Question:

I am concerned about the unfortunate investor in retirement or approaching retirement who chances to have his/her life savings invested in the markets at the time a slump occurs.

It seems to me this is a risk we all face for what if we have a recovery in the intermediate term, but the world enters another slump in or about 2020, when you want to start drawing on your own retirement funds?

I have a close friend who has been saving diligently over the past 40 years through a pension fund that has now reached maturity. In August 2007 the redemption value of the policy was $60,000, but in the ensuing 18 months almost 50 per cent has been wiped off the value of the savings. If cashed in today she will receive only $30,000, a harsh penalty for not getting her timing right.

There is risk associated with everything we do in life and this especially applies to our retirement savings, be they in shares, property, fixed-interest securities or cash. Over an adult lifetime the cash and fixed-interest securities tend to be eaten away by the ravages of inflation. And the value of shares, commercial and industrial property tend to demonstrate high volatility reflecting the economic conditions of the day.

What I like about residential property (freehold house and land) is that people need to be housed no matter what the state of the economy, and the volatility in the housing market tends to be less marked. Even in the current downturn the apparent loss in value in the housing market (I do not include flat and apartment complexes) has been considerably less than the corresponding losses in fixed-interest and sharemarkets.

I accept what you say in that gearing to buy property has its risk, but it also offers the opportunity to significantly increase one's personal wealth. People do this all the time when buying a home to live in, and extending this idea to buy another property or two over a period of time does not strike me as being high risk.

Cash flow is all-important, and an individual can control that risk by not overextending his/her resources.

Answer:

Mary Holm: There's no disputing that people need to be housed. But if you think that means rental property is automatically a good investment, let me offer you my home for a mere $100 million.

People also need to be fed and clothed, but that doesn't mean we should all rush out and buy shares in companies that provide food and clothing. Whether any investment is good or bad depends largely on what you pay for it. And in recent years New Zealand house prices have got a bit silly.

Business Herald columnist Brian Gaynor points out that the median New Zealand house price rose 113 per cent between June 1998 and November 2007, while inflation was just 24 per cent.

That difference between house prices and inflation can't be sustained. As a recent OECD report on New Zealand says, "... a deep and protracted recession, involving a housing market correction, is unlikely to be avoided".

I'm not saying house prices are certain to fall further. But I certainly don't share your apparent confidence that they won't.

Of course a price fall might not matter much to someone who owns a mortgage-free property. The tricky part is getting to that point.

Very few people can buy a property without a large loan. And usually for the next decade or so the mortgage remains substantial. That's fine if the tenants behave themselves and pay regularly; the house doesn't turn out to be a leaky home, and the owner has enough income to cover any shortfall between the rent and all the property expenses - mortgage, insurance, rates and maintenance. Oh - and if prices rise.

But things can turn ugly if the owner can't keep up the payments and is forced to sell when prices are down. More than a few people have recently found themselves selling their rentals for less than their mortgages, ending up with debt and nothing to show for it. That's a lot worse than seeing your savings halve.

You acknowledge the importance of cash flow, and say investors shouldn't overextend. But unless they have several hundred thousand dollars sitting around, they can't get into rental property without taking on a fair bit of risk.

Turning to your story of your friend and others approaching retirement, they shouldn't try to time markets. Nobody, not even the experts, gets that right often enough.

I've said so many times that I feel like a broken record: If you are within 10 years or so of spending your savings, move it out of shares, property and other risky assets into high-quality bonds and cash.

One more point: You say people buy houses to live in all the time, so extending this to rentals is not high risk. The very fact that they already have lots of their wealth in property makes further exposure to that market riskier.

Okay, now I'm going to have a flood of complaints that I'm anti-property. Time for another of my broken record sayings: Property can be a great investment. I - and many of my friends - have done well with it over the years. It's just that it's riskier than many people realise.

Mary Holm is the author of bestselling books on KiwiSaver and personal finance. She is also a highly praised seminar presenter. Her written advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following that advice.