Sharesight Blog

Calling all Share Clubs

Posted by Tony Ryburn on April 9, 2008

I frequently bemoan the fact that New Zealanders are such poor share market investors. This deprives them of what is probably their best opportunity to generate superior long-term investment returns.

People often respond by saying they would like to invest in the share market but do not know where to start. One way to dip your toe in the water is through a share club. Share clubs offer an excellent learning environment and often draw together people with a wide range of skills and experience.

If you manage a share club or are planning to start one, please contact us and ask us how Sharesight can help. Sharesight is ideal for share clubs because it greatly simplifies the administrative work load of running a club.

Furthermore all members can monitor the portfolio in which they have invested by being given read-only access through Sharesight’s portfolio sharing system. This means they are kept fully up to date on every aspect of the portfolio’s performance with no effort required by the club.

Aussies are richer than us but are they smarter?

Posted by Tony Ryburn on February 25, 2008

Maybe like me you think this is a pretty facile question but this will not stop comparisons between us and the Aussies – especially as the election draws nearer. There is no shortage of opinions on why the Aussies are ‘richer’ than us but I have not heard of anyone who has dared to suggest they are smarter – until now.

I believe a significant reason why Australia outperforms NZ economically is that Australians are much more actively engaged in their share market than we are. There are 7.3 million Aussies who own shares. This is around 10 times the number of share-owning New Zealanders in a country that has only 5 times our population. And each Aussie invests far more on average than we do. As I noted in a previous blog, history shows that in the long run shares provide the best return so the Aussies’ willingness to invest in the share market creates a significant win/win/win for them.

The 7.3 million Aussies and their families who own shares win. Australian companies also win because the high level of share investment provides the equity that helps fund the rapid growth many of them achieve. And through this growth the Australian economy wins as well.

This makes the Aussies richer but does it mean they are smarter? Clearly, at least when it comes to the question of share ownership, the answer is a resounding “YES”. No ifs, no buts, no maybes, when it comes to understanding the value of investing in their share market Aussies are smarter than us -by about 200%!

I have not got time to discuss all the (spurious) reasons New Zealanders raise for not being more active share market investors. However one look at the graph below will go a long way to persuading you that whatever the reasons are, they simply do not stack up. I know the graph is 2 years out of date but this does not change the long-term story it tells. If the last 2 years were added the graph would show a further 18 months of rapid share market growth followed by a significant decline in the last 6 months.

The graph shows clearly that shares are more volatile and there are periods when you can sustain significant paper losses, but overall you are likely to end up well ahead if you take a long-term view. It’s true that history is no guarantee of future performance. But the wisdom of investing in the share market is supported by over 100 years of history and, in a world of uncertainty, I reckon that’s as good as you are likely to get.

Graph taken from publication by ING Australia. Data sources: ABN Amro, Reserve Bank of New Zealand, Quotable Value, Bloomberg.

Returns shown are in New Zealand dollars but do not take into account taxes, fees or inflation.

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Diversify or Bust?

Posted by Tony Ryburn on February 11, 2008

In my last blog I suggested that a lot is made of the merits of diversification without any real analysis of the costs and benefits. There often seems to be an assumption that more is better when it comes to diversification. I suggested that beyond a certain point, diversification is likely to impede, rather than contribute to, superior returns.

Investors who place a significant proportion of their savings in shares are often more diversified than they think. They should not allow themselves to be railroaded or frightened into diluting their returns by diversifying further into lower yielding assets.

For one thing, if they have followed the old adage of getting rid of their mortgage before they start saving seriously, they are likely to already have a significant investment in residential real estate.

Secondly, shares in themselves are an excellent way of diversifying across a range of different companies operating in widely varying sectors such as infrastructure, manufacturing, retail, tourism, mining, telecommunications etc. It is easy to invest in Australian as well as NZ shares so you get some country diversification too.

As an aside, many people have lost money in several different finance companies recently. No doubt they were heeding the call to diversify when, in reality, they were doing the opposite – investing in similar companies all in the same sector.

So my contention is that people with a freehold home who invest a significant proportion of their savings in NZ & Australian shares can be adequately diversified. And they are likely to end up with a significantly larger retirement nest egg than if they had diversified into other, historically lower-yielding, assets. The only major rider is to only invest funds in shares that you are confident you will not need in the short or medium term – say within 7-10 years. That way you minimise the risk that you will have to sell your shares before they have been able to generate the higher returns you want.

As a final word on diversification let’s say that 10 years ago you decided to diversify away from shares by placing some funds in an ANZ term deposit (unsecured). I’m not sure what your average interest rate over the last 10 years would have been – let’s be generous and say 7% p.a. What I can tell you (by checking it out on Sharesight) is that if you had bought ANZ shares 10 years ago instead of making that term deposit, your return would have been 25.23% p.a!

