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What is happening with Life insurers ?
Rental property - is it for you ?
Successful investors are informed investors
Retirement planning with attitude
Making sense of sharemarket jargon
What's happening with life insurers?
The life insurance sector has featured in the news a lot recently but not always under the sort of headlines life insurers would have wanted. Now, international rating agency Standard & Poors has produced its latest annual report on the outlook for the New Zealand and Australian industry, and its forecasting a tough year ahead.
The industry outlook remains negative, as many of the difficulties faced in 2002 carry over into this year. Uncertain equity markets will continue to influence the product choices of consumers, capitalisation will remain under pressure, and profitability for most companies is likely to be weak, reads the reports introduction.
While thats not exactly good news for investors, it doesnt mean policyholders should start worrying. Of the 17 life companies covered by the report (seven operating in New Zealand), none had a credit rating lower than A, which is still defined as strong financial security characteristics. And while the shareprices of a number of insurers are currently down on past years, it is important to bear in mind that the shareprice has little to do with the financial strength of an insurer. It is the strength of an insurers reserves relative to its policy liabilities that matters for policyholders.
In fact, in some cases a high credit rating may act as a constraint on the shareprice, as a high credit rating indicates the company has large amounts of low-risk or readily available assets (such as government stock) to ensure it can easily meet all its policy payouts. Some shareholders may prefer to see a greater proportion of their money put to work in higher-risk/higher-return investment assets.
Policyholders can also take some comfort from the fact that there is an expert watchdog the Government Actuary batting on their behalf. One of his statutory duties is to monitor the solvency of life insurers and the security of policyholders funds. If he gets sufficiently concerned about a life company, he will step in to ensure policyholders interests are appropriately protected. Fortunately, he hasnt had to do this for many years.
Choosing a life insurer and a life insurance policy that suits you and your needs is clearly an important matter. Few people would buy just any car on the basis that one is just as good as another. Similarly, with life insurance you need to look under the bonnet and ask questions before making a decision.
A professional adviser is the person best suited to help you with your decision. And because life and your circumstances change over time, he or she can ensure your insurance cover continues to meet your needs.
Rental property - is it for you ?
Rental property has traditionally been a popular Kiwi investment, and theres no doubt many people have done and continue to do well out of it.
For those interested, there is no shortage of experts on the subject. Numerous books have been written about it, and often the newspaper features large ads promoting seminars on the topic.
However, owning a rental property is not for everyone. Perhaps only one in 10 people are really able to succeed at it although those people do tend to do very well. Meanwhile, others often find it turns out to be a little more complex than they thought it would be.
Lets look at whats involved.
For a start, you need to buy the right property or properties, which can take a bit of time. Residential property investor Dolf de Roos suggests you may need to look at as many as 50 to 100 properties before settling on one. Thats a lot of Saturday mornings!
Once you've bought a property, it may then need renovating, redecorating or landscaping or even all three. When your property is ready, the next step is finding a suitable tenant or tenants. This can be a very time-consuming process and is likely to involve you interviewing various applicants, as well as following through with the necessary checks and references.
Once the property is tenanted, youll need to make arrangements for the rent to be collected, as well as ensuring that the property is maintained, repairs attended to, and bills such as rates and insurance paid. You can do all this yourself or you may choose to pay someone else, such as a property manager, to do it for you.
Before you make the decision to become a landlord, make sure you get good advice from a lawyer and a tax adviser who know property. If you are looking at a proposition put to you by a promoter, they will probably refer you to their own professional advisers. While it is a good idea to see these people, it is still vital you seek your own independent advice from someone who can point out the downside and the fishhooks, as well as the benefits and advantages.
If you do attend a seminar, never let yourself be pressured into signing up on the spot even if it means you miss out on a special offer or the chance of going into a draw for a luxury holiday.
Finally, if all this doesnt sound like you, but you'd still like to be a property investor, consider investing in a managed fund that holds a variety of property and property-related assets. Such a fund will give you access to a wide range of investments you would be unlikely to afford on your own and, in addition, the fund manager will take care of all the administration and property management issues.
Successful investors are informed investors
Ignorance may be bliss but as far as investing is concerned, what you dont know can definitely hurt you.
Investing is sometimes defined as an optimal trade-off between risk and reward. That means, getting the best returns for accepting a given amount of risk. But how can you work out whether a particular trade-off is a good one if you dont have all the facts?
The golden rule is not to sign anything until you fully understand the terms and conditions of an investment. That means taking away the Investment Statement and reading it at your own pace. You may also wish to take independent advice from an investment adviser, lawyer or accountant of your choosing.
