currently because of a withdrawal of buyers, not a wave of sellers,” says Alexander.

Share clubs

Q: Your recent letters about share clubs brought back some memories that I would like to share with you (pun not intended).

In the mid-’80s a share trading club was established at my work. We put in a given amount of money each month and we received advice from a retired sharebroker I’ll call Bill.

At every group meeting, Bill would present recommended best buys. I can still remember the graphs on which he would plot the prices of those shares — hand drawn on blue A3 graph paper with copious amounts of white correction ink. After discussion, we would not always decide to buy his top pick, which I think irked him, but that was our right.

Once we had accumulated a portfolio that was worth a bit, some colleagues became keen to sell up. So Bill was instructed to sell our entire portfolio. This must have infuriated him because at the next meeting he dramatically announced that he was withdrawing his services. He “didn’t want anything to do with losers” (I have never forgotten those words). But the shares were sold and we all ended up with a tidy sum.

By then it was 1987 and — add drumroll here — six months later the sharemarket crashed!

Our decision had everything to do with complete and utter luck, although some people such as Rob Muldoon had started to warn that the share market was overheating to the point where a crash would be pretty well inevitable. Maybe that was in the back of our minds.

Anyway, we never heard from Bill again. I should add that from the start, he insisted that we keep his commissions off the books, something none of us felt comfortable about but reluctantly agreed to. At times I’ve wondered if the IRD ever caught up with him!

A: So do I. Thanks for a good yarn. Next week: a share club that welcomes new members.

Great Barrier talk

Everyone is welcome to a talk I will be presenting about Money and Happiness this Sunday at 5pm, at the Currach Pub, Tryphena, on Great Barrier Island. To book a $10 ticket, go to smallislandbigideas. co.nz

Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions 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. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.