Heart set on leaving the big city
Keen on a move to Whanganui? Now might be the right time
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.