If there is something you dont understand, chances are it will be something to do with the risks or possible downside of the investment. It almost certainly wont be about the positive aspects, as the promoter will generally make sure theyre easy to understand.
An example many New Zealanders will be familiar with is the Metropolis bond issue. Back in the late 1990s, around 1,750 people collectively invested $21 million, attracted by promises of 14%-a-year returns. However, the promoter defaulted on repaying their capital more than a year ago and now it appears they may get back only 50c to 80c in the dollar.
Unfortunately, many investors didnt fully understand what could go wrong, nor the fact that they wouldnt get their money back until a major bank had first had a multi-million dollar mortgage over the scheme repaid. Had they realised this fact, many say they would never have invested in the first place.
Another example is the legendary US investor, Warren Buffett. Buffett is one of the most successful investors of all time, but in the late 90s he seemed to have lost his Midas touch. For a couple of years, while some investors were making money hand over fist, Buffets returns looked decidedly pedestrian. The reason? Buffet was not investing in the thriving dot.coms because he said he couldnt understand them.
He says he looked at their skyrocketing share prices, but couldnt work out what justified them, given that many had negligible cashflows and few were yet profitable. So he preferred to stay with companies he could understand companies with real businesses, real cashflows and real profits.
Of course, Buffett had the last laugh when the technology sector declined and the share prices of many dot.coms plunged to a fraction of what they once were. While Buffett wasnt the only investor who didnt understand dot.coms and what was driving them, he was one of the few with the courage to acknowledge it.
Lets give Buffett the last word. He is renowned as a long-term investor who likes to hold on to stocks rather than trade them in for a quick profit. When once asked for his definition of long term, he answered: Hopefully forever.
Most of us have a plan that we will work hard now and retire at 65 for a well-deserved life of ease. However, it doesnt always work out that way. For starters, not everyone makes it to 65, and while having a life insurance policy can ensure your family is taken care of after you die, its not actually death that is the real worry, but critical illness.
Lets look at the facts. Men have a one-in-eight chance of getting cancer before 65, and for women its a one-in-six chance. The risk of having a heart attack is one in 12 for men and one in 36 for women, while for a stroke the odds are one in 22 and one in 33 respectively. In addition, theres a one-in-19 chance a man will need major surgery, and a one-in-66 chance for women. Of course, there are also many other things that can leave you injured and unable to earn the income you used to.
In many instances, medical science can save you from what would once have meant certain death, but it wont pay the bills. The harsh reality is that surviving a critical illness can wipe you out financially if you dont have the right insurance cover.
Income protection is part of the answer. It can replace most or all of your income over a period, but it doesnt provide you with a lump sum when a medical crisis strikes.
Surviving a critical illness or accident can also necessitate major changes to your lifestyle and home. ACC may cover the costs of providing wheelchair access if youve had an accident, but it wont usually cover you if youre impaired through illness.
Trauma insurance may provide you with a lump sum if you need to restructure your business, modify your home or even take a holiday to get away from it all and recuperate. It could also mean you are able to exercise greater choice when considering your medical treatment options.
Its certainly worth thinking about these options and talking it over with an insurance professional.
One last point. Did you know that trauma insurance was developed by Marius Barnard, brother of the acclaimed cardiac surgeon Christian Barnard. Christians job was to make sure people survived heart disease, while Mariuss job was to make sure they could afford to survive!
Retirement planning with attitude
Preparing for retirement is as much a psychological issue as it is a financial one. As well as making sure you have enough money to live on, you also need to have interests that will fill your day, and give you satisfaction and enjoyment.
In 1993, the financial institution Merrill Lynch conducted a survey of US baby boomers (i.e. those born between 1946 and 1964), and more recently, the US equivalent of Grey Power the American Association of Retired Persons (AARP) did a follow-up survey.
While the surveys are American, the general trends identified are worth noting.
As some background, baby boomers currently make up around a quarter of the US population. They collectively control 40% of the US publics disposable income, and more than 70% of them are homeowners.
With the oldest baby boomers now being 56, many will be thinking seriously about their retirement, in what kind of shape they plan to be when they get there and how they will live when they do get there.
However, back in 1993, Merrill Lynch found only a third of them were on track to saving enough for their retirement nestegg. While many Americans did well out of the sharemarket over the four years from 1996 to 1999, those still in the sharemarket have since been hit hard.
Some of these may well have been late starters, who decided to take an aggressive stance with their money to make up for lost time and their poor savings levels. Its an easy trap to fall into, and shows up the danger of not committing to a regular savings plan early into working life.
