Investing Guide
Invest Like a Pro and Avoid Common Mistakes
Updated 3 April 2019
It is never too early to invest for the future. Every New Zealander is different with unique financial needs, but if you have KiwiSaver and/or a bank account, you are by definition an investor already. Deciding on what investments to make does not need to be complicated - MoneyHub has created this guide to point out the many steps you can take to grow your savings while keeping it safe. We also identify some red flags to protect your savings from ‘bad’ investments.
After you understand the basics of investing, we outline the most common types of investments New Zealanders make, including shares, managed funds and property.
Our Guide
Warning - This guide is informational only - MoneyHub does not offer any investment advice, guidance or any opinion on investment options.
After you understand the basics of investing, we outline the most common types of investments New Zealanders make, including shares, managed funds and property.
Our Guide
- Investing – The Basics
- Understanding The Basics Of Different Types Of Investments
- What You Need To Know To Invest Like A Pro
- Determining Your ‘Investor Type’
- Investment Red Flags
- Financial Advisors
Warning - This guide is informational only - MoneyHub does not offer any investment advice, guidance or any opinion on investment options.
Investing – The Basics
Investing is best defined by billionaire investor Warren Buffett who defines it as “the process of laying out money now to receive more money in the future.” Ultimately, people make investments intending to end up with more money than they contributed. For example, buying a house for $500,000 and selling it later for $1,000,000 is just as valid an investment as buying shares in Xero for $1.00 and selling them for $40.00. For most people, investing is really about having your money work for you over time without worrying about it.
1. Set Money Aside So You Work Smarter, Not Harder
Most of us work long and hard at our job, whether for a company or our own business, saving a portion of our hard-earned money and putting it aside. If done correctly, our investment grows over time. As our money works for us, working less becomes an option as our savings build up. For example, if you reach 60 and have $500,000 in savings, a 5% annual return is the same as a $25,000 income - this can make a huge difference if you want to spend your time on other things.
2. Investing does have drawbacks - you can't spend frivolously
Investing money means the same money cannot be spent on things that make us happy, such as holidays, new clothes and eating out. However, balancing spending with saving is not as hard as it sounds – you just need to work out what you can afford and stick to it. In the long term, your investments will hopefully grow in value giving you more financial freedom and the ability to have more money in the future without necessarily working.
Investing is primarily a means to a happier life in the future. Our investment calculator outlines how making regular monthly contributes can build up your nest egg in no time at all.
Investing is primarily a means to a happier life in the future. Our investment calculator outlines how making regular monthly contributes can build up your nest egg in no time at all.
3. Understand Risk versus Reward, and Select the ‘Right’ Investments
Investing has a degree of risk, and the old saying of ‘high risk, high reward’ generally applies to the investment market. To avoid investments that don’t deliver what you expected, you’ll need to start by deciding what you want to achieve with the money you set aside. Once decided, you will have an investment strategy you can use to make the most appropriate choices.
4. Deciding on an Investment Strategy Upfront Makes for Better Investing
Successful investors have two things in common – they are clear and realistic about what they want to achieve, and they research where their money goes and make sure they understand how it works. Anyone who blindly hands over money to something that 'sounds like a winner’ without doing their research, is risking their money.
Think about financial goals, like saving for a car, buying a house or saving for retirement. It helps to ask, ‘What goal will investing help me achieve?’
Think about financial goals, like saving for a car, buying a house or saving for retirement. It helps to ask, ‘What goal will investing help me achieve?’
Understand the Basics of Different Types of Investments
Before choosing an investment, it is essential to know what the different types of investment options are. Once you have an idea about the choices available, you can decide which ones are right for your investing goals.
Bank deposits and term deposits – this is where you invest a sum of money with your bank and earn interest (the return) for a fixed period. For example, a bank offering ‘4.99% p.a. for 12 months’ (meaning that the bank a return of 4.99% per year on your money) is an example of a term deposit, whereas an offer of ‘2.00% on balances above $500’ is an example of a bank deposit (the bank pays you interest on money you keep in your account above $500, for example). Interest can be paid monthly, quarterly or annually.
Bonds – this is where you loan your money to a company who provides you with a fixed return which is usually (but not always) higher than what a typical bank offers. For example, you can buy bonds in companies you know like Spark, Air New Zealand and Fletcher Building who may offer a return of 5.50% p.a. for two years (meaning every year the company pays you 5.50% of your investment balance).
Property – buying houses is a longstanding New Zealand favourite. The process is simple; you buy a property with two goals in mind – renting it to pay the mortgage and/or provide an income and anticipating an increase of value over the time you own it. Most investor mortgages now require 35% or 40% of the price of the house upfront, but not always, and the rates of returns differ depending on the property type and location.
