Feature
The price is right
by Cameron Watson
For retired people, the financial priorities this year have to be generating income, protecting their capital, and then growth.
But for younger people looking to build capital, it could be a year of opportunity, both in property and shares. The next year or so could be a once-in-lifetime chance to pick up assets cheaply.
With sharemarkets down about 40% from their peak, share prices look a lot more reasonable than they did two years ago, and you can start accumulating assets at a reasonable level of comfort that in three to five years should be trading at higher valuations than today.
But the emphasis is on the word “start”. We have a view that markets will turn this year at some point. Even if the economic environment is poor, sharemarkets are forward-looking and will respond to any indication that an economic turning point may be on the way. But serious uncertainties and risks remain, and people should invest carefully and slowly.
Buying in instalments is one way of evening out the risks – for instance, if you have some capital that you want to put into shares, think about splitting it into four or five parcels and investing it over, say, 18 months.
Stick to some old-fashioned rules when it comes to choosing which companies to invest in: look for low-risk, high-quality, defensive businesses like supermarkets, power companies, utilities and healthcare companies, and those with a strong competitive advantage. We are also buying some overseas shares at the moment as a protection against a falling New Zealand dollar, and because they are so cheap.
Asian markets could hold opportunities this year – they have been pummelled in the economic downturn, but in many cases those countries don’t have the debt that the rich world has, and so they may recover more quickly.
Fixed-term interest rates in New Zealand could stay low for some time, which is a big shift from recent years when savers have been spoilt with high deposit rates. But for those who prefer this type of investment, the trick is to make sure you “ladder” your deposits – that is, a mix of short- and long-term deposits spread across the interest-rate spectrum.
But it is not ideal to be exposed only to the interest-rate market – we advise people to have a mix of cash, longer-term bonds, property and shares.
Many New Zealanders dislike the sharemarket because prices are volatile and haphazard. But if you shift your focus from the price and focus instead on income, equities become more tolerable. We did an exercise recently showing that a portfolio of blue-chip shares would have earned a gross dividend yield of 4.9% 10 years ago; today, it would be earning 13.7% on the original amount invested. It’s income growth like this that is the key benefit of investing in shares. Most people invest in shares to earn capital gains, but it’s better to focus on earning a good income stream from them: if dividends grow, then capital gains will follow.
If you are new to investing in equities, start small and get used to the ups and downs that come with shares, and keep well diversified to avoid any chance of disaster. The reality is that if you want to earn more than the Official Cash Rate, you have to take risk. But investment is not a team game – it’s your money and you are your own best defence.
Read lots about investing – I recommend anything by Warren Buffett (including his commentary in the Berkshire Hathaway annual reports, which are on the company’s website), The Intelligent Investor by Ben Graham (Buffett’s mentor), and One Up on Wall Street by Peter Lynch (a book about picking stocks).
Property is still a good asset if you buy at the right price, and prices are becoming more reasonable. Rental yields are also starting to improve, although they are still not as good as the dividend yields on shares. But the old shares versus property argument is misguided – the diversified investor should have both.
Cameron Watson is the chief investment officer for Abn Amro Craigs.