However, the savings picture may not be quite so gloomy. While the Merrill Lynch survey found baby boomers had on average only 35% of the savings they needed for retirement, AARP found this rose to 80% if the money tied up in their houses was included. While that figure sounds quite healthy, its only relevant if those people are prepared to sell their homes and trade down or even rent.
From a psychological perspective, baby boomers are likely to live longer than their parents and many will stay healthy and active well into their retirement. They will also probably seek a different kind of retirement than their parents had. In fact, 40% of baby boomers surveyed told AARP they could not imagine themselves retired, and only 16% plan to stop work entirely when they retire.
Many also dont want to move into a smaller property, let alone to a different area. In fact, only 21% told AARP they plan to live in a different area when they retire, and only 35% expect to have to cut back their lifestyle. Unfortunately, in reality, many wont be able to afford their vision for retirement.
If you want your retirement dreams to come true, you need to plan to make it happen. It may look daunting, but talking it over with a professional adviser will make it more manageable and show you just what steps you need to take.
Making sense of sharemarket jargon
At times, sharemarket commentators and fund managers seem to speak a language of their own constantly using terms such as P/E ratios and EPS. Whether you are a DIY investor or whether you use a professional fund manager, it pays to have a basic understanding of share jargon and what it all means.
The above two terms are particularly relevant to sharemarket investment. EPS stands for earnings per share. It is calculated by dividing a companys earning or profit (usually over a year) by the number of shares currently on issue.
The higher the EPS, the better since it means the company is generating a higher profit for every dollar invested in its shares. For example, suppose the XYZ company has 50 million shares on issue and reported a $10 million profit for the last financial year. Dividing 10 million by 50 million gives an EPS of 0.2.
The P/E ratio stands for price-to-earnings ratio and is simply the relationship between a companys share price and its earnings, or rather how expensive a companys shares are. The ratio is calculated by dividing the latest earnings of a share (EPS) into the current share price. So if XYZs shares are trading at $2.50, the P/E would be 12.5 (2.50 divided by 0.2). This means XYZs share price is currently 12.5 times its earnings per share.
There is no ideal P/E ratio; its all relative. For example, Telecom shares currently trade at around $4.80, which represents a P/E ratio of approximately 13.3. Meanwhile, Guinness Peat Group is trading at around $2.00 with P/E of 6.3, meaning they are less than half as expensive as Telecom, while The Warehouse, trading at around $7.45 with a P/E of 34, is 2.5 times as expensive as Telecom.
However, it is actually more meaningful to compare the P/Es of two companies operating in the same sector for example, Lion Nathan (16.4) and Dominion Breweries (12.9).
So far so good, but while P/E ratios are useful starting points, they also have their limitations. Because they are based on a companys past earnings, they are backward-looking measures and past performance is never a guarantee of future performance.
So, when deciding whether to opt for a DIY approach or use a fund manager, you should ask yourself on what basis you would pick your shares and how well you think your expertise stacks up against that of the professionals.
Retirement planning has traditionally been something many couples leave to the male partner to deal with. However, it is vital women play an active role in the process too whether they are on their own or in a relationship. Otherwise, retirement could end up being something to be endured rather than enjoyed.
The reality is that more than half of all New Zealand women will spend all or some of their retirement alone, simply because they tend to live longer. Nowadays, a women who reaches 60 can expect to live another 22 or 23 years on average, while men generally live only another 16 or 17. Combined with the fact that in most relationships the man is usually the older partner, that adds up to a lot more women on their own in retirement.
So, when planning their retirement, women need to think about how to generate enough income to last around 20 years. Unfortunately, this is far from easy for many. Generally speaking, women still earn less than men, and they tend to spend fewer years in full-time employment because they are more likely to interrupt their careers to raise children or care for elderly parents.
When they do return to the workforce, many women have to accept part-time employment or a more junior position as a result of their absence from the workforce. According to an Australian survey carried out in the mid 1990s, while men spend an average of 38 years in the workforce, women spend only 17.
With increasing numbers of women spending much of their retirement alone, adequate provision has to be made to ensure those years will be comfortable. Women who plan to rely on their spouses in retirement need to check they will still be entitled to any benefits from their partners employer-sponsored superannuation scheme should they end up on their own (a landmark High Court ruling in 1993 means many will not be).
Women also need to be just as aware as their partners of financial issues such as knowing what their household income is and where it all comes from, how it is spent and invested, and what it will be during retirement.
Retirement is meant to be a golden time. The only way to make sure it turns out that way is to plan and to start planning as early as possible. Part of the planning process should be seeking the right advice both at the outset and on a regular basis from a properly qualified professional.
Please contact us if you require further information or would like to make an appointment with a financial adviser.