Investing
For most people, investing is seen as something only for the rich. However, you don’t need thousands of dollars to get started. Even the smallest amounts can be invested! Most of us are already investing, even if you don’t realise it. If you have Kiwisaver or a savings account, you’re investing!
By following the advice on this website, then you should have some money freed up to invest. See our budgeting area for some tips here.
Investing is a massive field, there’s no way we can explain everything in a short guide. However, we want to give you the basics, so you know where to start.
What is investing?:
Investing can mean a lot of things. At its core, you’re putting money into an asset which is expected to earn you more money.
This can be either in the form of cash flow:
- Dividends from shares
- Interest on term deposit
- Rent from an investment property.
Or, it is for the purpose of capital gains, buying an asset which you believe will be worth more in the future:
- Artwork
- Classic Cars
- Gold
Often, they can be a combination of both. An investment property generates rent, and hopefully will also be worth more in the future.
Investment Types:
The most common forms of investment are:
- · Savings accounts/Term deposits
- · Property (Commercial & Residential)
- · Shares
There are also a slew of others such as bonds, cryptocurrency & commodities like gold.
Compound Interest:
The great thing about investing, is it can be a form of passive income. Your money works for you by generating more money, and you don’t even need to go into work! A big part of this is the power of compound interest. As you collect money from your investments, and reinvest this money, you earn even more!
Not everyone understands compound interest too well. If for example you invested $5,000 and managed to get a 7.2% return every year, after those 10 years your investment has now doubled! The reality is compound interest is a large factor separating the wealthy from the poor. Even if you manage to put aside small amounts to invest, utilising compound interest over your lifetime will make a huge difference to your wealth!
Portfolios & Diversification:
I’m sure you’ve heard the saying, “don’t put all your eggs in one basket“. That is to say, do not invest all your money in one place! For example, if you’re buying shares, don’t just buy into one company. Spread out your purchases over a number of different companies.
To do this yourself is relatively expensive because of brokerage fees (online platform exception discussed here). This is why there are many investment funds around. They pool money together from many investors and invest in a range of shares or investment categories. To learn more, check out our articles on managed vs passive funds and getting into the share market in NZ.
The key concept is to minimise your risk. If one company goes bankrupt, then it will only have a small impact on your overall investments.
Risk & Return
Investing isn’t without risks. Even with a diversified portfolio, the value can still drop (sometimes dramatically) in a market downturn. This is very scary for first time investors and can lead to panic selling. The general rule is: The higher the return, the higher the risk!
Putting all your money in a bank savings account is very low risk but will also generate very low returns. To double a $5,000 investment in a regular savings account at current rates, would take 40 years!*
Risk is minimised over longer timeframes. If you’re nearing retirement or going to buy a house soon then it makes sense not to be invested in riskier assets – Because your portfolio could drop rapidly just as you need the money the most! However this changes if you’re looking at the longer term. It doesn’t matter so much if you lose value at some point, because it will recover and bounce back even further.
Even after the Financial Crisis of 2008, which saw share markets drop by around 50%. The markets recovered to pre-crisis levels about 4 years after their lowest point!
The worst thing someone can do is to pull out their investment when it has already dropped in value. While some people may try to ‘time the market’ and pull out money or invest more when they believe it is about to rebound, for most people it is best to simply ride it out. Continue to make investments when the prices are low, and eventually you will be ahead of where you were before.
Here are some examples of annual returns across varying time frames in the New Zealand share market**
| 2001-2020 | 10.26% |
| 2001-2011 | 6.19% |
| 2007-2012 | -4.52% |
| 2007-2017 | 5.44% |
| 2009-2014 | 11.94% |
| 2009-2019 | 15.5% |
Unfortunately, there are also scams preying on those new to investing. Check out our article here to avoid falling into these traps!
*Based on 1.75% p.a. through Rabobank
**Annual returns are allowing for compound interest, i.e. assuming all earnings are reinvested and not withdrawn. Going from $1000 to $2000 over 10 years is a 7.2% annual return, however if it was averaged it equates to 10% (from initial value).