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.
1. Before you invest
Firstly, what should you do before you even start to invest?
Pay off high-interest debt
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.
Have an emergency fund
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.
Sort your KiwiSaver
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The money you put into KiwiSaver can be withdrawn for your first home or retirement, so ensure you’re in a fund that aligns with the goal you have in mind.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:
– KiwiSaver 101 – How does KiwiSaver fit into your investment portfolio?
2. Investment options
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:
- Income assets – Assets that generally pay you a regular, stable income (e.g. interest), but have lower potential to significantly increase or decrease in value.
- Growth assets – Assets that have potential to grow in value, and may also pay an income (e.g. dividends), but also have the potential to significantly fall in value.
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):
- Individually – This involves buying shares in individual companies (e.g. Auckland Airport or Microsoft) or individual bond issues. This method gives you more control over what you’re specifically investing in, but can be harder work as it requires researching and picking individual assets.
- Through a fund – This involves investing your money through a fund where a fund manager decides which individual assets to invest in. For example, the Kernel NZ 20 Fund invests in the 20 largest companies listed on the NZ sharemarket. This is the easier method to invest as your fund manager invests in a diversified basket of assets on your behalf, saving you a lot of research and admin work. However, you’ll lose some control in what you invest in as each fund’s investments are controlled by the fund manager.
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:
- Fund managers – Offer and manage funds. Examples are Kernel, Simplicity, and Milford who offer funds investing across a variety of asset classes.
- Fund platforms – Offer a variety of funds from different fund managers. An example is InvestNow who offers over 150 funds from 27 different fund managers.
- Brokers – Offer the ability to buy and sell individual companies and funds listed on the sharemarket. Examples are Sharesies (allowing you to invest in the NZ, Australia, and US sharemarkets) and Hatch (US sharemarkets).
There is no best option
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:
- Income assets are lower risk, but you pay for that safety with lower returns.
- Growth assets have higher potential returns, but you pay for those returns with higher risk.
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.
3. How to choose what to invest in
Thirdly, here’s some important factors you should think about when deciding what you should invest in.
Most important factors
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:
- Growing a nest egg for your retirement
- Accumulating money to support your child’s future
- Generating income to support your retirement
- Preserving capital – keeping money you’re looking to spend soon safe
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:
|Example time horizon
|Example asset allocation
|Very short-term (e.g. 1-2 years)
|Short-term (e.g. 2-5 years)
|Mostly income assets
|Medium-term (e.g. 5-10 years)
|Split between growth and income assets
|Long-term (e.g. 10+ years)
|Mostly 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:
- Realign your expectations of what investing can do for your money. It’s not a get rich quick scheme, but rather something that requires time to be effective.
- Consider whether your time horizon is fixed or fluid – if you invested in growth assets could you postpone your goals if the markets dipped? If not, you’re likely better off sticking with conservative investments.
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.
- Low risk tolerance – You may want to reduce your allocation towards growth assets. Having income assets in your portfolio will reduce your portfolio’s volatility, acting as a “shock absorber” in market downturns.
- High risk tolerance – You may want to increase your allocation towards growth assets to increase your portfolio’s potential returns (at the expense of greater volatility).
While risk tolerance has an important impact on what you invest in, keep in mind that:
- Having a low risk tolerance doesn’t necessarily mean you should hide in the safety of income assets. Taking on too little risk may mean you don’t earn enough returns to reach your goals. In which case you might have to bite the bullet and take on the additional risk of growth assets, or accept the lower returns.
- Having a high risk tolerance doesn’t mean you should put everything in crypto and meme stocks. It’s possible to take on more risk than you need, for example, by investing heavily in speculative cryptocurrencies, when shares are all you need to reach your goals. Taking on more risk than you need might get you to your goals faster, but could just as easily jeopardise your progress if one of your risky investments went bad.
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:
- Individual assets vs Funds – Those wanting more control over their investments may prefer investing in individual assets – in which case a platform like Sharesies or Interactive Brokers would be most suitable. Those wanting to be more hands-off in their investments may prefer funds – in which case a platform like Kernel, InvestNow, or Simplicity would be more suitable.
- Ethical considerations – Is investing in assets that align with your ethics important to you? If so you’ll want to invest in companies or funds whose ethical views align with yours.
- Tax requirements – Different investments may have different tax requirements. For NZ domiciled investments, your tax obligations are taken care of you automatically in many cases, which is great for hands-off investors. While those investing in foreign investments will likely need to declare and pay tax on these investments each year as part of their tax returns – therefore requiring a little bit more work.
Less important factors
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:
- Two investors aged 30 may have different goals – one could be saving to buy a house in a few years’ time, the other may be saving for retirement in 35 years’ time.
- Two investors aged 50 may have different tolerance for risk – one might not be able to bear a dip in their investments’ value, the other might be willing to embrace the ups and downs of the market.
Amount to invest
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:
- Fees – The fee structure of some platforms suit those investing large amounts, while others are better suited to those investing small amounts. For example, Kernel is expensive for those investing just $1,000 (due to their fixed $36 account fee), but is among the cheapest options for those investing large amounts of money.
- Tax – Those investing $50,000 or more in foreign investments must pay tax on those investments using the FIF (Foreign Investment Fund) tax rules, while those investing less than $50,000 are exempt from those rules. This may have an impact on how you invest in international assets.