Shares – when you buy a share, you buy a piece of a company – the more you buy, the more of the company you own. Investors buy shares believing the price will go up in time and/or that the dividend (cash return on the share) is attractive. Shares are not without their risks – the price can go up and down every day, and in a given week your investment may fall in value, but you don’t make (or lose) any actual money until you sell your shares.
KiwiSaver – KiwiSaver is the government-run retirement saving scheme. It operates to allow you and your employer to contribute to an investment with the aim of building a ‘nest egg’ (sum of money) for your retirement. Read our KiwiSaver Guide to know more.
Peer to Peer investments – this is a recently launched type of investment where you lend to a platform, such as Harmoney, Lending Crowd or Squirrel Money, who lends your money directly to borrowers. The idea is that you get a higher return than that offered by banks while the platform carefully assesses whether borrowers can repay before lending out your money.
Finance Companies – these are private companies and they work by lending your money to borrowers usually in the form of short-term loans. Finance companies pay you a return on your money – for example 9.00% p.a. with a minimum investment of 2 years. Once the two years is up, you can reinvest the money or withdraw it. Finance companies were in the news a lot during the 2008 financial crisis due to many of them going bankrupt because of borrowers not repaying their loans.
Managed funds – these investments come in many forms. The basics are the same – you buy ‘units’ in a fund, which is made up of many underlying investments. For example, a managed fund may be comprised of 1,000 shares, and so your investment is spread over these shares. The overall performance of the managed fund (i.e. the gain) depends on the performance of all of the investments that comprise your fund. Managed funds usually charge annual fees to operate, which can range from 0.10% to 5.00% of the value of your investment. There may also be entry and exit fees so for these reasons managed funds often form part of a long-term investment strategy.
A business or venture – this could be a startup or buying into an existing operation. This type of investment could be passive (i.e. you don’t need to do anything) or active (i.e. you work in the business). Whatever the nature, this is usually an investment with high risk. For this reason, understanding all of the details about the business before you invest is really important – businesses can become money vacuums, and you may be required to invest more than you originally planned to keep it going in the short term.
Other investments - we haven’t mentioned investments such as cryptocurrency (i.e. Bitcoin), gold and precious metals, futures and similar platform trading – we believe these are best avoided by the average New Zealander looking to invest in their future.
Bank deposits and term deposits – this is where you invest a sum of money with your bank and earn interest (the return) for a fixed period. For example, a bank offering ‘4.99% p.a. for 12 months’ (meaning that the bank a return of 4.99% per year on your money) is an example of a term deposit, whereas an offer of ‘2.00% on balances above $500’ is an example of a bank deposit (the bank pays you interest on money you keep in your account above $500, for example). Interest can be paid monthly, quarterly or annually.
Bonds – this is where you loan your money to a company who provides you with a fixed return which is usually (but not always) higher than what a typical bank offers. For example, you can buy bonds in companies you know like Spark, Air New Zealand and Fletcher Building who may offer a return of 5.50% p.a. for two years (meaning every year the company pays you 5.50% of your investment balance).
Property – buying houses is a longstanding New Zealand favourite. The process is simple; you buy a property with two goals in mind – renting it to pay the mortgage and/or provide an income and anticipating an increase of value over the time you own it. Most investor mortgages now require 35% or 40% of the price of the house upfront, but not always, and the rates of returns differ depending on the property type and location.
Shares – when you buy a share, you buy a piece of a company – the more you buy, the more of the company you own. Investors buy shares believing the price will go up in time and/or that the dividend (cash return on the share) is attractive. Shares are not without their risks – the price can go up and down every day, and in a given week your investment may fall in value, but you don’t make (or lose) any actual money until you sell your shares.
KiwiSaver – KiwiSaver is the government-run retirement saving scheme. It operates to allow you and your employer to contribute to an investment with the aim of building a ‘nest egg’ (sum of money) for your retirement. Read our KiwiSaver Guide to know more.
Peer to Peer investments – this is a recently launched type of investment where you lend to a platform, such as Harmoney, Lending Crowd or Squirrel Money, who lends your money directly to borrowers. The idea is that you get a higher return than that offered by banks while the platform carefully assesses whether borrowers can repay before lending out your money.
Finance Companies – these are private companies and they work by lending your money to borrowers usually in the form of short-term loans. Finance companies pay you a return on your money – for example 9.00% p.a. with a minimum investment of 2 years. Once the two years is up, you can reinvest the money or withdraw it. Finance companies were in the news a lot during the 2008 financial crisis due to many of them going bankrupt because of borrowers not repaying their loans.
