INVESTMENT LESSONS FROM GABRIELLE
Mark Lister, 28 February 2023
The impact of recent flooding and weather across the country has been devasting, and the human toll tragic. The recovery will be lengthy, and the rebuild expensive.
The trivialities of financial markets don’t compare to what many are going through, but there are some genuine lessons for investors from events like this.
The first and most obvious is the need for broad diversification.
Residential property has been a great wealth creator for New Zealanders over the decades, with national house prices rising 6.2 per cent annually since 1990.
Take a bit off that return for running costs, including insurance, rates and maintenance, then add some back to account for rental income received.
Many people borrow to invest in property, which means the gains will have been higher than this for most investors. Debt supercharges your returns, in a rising market at least.
Things haven’t been as kind to the housing market in recent years.
Prices are down 16.3 per cent from the November 2021 peak, although that merely puts them back at early 2021 levels, such was the stratospheric increase in prices we saw during 2020 and 2021.
At the same time, mortgage interest rates have almost tripled from their lows, and a raft of policy changes from the Government have made things more difficult for landlords.
These headwinds pale in comparison to the challenges many are facing in the wake of Cyclone Gabrielle, which make it abundantly clear the investment of choice for many New Zealanders’ is far from a sure thing.
The events of recent weeks in Auckland, on the East Coast or in the Bay of Plenty are a reminder that being concentrated in one asset class is a risky strategy.
Property is an excellent long-term investment, but it’s much better when balanced with a portfolio of shares and fixed income assets.
Historically, shares have delivered a higher return than property, albeit with more ups and downs along the way.
The domestic market has returned 8.8 per cent annually since 1990, while the US market has produced a stronger 10.3 per cent (both including dividends).
Fixed income is at the other end of the spectrum.
It’s historically returned 5.4 per cent per annum, based on the NZX Corporate Bond index since its inception in 2001.
That’s a more modest return than either property or shares, although fixed income has been much less volatile whilst providing very predictable, steady income.
These asset classes have some distinct advantages, one of which is the ease with which you can diversify your risk.
Unless you’re very wealthy, it’s tough to spread your capital across investment properties in multiple suburbs, cities or regions.
In contrast, it’s extremely simple to invest far and wide across a range of companies, spanning different markets, industries and countries.
Liquidity is another important attribute, and one which is never fully appreciated while the going is good.
This means the ability to sell some or all of an investment, quickly and easily without significant transaction costs or being forced to accept a bargain basement price.
It can take weeks, even months to sell a property and get the money in the door, and you can’t sell just a portion of your million-dollar house if you need to.
Shares and fixed income are much more liquid. In many cases, you can sell a part or the entirety of your holding very easily, realising the funds within a few days.
Most of the time liquidity isn’t important, but when you need it, it’s vital.
Risk can come from anywhere, and it’s rarely the obvious ones that can do the most damage to an investment portfolio.
The best approach for those looking to mitigate this is a diversified portfolio of high-quality assets, spread across a range of asset classes, sectors and geographies.
Property is a great investment ingredient, but it’s much better (as well as safer) with a side of shares or fixed income.