Everyday we see Kiwis wanting to invest and make their money work harder for them. This is easier said than done, with so many investment options out there and no definitive answer as to which one is best. Investing isn’t a one-size-fits-all thing, with everyone’s circumstances being different, therefore requiring a unique set of investments to match. So in this article we’ll cover how we’d approach deciding how to invest your money, including what you to do before investing, and the factors you should consider when selecting your investment options.
The information presented in this article is general in nature and isn’t financial advice. Do your own research before investing, and if in doubt talk to a financial adviser.
This article covers:
Firstly, what should you do before you even start to invest?
Any high-interest debt like credit cards, personal loans, or car loans should be paid off first, as these will likely cost more (in interest payments) than your investments can make.
An emergency fund is a pool of money you hope you’ll never have to touch, but something everyone should have. Its intention is to cover any unexpected but necessary expenses you might face such as your car breaking down, dental treatment, vet visits, or putting food on the table if you lose your job.
There’s no set rule as to how much money you should have in your emergency fund, but common approaches are to save up 2-3 months worth of income, or 3-6 months worth of expenses. This money is typically kept in a bank savings account, so that it’s easy to access and stable. Your emergency fund won’t earn much interest, but the point of it is to act as a form of insurance rather than to grow your wealth. It exists to pay for the unexpected without having to take on debt, cause too much financial stress, or having to disturb your investments.
KiwiSaver is the first investment that almost everyone should have sorted, even if you’re only contributing the bare minimum to harvest the benefits of the scheme such as employer and government contributions.
The money you put into KiwiSaver can be withdrawn for your first home or retirement, so ensure you’re in a fund that aligns with the goal you have in mind. We won’t go into further detail about KiwiSaver in this article, but more information can be found below:
Secondly, let’s have an overview of what investment options are available:
There are lots of asset classes (types of investments) in which you can invest. These can be divided into two broad categories:
There are a couple of methods to invest in the above asset classes. You can buy these assets individually or through a fund (or use a mix of both methods):
Lastly we have investment platforms, which are services you’ll need to buy and sell the above investments. There are a few types of platforms:
There isn’t a definitive best when it comes to what option you should invest in. All of the above investment options require you to make an important trade-off between risk and return:
There is no free lunch in investing – you can’t get bigger gains without taking on more volatility and potential for losses! So in the next section of this article we’ll cover how we’d approach figuring out which investment best suits you.
Thirdly, here’s some important factors you should think about when deciding what you should invest in.
These factors are what we believe to have the largest impact on what you should invest in.
Why are you looking to invest in the first place? Different people will want to invest for different reasons such as:
If you’re investing for multiple goals, you might want to split your money into different buckets – one for each goal.
A goal alone isn’t enough to determine what you should invest in, but it’s great to have a “why” instead of investing your money aimlessly.
Perhaps the most important factor determining what you should invest in, time horizon refers to how much time you have to invest before you need the money for your above goal. In general, those with shorter time horizons should invest more conservatively in income assets, while those with longer time horizons should invest more aggressively in growth assets.
Longer time horizons enable investors ride out any volatility in growth assets. For example if the sharemarkets crash, long-term investors have time up their sleeves for the market to recover before they need to take their money out.
Shorter time horizons require investors to choose more conservative income assets. Short-term investors who invest in growth assets don’t have sufficient time for their investments to recover in value if they suffered from a downturn, and they risk having to pull their investments out at a loss. Very short-term investors should stick to bank deposits as even “safe” assets like bonds can fall in value.
What if your investment goals and time horizon don’t align? For example, what if your goal is to grow your capital (which requires investing in growth assets), but you only have a 1 year time horizon (which suggests investing in bank deposits)? In this case you may have to:
Tip: Unsure whether a fund is right for your time horizon? NZ domiciled funds all have a “Minimum suggested investment timeframe” in their Product Disclosure Statements. Use this as a guide as to what time horizon you should have before investing in that fund.
Your risk tolerance refers to how well you can tolerate losses to the value of your investments. Would you be stressed out or remain calm if your investment fell by 20%, 30%, or more?
Having investments that suit your risk tolerance matters, as growth assets in particular face downturns on a regular basis – so you want to have a portfolio that won’t cause sleepless nights, or lead you to panic sell your assets when an inevitable dip in the market hits.
While risk tolerance has an important impact on what you invest in, keep in mind that:
Investing is personal, involving putting your hard earned money to work. So it’s reasonable to make sure your investments are personalised to suit you. Your personal preferences such as how involved you want to be with your investments will likely have a major impact on what specific assets and investment platforms you choose, for example:
These factors are still relevant, but have a smaller impact on what you should invest in.
