They say if you live long enough you get to see everything. Well, after more than two decades of advising, it certainly feels like that.
Maybe I would add, you get to see some things twice.
Remember when interest rates for deposits were 18%? The top tax rate was 66% and inflation was running in the high double digits.
While the nominal rate of return from the investments was attractive - 18% does sound impressive! - the real value (purchasing power) of an investor's capital was eroding dramatically after the deduction of taxes and inflation.
Ironically, it looks like we are now back to a similar scenario, where "conservative" investors will face the erosion of the purchasing power of their investment capital in fixed interest, especially those investments covered by the Deposit Guarantee Scheme.
Interest rates provided by those institutions covered by the guarantee are dropping rapidly. Expect this to continue.
When the Reserve Bank governor, Dr Alan Bollard, announced the reduction of 150bpts in the OCR, the Reserve Bank also produced a one-page slide that had two numbers on it: inflation 5.1% and OCR 5%.
Inflation is likely to remain stubborn and to the outer limits of the bank's range (3% per annum) as imported inflation flows through as a result of a lower New Zealand dollar.
So what returns might investors expect from bank deposits in 3 to 6 months' time?
Deposit rate (say) 3.0%
Less tax (say 30%) 0.9%
Less inflation (say) 3.0%
Net real return to investor -0.9%
Much of the focus by commentators and news media is rather than what lies beyond this period of adjustment.
Market prices for many financial assets are at present deeply discounted and may get cheaper.
On a long-term basis, those investors who enter now will undoubtedly do well irrespective of what the short term brings, with one proviso: that they diversify on a mass basis.
So what are investors to do?
Here are some suggested steps to take. -
1. Decide whether the next six months are more important to you than the next six years.
2. If your time frame is short-term-focused, then get used to plummeting returns and the loss of purchasing power. But be cautious about the reliance you place on the Government Deposit Guarantee Scheme in making your selection. There are many traps for the uninformed.
3. If your time frame is of a longer duration, look to develop some entry points into a well-diversified portfolio based on a written financial plan centred on your lifestyle objectives. As the old saying goes, those who fail to plan, plan to fail.
4. Look for defensive protections within any portfolio strategy recommended to you, such as down-side protection from further falls in equity markets, currency protection. Such mechanisms are usually only available to individual investors through managed funds.
5. If you are a medium- (5 years plus) to long-term (10 years plus) investor, look beyond 2009.
6. Remember "the bottom" is only known in hindsight and is seldom correctly picked, so don't waste your time looking for it. Rather than assisting your long-term return prospects, a strategy of "picking the bottom" will most likely mean you miss the upturn.
Many investors may well continue to perpetuate the single biggest wealth-destruction strategy of buying high and selling low - that is, rushing from markets which have just gone down in value to markets which are about to (or will through the time of their investment) decline in value.
The role of a financial adviser is to ensure you have a well-developed written plan that takes account of your lifestyle objectives (which are personal to you) and to report on and advise how your wealth is to be managed through all stages of your life.
An adviser helps you avoid, as much as possible, the risks of permanent capital loss.
Few private investors have gone into this environment well prepared or positioned; based on the portfolios we are seeing, most are littered with problematic investments.
Fewer are clear on what they should do next.
The careful selection of a trusted adviser has never been more important.
Sitting doing nothing will result in wealth destruction and lost opportunity, but it will take courage for investors to acknowledge that and make the decision to proceed with caution.
Craig Myles is the director of Myles Wealth Management Ltd.
A disclosure statement is available on request and free of charge.
