Investors relying on interest rates to help fund their retirement are looking at alternatives to Government Guaranteed deposits “because term deposits just aren’t cutting the mustard anymore!” Hopefully the low interest rate environment will work for some aspects of the economy, but it is hurting many who are dependant on a secure return to provide for their living costs.
There has been some comment suggesting that investing for a living now has become more risky. Bank term deposit rates have virtually halved in the past 12 months while our cost of living has not, which is prompting some to say that the response people have to make is to invest in greater risk to make ends meet. The response from many investors is likely to be;
“I took on some risk two years ago – now most of my wealth is either gone for ever, frozen or being paid back at a rate that may mean I am dead before I see it again.”
A lot of people have played the risk game, the goalposts have moved and now they do not know what the answers are. The reality is that many people unwittingly took long-term style risk with money that they needed in the short-term. Now there is a suggestion that they have to play the risk game all over again.
“Over my worthless debenture certificates!” is the cry from many.
If we liken investing to playing rugby or football, we could all agree that the goal posts have shifted . . . dramatically, but does the right response need to be equally dramatic? While the movement in the goalposts presents challenges it also presents opportunities for many New Zealanders. More importantly, it also requires a change in approach.
An example of opportunity, or “risk,” is the NZX purchase of Country-Wide Publications (CWP). The perceived appropriateness or inappropriateness of the purchase is not a comment for this newsletter, but what is clear is that the NZX is looking at the purchase to enhance its profile and its profits – and both of these things in themselves are worthy aspirations.
However, I will comment on investment in risk and will use the NZX purchase of CWP for illustration.
In anyone’s language, the NZX is assuming some risk with the purchase. The print media world-wide is experiencing catastrophic results. Revenues are being decimated through a loss of subscriptions and advertising. This loss in revenue is flowing through to their bottom lines. The losses are longer than international telephone numbers.
While there is no doubt that the NZX knows this, I think their vision for the purchase is a long-term play. They are playing the waiting game. The more time you have, the more able you are to assume risk provided you understand what you are taking on. This means that if the goalposts move, you have time to recover – provided the final whistle has not been blown and you have not lost everything.
However, if you have a short timeframe in which you are likely to need your money, you need to play it safe. The Crusaders do this if they are up with 10 minutes to play until the end of a game; they hold onto the ball, play terribly boring rugby, yet win. They play it safe. They hang onto the ball as if it were a gold nugget. A loose pass to a flighty first-five-eighth could undo seventy minutes of toil. I seem to remember an All Black World Cup game with this story line . . . and we did not live happily ever after.
The question on everyone’s lips is “what is a short timeframe?” for investments. That is a matter of perception and individual circumstances – and on this too the goalposts have moved. Five years ago, “short” may have been defined as two years. I think it is arguable that today five years may be considered “short”.
What this means is that investing for a timeframe of up to five years needs to be low risk – it needs to be safe. You need to hang onto the ball and play a boring investment game. A poorly understood investment to a flighty fund may undo 70 years of toil! I believe this is one of the things that the “crunch” has done – it has altered investment timeframes; it has moved the goalposts.
The challenge for most people though is that while they may be able to put five years worth of spending aside (and invested in a very low risk manner) to meet their short-term spending requirements, most New Zealanders still need to ensure the spending power of the capital they have isn’t eroded over the long term by inflation.
This then is the dilemma – New Zealanders have competing pressures to provide for their short-term timeframe such that it isn’t at risk – but they need to take some risk if they want to ensure they don’t outlive their money.
Yes the goalposts have changed – but the only way to deal with it is to recognise that we have different goalposts for our needs over the short-term to those goalposts for our needs over the long-term. With this change in approach we can invest specifically to each of our unique needs. Understanding how each need can be satisfied through appropriate investments can help you successfully kick the goals that will help you through these uncertain times.
The reality is that goalposts move all the time – with investing they always have. The right response is to look at your approach to make sure your goals are reached. Blindly taking on more risk may not be the right response, but understanding your options is a great start and I look forward to helping you with this.
Peter Curnow is an Adviser with Searells Financial Services Limited. A copy of his Adviser Disclosure is available free of charge upon request.
This article is general in nature; readers should seek advice prior to acting in reliance on any of the matters discussed. Neither Searells Financial Services Limited nor any person involved in the production of this newsletter accepts any liability for any loss, damage whatsoever that may directly or indirectly result from any opinion, information, representation or omission, whether negligent, or otherwise.
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