Your age may have some influence on what you should invest in – for example, a child is more likely to have a long time horizon compared to someone near retirement age. But we consider age a less important factor given two investors of the same age could have different goals and appetite for risk, therefore requiring different investments:
We don’t believe the amount of money you have makes a material difference to what you should invest in. These days the bulk of investment options are available to all investors, regardless of whether you have $1,000 or $100,000 to invest. Sharesies, InvestNow, Kernel are examples of platforms that allow you to invest with as little as $50, and work just as well if you’re investing $1 million. However, there’s a couple of things you should watch out for:
Similar to above, income has no significant impact on what you should invest in – someone earning $30,000 per year has the same opportunities to invest as someone earning $130,000 per year, as long as you can dedicate money towards it. However, income does impact a few areas such as:
Lastly, let’s see how the above factors might apply by looking at a few examples.
The following investors and their portfolios are hypothetical and examples only. This shouldn’t be taken as financial advice on how to construct your own portfolio.
Adam has $1,000 that he wants to invest somewhere. He doesn’t really have any specific goals other than to form good long-term money habits (by contributing to his investments every payday), and to make his money work harder for him. Adam is pretty clueless about investing, so would prefer a hands-off and lower risk investment until he becomes more confident about how it works.
Adam invests his $1,000 in a mix of shares and bonds through a fund on the InvestNow platform:
Sarah has $10,000 to invest. She’s in her early 20s and wants to have a deposit to buy a house in 10-15 years’ time. She believes that an investment in shares will be key to her achieving that goal, so is willing to invest aggressively and tolerate the ups and downs of the sharemarket.
But Sarah is very particular about where she wants to invest her money. Ethical investing is hugely important to her and she only wants to invest in companies that align with her views. She doesn’t mind getting hands-on with her investments (by researching and picking companies) to ensure her money doesn’t go towards the wrong companies.
Colin is in his 30s and wants to retire early in about 20 years, or at least reduce his work hours to part-time. He has $50,000 to put towards this goal. Colin is a bit of a gambler who doesn’t mind losing a bit of money as long as he has the chance to make higher returns. He’d prefer something hands off so he can have more spare time to play sports and try out new eateries.
Colin invests 95% of his $50,000 into shares through funds on the Kernel platform:
And he invests the remaining 5% into cryptocurrency through the Easy Crypto platform:
Joanne has $100,000 which she needs to settle on a new build townhouse when it’s completed in 9 months time. The money is sitting in the bank earning next to nothing so she wants to make the money work for her. She knows she can take on risk (due to past experience in share investing), but can’t afford to lose any of her $100,000.
Joanne invests her $100,000 into a bank deposit through Westpac bank:
Paul is a retiree who has $500,000 to invest, and is looking to generate some bonus income to spend in his retirement. Having this income isn’t a matter of life or death so he can afford to take on some risk, but he’d prefer to keep things stress free.
Paul invests his $500,000 into a variety of asset classes through funds on the InvestNow platform:
Once you’ve put your money into your chosen investments, it’s time to sit back and relax. Investing usually works best when you leave your investments alone and let time do its thing, rather than constantly monitoring or tinkering your portfolio and chasing the latest fads in the market.
You might not see immediate results with your investments. Investing isn’t like a savings account where you earn a consistent amount of money every month. Instead you might see your investments jump up and down in value, especially if you’re invested in growth assets. So if you’re holding the likes of shares or crypto don’t let poor short-term results discourage you – it’s the long-term outcome that matters. And hopefully your portfolio suits your risk tolerance and time horizon and you’re able to confidently ride out the dips you’ll inevitably face.
If you’re wanting to contribute extra money to your portfolio regularly, then setting up auto-invest (if your platform offers it) could be handy to keep your investments ticking along without you having to think about them. Otherwise it’s a good idea to review your portfolio once in a while, to ensure it remains suitable for you and your goals – For example, by gradually shifting to conservative assets as you get closer to reaching them.
Unfortunately there’s no simple answer to the question of where you should invest your money. Investing isn’t a one-size-fits-all thing – there’s no single best option, with different investments having different characteristics, therefore suiting different people. Investing in an S&P 500 index fund and crypto is not the answer for everyone! So hopefully this article has provided a starting point to what to think about when deciding what to invest in such as:
Then once you have a good idea of the above factors, you’ll be in a better position to choose investments that align with them.