Huljich Wealth Management

[Arthur]

Surely you jest Peat when you suggest that it be compulsory that we all have a high long term risk, low short term risk Kiwisaver investment. The Kiwisaver investment is long term and most of the money is drip feed in. Have a read up about "dollar cost averaging".

Plug some numbers into "Sorted" and you might decide that it should be compulsory to have an aggressive mandate.

A 20 year old on $20,000 will have 395K at 2%, 588k at 4% 862k at 8%. Even starting at 30 or 40 the amount saved is double with a "risky" 8% return than it is with a "safe" 2% one. In inflation adjusted terms the differences are even greater.

Even the bureaucrats are getting up to speed. I read that they are looking to change the mandate for default providers to "balanced" instead of "capital stable"

[peat]

well Arthur considering I've spent the last few weeks doing TVM (time value of money) questions for one of my papers I am totally aware of that ... I guess it depends how one evaluates risk exactly... whether we are talking about having say more than half of the portfolio in equities (which would be standard for a growth fund I think) or whether risk means having 13% of that 50% in a company like NEW and another 20% of that in eg Pike River Coal. The former sounds reasonable whereas the latter is what I would consider too risky for a super fund... . IMO a super fund shouldnt really be picking outsiders except perhaps with .001% of a portfolio. but then I'm not a fund manager just some one who has lived through 1987.

[peat]

Surely you jest Peat when you suggest that it be compulsory that we all have a high long term risk, low short term risk Kiwisaver investment.

this doesnt actually make sense to me but I think I got your drift from the rest of the post

[Arthur]

The point is Peat that it is an illusion that "low risk" portfolios are safer. In the long term "low risk" Kiwisaver portfolios are expected to be worth only half the value of "high risk" ones. To put it another way the "low risk" portfolio has potentially "lost" 50% of the persons retirement savings. Low short term risk = very high long term risk. Kiwisaver is longterm, hence "low risk" portfolios are far to dangerous to let the general public near. If I ruled the world all Kiwisaver investors with more than 20 years to retirement would default to aggressive funds (for their own safety) and It would be compulsory for the fund managers to invest in venture capital and companies with high potential. Unfortunately the NZ public is far too financially illiterate for that to happen, much to the countries cost.

[Alan3285]

The point is Peat that it is an illusion that "low risk" portfolios are safer. In the long term "low risk" Kiwisaver portfolios are expected to be worth only half the value of "high risk" ones. To put it another way the "low risk" portfolio has potentially "lost" 50% of the persons retirement savings. Low short term risk = very high long term risk. Kiwisaver is longterm, hence "low risk" portfolios are far to dangerous to let the general public near. If I ruled the world all Kiwisaver investors with more than 20 years to retirement would default to aggressive funds (for their own safety) and It would be compulsory for the fund managers to invest in venture capital and companies with high potential. Unfortunately the NZ public is far too financially illiterate for that to happen, much to the countries cost.

On balance, I have to agree with you on this.

It is actually quite 'risky' (if you include the risk of inflation) to be in a conservative fund for 20 years or more.

Alan.

[GTM 3442]

The problem is being inthe fund for 20 years.



The sharemarket tanks.

A unit drops from $1 to 50c, the fund rides the price all the way down, and then shows great gains as the unit price recovers to 75c - a 50% gain ! Yowzah ! Terrific !

Nope, it's actually made a 25c/25% loss.

Ah the magic of numbers !

The trick seems to me to be to avoid losses ! When in doubt, get out.

[Arthur]

The trouble is in the timing GTM 3442. Several studies have shown the average investor under performs the market by a huge market. They say buy low, sell high. They do exactly the opposite and invest at the top or miss the bounce from the bottom. Take a look at the massive funds flows out of managed funds in NZ last Feb/March, just before the big bounce. Even self proclaimed experts like our mates at GMK missed the bounce (all for your own protection of course). There is no reason when the markets are irrationally high, or low that you can't transfer to a different portfolio within Kiwisaver, or even your provider. Its human nature to be greedy at the top and fearful at the bottom.

[GTM 3442]

The trouble is in the timing. . .

Yep, Arthur, it sure is.

But staying in the fund exposes you to the losses.

I don't know about GMK "missing the bounce".

If they were in at (say) $1/unit, and got out at (say) 90c/unit then got back in at

a) 95c/unit they have a loss
b) 85c/unit they have a gain

If they didn't get out, that's a different story - a straight loss.

The important thing is an exit strategy. Just don't buy it without knowing where your stop loss point is.

And act on it.

[minimoke]

FWIW and I don't want to show my age here, the Huljich who used to bounce around on Sharetrader many moons ago went by the name 'Long Strangle'.

I wonder what Long Strangle thinks of todays Capital and Merchant criminal charges and civil proceeedings. (Now where did the 2005 Long Strangle go {and all his posts} - but welcome to todays new forum Member Long Strangle.)

[peat]

Note that :
the long strangle expires worthless if the underlying price is at or between the strike prices at expiration