Makes you think doesn’t it?
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A copy of a disclosure statement for Tony Ryburn and Sharesight is available here. This is provided in order to comply with our obligations (if any) under the relevant legislation and is not a representation that either Tony or Sharesight is an investment adviser.
Nothing contained in this blog is intended to be investment advice and neither the writers nor Sharesight accept any liability for reliance on information or opinions contained in this blog.

Do you need to diversify your investments?

Posted by Tony Ryburn on February 1, 2008

An article in the Dominion Post on 29 January said “Diversify and beat the retirement cash blues”. It went on to advise that “an effective portfolio is well diversified across different asset classes – cash, fixed interest, property and shares – and countries”.

In my view diversification to that extent is more likely to create retirement cash blues than beat them and would not result in a very effective portfolio. For one thing it is not practical for most investors to diversify to the extent recommended unless they invest in managed funds. And the long-term performance of almost all managed funds leaves a lot to be desired. Even a portfolio of randomly selected NZ and Australian shares is likely to out-perform most managed funds, particularly when their fees are taken into account.

Shares and property consistently outperform cash or fixed interest on a long-term basis (and retirement saving is a long-term project) so why would you want to erode your higher-earning share portfolio by diversifying into fixed interest? There are three main reasons often put forward.

First, diversification allows you to spread risk. The hope is that any poor performance will be confined to a small part of your portfolio.

The second reason has to do with liquidity risk. If you need your money urgently, will it be available when you want it and without suffering a loss or an early repayment penalty?

And finally, diversification reduces volatility.

These sound like good reasons to diversify. But are they? The problem with diversification is that while it can limit your losses, it can have a far greater limiting effect on your gains. It dumbs down your investment performance to a low average. As DIY investors we can do much better than that. Remember, the worst you can do is lose 100% your money, but on the other hand the share market gives you plenty of opportunities to earn far more than 100%.

Many people lose sight of the fact that the primary objective of a long-term savings plan should not be to reduce volatility or the risk of loss, but rather, to maximise returns.

There is another problem with diversification. It works on the premise that if one asset class is doing poorly this will be offset by others in your portfolio doing well. Unfortunately the opposite is more likely to be the case. In the last 12 months people have lost money from fixed interest debentures in finance companies and a decline in the share market and property prices are widely tipped to take a tumble as well.

So here’s the big question: Is there a way for the average DIY Kiwi investor to deal with diversification and maximise returns? Can you have your cake and eat it too? I believe you can. I’ll explain how in my next blog post.

A copy of a disclosure statement for Tony Ryburn and Sharesight is available here. This is provided in order to comply with our obligations (if any) under the relevant legislation and is not a representation that either Tony or Sharesight is an investment adviser.
Nothing contained in this blog is intended to be investment advice and neither the writers nor Sharesight accept any liability for reliance on information or opinions contained in this blog.

Should I Sell My Shares?

Posted by Tony Ryburn on January 28, 2008

There are good reasons for some overseas Banks and others to sell out of the share market at present. It’s not because they fear a US recession – they need the money! But that is no reason for private investors to follow suit.

I have had a number of friends ask me recently whether they should bail out of their NZ and Australian shares. Today I received an email that said “Gawd, what do you think of the share market?”

My response is that I think the same about the share market as I always have. It goes up and down – sometimes fast! I don’t really care because I know big falls will occur from time to time and that growth the rest of the time will more than offset them.

I’m in there for the long haul. There are two reasons for this. Firstly, history shows that in the long run, shares give the best returns. Secondly, trying to make money on a consistent basis by buying low and selling high is a recipe for disaster for all but a few skilled (lucky?) operators.

For we lesser mortals this is what usually happens if we don’t take a long term perspective: The market falls, we panic and bail out, usually after most of the damage has been done. The market rises, and we are not there to reap the benefit. Nice one!

The trick is not to invest money in the share market that you know you will need for another purpose at a specific future date. If that date coincides with a sharp drop in the market you will be in trouble.

Many people have only a hazy idea of the return on their shares and this leaves them vulnerable to being panicked by media hype about falls in the market. You need to factor in the impact of dividends and calculate the result on an annualised basis. If this sounds daunting help is at hand. It is easily done in Sharesight and you will get a wealth of other useful information as well.

If you don’t already have a Sharesight account, sign up today for a free trial, or check out the video tour to find out more.

A copy of a disclosure statement for Tony Ryburn and Sharesight is available here. This is provided in order to comply with our obligations (if any) under the relevant legislation and is not a representation that either Tony or Sharesight is an investment adviser.
Nothing contained in this blog is intended to be investment advice and neither the writers nor Sharesight accept any liability for reliance on information or opinions contained in this blog.