Salute to a greatly-respected colleague and friend - New Zealand ...

New Zealand Police AssociationSeptember 2004Investing, property and diversificationThere is now a widespread perceptionthat falling house prices are about towipe billions of dollars from the assetsof homeowners and investors. Thisis of particular concern, as residentialproperty has become a very popular formof retirement savings, especially in NewZealand.As in Australia and the United Kingdom,the amazing rise in houseprices in New Zealand has anincredible similarity to pricebooms witnessed in other typesof assets in the past. Although thecycles in each country are outof-syncin their timing, thedownturn in the Melbourneapartment market islikely to soon haverepercussions forthe rest of Australiaand eventually perhapsfor house prices in New Zealand.While everyone can argue that what’shappening in their neighbourhood isdifferent, history shows that bursting assetbubbles spread contagion far further thaninitially forecast.Learning from historyInvestors and homeowners only needto look at the dynamics of the previousboom - the dotcom bubble of the late1990s - to determine how they shouldconsider reacting to the prospect of aforced devaluation of their wealth.The dotcom collapse dented investorconfidence in sharemarkets around theworld and also prompted decisions byeconomic policy-makers, which had theby-product of boosting investment inhousing.The poor performance of equity markets,the abnormally long duration of thebusiness downturn, and the corporateaccounting scandals caused investors toshift their focus to bricks and mortar.They quickly developed a preference forassets that they could manage themselves.The confidence in one type of asset wasdriven by the loss of confidence in thealternatives.Ironically, for many investors, theunwinding of the first bubble becamethe justification for participation in thesecond bubble.Supporting economic growthThe second major driver was the responseof central banks to the developingeconomic risks that came from the slumpin sharemarkets and the nervousnessresulting from terrorism. Central banks,to varying degrees, took emergencymeasures to ensure that economic growthwas supported, even if it was from debtfundedconsumer spending.These emergency measures took the formof abnormally low interest rates, whichhave been maintained well beyond theend of the period of crisis. The bankingsector’s preference for lendingagainst real estate has channelledthis monetary stimulus directlyat property buyers. Highlyleveraged investorsshould be aware thatany withdrawal of thispreference is likelyto be a long andpainful process.The key lesson isthat any investment assetis likely to experience periods of underand over valuation as it moves from beingneglected to being popular and as itmoves from being unfashionable to highlyacceptable (either around the dinner tableor across the bank manager’s desk).The quick gain mentalityHistorically, the typical response of NewZealanders following the collapse of anyasset price bubbles has been to resolveto get out earlier next time around. Asa nation of debt-dependant speculatorswe continue to look for the quick gains.Asset price bubbles are often seen asopportunities for participation rather thana risk to be avoided.Going forward, we recommend thebest approach for investors is to buildportfolios with a mix of financial assetsand real estate, which can ride out thecyclical fluctuations and smooth theoverall return.The fact that different types ofinvestments go through different cyclesshould be seen as an opportunity tospread risk. However, the typical NewZealander still has highly concentratedinvestments and often a high degree ofdebt.The sooner New Zealanders invest inquality and diversify, the sooner wecan start to deal with the problem ofretirement savings.To speak with a Spicers Adviser todayabout your personal investment planplease call the Police Financial PlanningEnquiry Line on 0800 ON BEAT(0800 66 2328).Have those cheapairfares got youjumping withexcitement?Why don’t you check out Travelpacwhen you book your next trip?• Emergency Assistance 24 hours, 7days a week, anywhere in the world.• Comprehensive cover, that you andyour family can trust - when you need itmost.• 15% premium discount for membersof Police Health Plan (this discount isautomatically included in the Travelpac ratingchart).Plus our commitment to providing you withexceptional, professional service.Check out our website:www.policeassn.org.nzOr call us 0800 500 122Mon - Fri 8am to 5:30pmYou’d be flipping-well mad not to!Need a 2005wallplanner for yourteam or station?Wait - don’t order one yet!Our A2 wallplanners are beingreproduced for 2005 and will be sentto your local Association committeefor distribution shortly.The planners note useful dates likePolice pay days, holiday home ballotperiods, when daylight savings timebegins and ends, Police memorial day,school term start and finish dates andwhen your 2.5% general pay increaseapplies from.167