Investment Research Group
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Other markets suffered heavy losses in 1987 and they recovered quickly, but New Zealand's wounded investors wallowed in misery and suffered more than most. The single biggest factor holding back investment in the New Zealand share market is that when we look back at the market index that existed in 1987, compared with the NZSX40 index that exists today (if you look hard for it), our share market is still some 15% below the level it peaked at in 1987.
On long-term charts, this would translate into the worst share market performance on the planet in the past 50 years, and it weighs heavily on the minds of older investors. But experts contend that the market that existed in 1987 created an artificial spike in the index. This is because massive corporations that were the creation of clever accountants who produced mountains of paper wealth through investment holding vehicles dominated the top ten companies. Most of these went bust in the crash.
This sort of company existed elsewhere in the world, but only in New Zealand did they so dominate the top of the index. When shares in a real industrial company crash because they are overvalued and the economy is heading for recession, those shares will eventually more than recover as the company trades its way back to health in the next upward cycle. The wealth fabrications that existed in 1987 couldn’t trade their way back to health because they weren’t traditional trading companies. Today, our index resembles that of other countries: Real companies producing real wealth.
Since 1987, our share market has produced very respectable returns. If you compare the gross performance of the New Zealand share market with Australia and Wall Street during the 1990s, it comes out well. New Zealand companies paid healthy dividends; US companies did not.
The bottom line is this: If you own property only, you are betting your future on a single asset class, and an illiquid one at that. If you keep you cash on term deposit, you have a dying asset, eaten up by inflation. The only solution is to invest in the NZ economy itself, and that can only be done through the sharemarket.
Direct investment in shares is an important retirement strategy, but it has to be approached with the aid of professionals. A private share portfolio is free from capital gains tax and free also of most of the fees involved in investing through a fund. If you insist on doing it yourself, stick to absolute basics and aim for a bullet proof portfolio.
In a long-term retirement portfolio, avoid all technology stocks. Invest only in companies that dominate their industry and are in recession proof industries. And don't invest in anything that flies (airlines), swims (fishing), grows (forests) or requires a high level of innovation to remain competitive (biotech company with a promised cure for dandruff).
With this conservative portfolio, you will not produce the highest returns available from the market, but you should produce very respectable returns, ahead of other asset categories.