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:
- Risk tolerance – Those with higher or more stable incomes may feel like they can take on higher risk, compared to those with lower or less stable incomes.
- Tax treatment – Those on higher incomes (i.e. paying tax through the 33% or 39% tax brackets) may find it beneficial to invest through a PIE (most NZ domiciled funds) which is taxed at a maximum rate of 28%.
- Fees – Income may impact the amount of money you regularly contribute to investments, therefore having an impact on fees. For example, someone contributing $100 per week to Hatch wouldn’t find it cost effective (given they have a flat $3 USD fee for every transaction), while someone with a high income contributing $1,000 per week would find Hatch’s fees to be reasonable.
4. Example portfolios
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:
- InvestNow Foundation Series Balanced Fund
Rationale for the portfolio
- It’s a very hands-off portfolio – investing in a single fund is incredibly simple, yet is still well-diversified across NZ and international assets.
- The fund should provide long-term growth, with its ~60% allocation towards shares.
- The remaining ~40% of the fund is allocated to bonds, which are less volatile than shares. This should better suit Adam’s low risk tolerance (at the expense of long-term returns).
- Fees are low, with the fund charging a reasonable management fee of 0.37%. In addition, the InvestNow platform doesn’t charge any account or transaction fees, so is suitable for drip feeding small amounts of money in every payday.
- Adam has the option of easily switching to a Growth fund (containing more shares) once he becomes more confident with investing.
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.
Sarah invests her $10,000 into the shares of 20 individual companies ($500 each) through the Sharesies platform:
|Property For Industry
Rationale for the portfolio
- Sarah’s time-horizon is fairly long and flexible, and she also has a high risk tolerance. This allows her to invest 100% into shares to maximise long-term growth potential.
- Her share portfolio is spread across multiple geographies (NZ, Australia, and US) and industries (e.g.. Healthcare, IT, Infrastructure, Utilities).
- The portfolio requires a lot of work to research, put together, and maintain, but the companies Sarah has picked align well with her ethics.
- The Sharesies platform allows her to have all her investments in one place. And it’s among the cheapest platforms to invest an amount of $500 per transaction.
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:
- 60% into the Kernel Global 100 Fund
- 30% into the Kernel NZ 50 ESG Tilted Fund
- 5% into the Kernel Moonshots Innovation Fund
And he invests the remaining 5% into cryptocurrency through the Easy Crypto platform:
Rationale for the portfolio
- His long time horizon enables Colin to invest heavily into growth assets – he has time to ride out the inevitable bumps his investments will face in the market.
- His mix of funds is simple, but diverse. The core of his portfolio (the Global 100 and NZ 50 ESG Tilted funds) contains 148 companies and is diversified across the world and across many industries. Investing in funds saves him a lot of work in picking individual companies.
- The 10% allocation towards the thematic Moonshots Fund and Bitcoin satisfies Colin’s desire to have a bit of a gamble, but won’t completely tank his portfolio if those investments don’t work out – it’s a sensible amount of added risk over his core funds.
- Kernel’s fees are good value for money for the amount he’s investing – They give a 0.10% fee rebate for investing over $25,000, and the fixed $36 account fee is a low proportion of his portfolio. In addition, Easy Crypto is a cost effective option for purchasing Bitcoin, charging no network fees to send the Bitcoin to his wallet.
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:
- 9-month term deposit
Rationale for the portfolio
- While growth assets like shares have higher potential returns, Joanne can’t afford to take on the potential losses associated with them. She’ll have no other way to settle on her house if her investment value falls below the amount she started with, so has to stick with a bank deposit and accept the lower returns.
- This isn’t helped by having a fixed time horizon of 9 months. If she invested in shares, she’d have no ability to defer the settlement of her house and wait for her investment to recover in value if they suffered from a downturn.
- On the positive side, since she has a clear timeframe of when she needs the money. This allows her to go into a term deposit which should provide higher returns than more flexible bank deposit options like a savings account.
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:
- 25% into the Smartshares NZ Dividend ETF (Shares)
- 25% into the Squirrel Monthly Income Fund (P2P Lending)
- 25% into the Smartshares Global Bond ETF
- 25% into the Smartshares NZ Bond ETF
Rationale for the portfolio
- The funds he’s chosen focus on income producing assets, which comfortably produce an average income of over $1,000 per month and can be withdrawn from the InvestNow platform as he needs it. There’s no need for Paul to sell off units in his funds whenever he needs cash.
- The portfolio isn’t too risky with the allocation towards shares and P2P Lending offset by the allocation to bonds. Investing fully in shares and P2P lending might produce a higher amount of income, but involves taking on more risk than Paul needs to meet his goals – a downturn in the market or reduction of dividends might cause unnecessary stress.
- The InvestNow platform allows Paul to manage his investments in one place, and doesn’t charge any fees for buying into his funds.
5. What’s next?
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.
– Portfolio WOF and service – How to maintain your investments
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:
- Your goals – What are you investing for?
- Time horizon – How long until you need the money for your goal?
- Risk tolerance – How well can you tolerate the value of your investments going down?
- Personal preferences – Do you want to stay hands-off with your investments, or do you prefer having more control? How about ethical considerations?
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.
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The content of this article is based on Money King NZ’s opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with an authorised financial adviser before making any investment decisions.