Managed funds – these investments come in many forms. The basics are the same – you buy ‘units’ in a fund, which is made up of many underlying investments. For example, a managed fund may be comprised of 1,000 shares, and so your investment is spread over these shares. The overall performance of the managed fund (i.e. the gain) depends on the performance of all of the investments that comprise your fund. Managed funds usually charge annual fees to operate, which can range from 0.10% to 5.00% of the value of your investment. There may also be entry and exit fees so for these reasons managed funds often form part of a long-term investment strategy.
A business or venture – this could be a startup or buying into an existing operation. This type of investment could be passive (i.e. you don’t need to do anything) or active (i.e. you work in the business). Whatever the nature, this is usually an investment with high risk. For this reason, understanding all of the details about the business before you invest is really important – businesses can become money vacuums, and you may be required to invest more than you originally planned to keep it going in the short term.
Other investments - we haven’t mentioned investments such as cryptocurrency (i.e. Bitcoin), gold and precious metals, futures and similar platform trading – we believe these are best avoided by the average New Zealander looking to invest in their future.
What You Need to Know to Invest Like a Pro
To make the right investments that suit your needs, you'll need to do two things. Firstly, asking the right questions to understand the investment will let you determine if the investment is for you. Secondly, you'll need to follow basic investing principles to allocate your money appropriately among the investments you make.
To get the best possible returns on your investment, it is vital to understand the investment. We outline some questions you can ask.
To get the best possible returns on your investment, it is vital to understand the investment. We outline some questions you can ask.
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How is my money being invested?Understanding how your money will be used is essential. For example, if you are investing into a managed fund, your money will be used to buy a portion of the fund – if the fund’s investments perform well, the value of your investment will increase. If you are investing in the share market, your money is buying a share in a company – the better the company does in the future, the more likely the value of your share will increase.
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How well has the investment performed compared to similar investments over the last 3-10 years?Every investment should have graphs or tables to make a comparison. If it doesn’t, that could be a red flag about the seriousness of the investment. If you are investing in something that pays a fixed return, such as a bond, peer-to-peer loan or finance company, there should be data about the most recent returns.
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What are the benefits and risks?The benefits will usually be an expected rate of return, the potential for an increase in value and low or zero fees. The risks could include losing all of your money – for example, if you invest in a company and it goes bankrupt, you’ll lose all of your money. Likewise with a finance company – if it makes the wrong investments with your money, what you get back may be less than what you put in. Every investment has some level of risk – knowing the risks upfront lets you make a better decision.
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What are the fees and how are they charged?Many investments, such as managed funds and index funds, charge fees. These can include:
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Is there is a ready market if I need to exit the investment?This is a significant consideration as being able to get your money out is as important as the return you’ll get. Investments like shares, managed funds and bonds can usually be sold relatively quickly, but if you buy a house and the market is flat, selling it might take some time.
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With every investment, understand its key features, fees, commissions, benefits and risks. It doesn’t cost you anything to ask the company behind the investment any question you’re unsure about.
Having asked the right questions about the investment, our selection of tips below are designed to protect the money you invest and have it work hard for you in the long term.
Having asked the right questions about the investment, our selection of tips below are designed to protect the money you invest and have it work hard for you in the long term.
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Find the right balance between risk and returnUnless you are investing in a cash deposit or bond, you won’t know the returns on most investments in advance, and there is a possibility that the investment will not meet your return expectations. Each investment type has its own risks – for example, shares and managed funds have ‘market risk’ – the risk that the value of your investment will be affected by overall share market movements. To minimise risk while giving yourself decent returns, it’s essential to find the right mix of investments, which we outline next.
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Find the right mix of investmentsYou will probably get a lower return on your savings if you put everything in the bank rather than invest it in shares, managed funds and/or property. Finding the right mix depends on personal choice and avoid any investments that make you uncomfortable. For example, if you don’t like shares, don’t invest in them. If you want to be able to see and touch your investment physically, a property could be more suitable. If you want to know your investment is safe and accessible at any time, bank deposits and term investments are likely to achieve that.
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Diversify your portfolioThe best investors have money in lots of different things, such as cash, bonds, shares, managed funds and even property. By owning several investments rather than just one, a fall in the value of one investment won’t affect your total return in the long term.
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Stay for the long term and ride the ups and downs of the marketsEvery market rises and falls, take the New Zealand property market or the share market for example. Staying in the markets through different market cycles is essential – if you panic and sell everything when a market falls, your overall returns will be lower than if you stay in the market for the long term.
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NEVER put all of your money into one investmentThis follows the ‘eggs in one basket’ rule. People who have a terrible time have usually exposed themselves to one investment which has invariably turned sour. Diversification is the key.
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Understand compound interest and how investments grow over timeThis is often overlooked, but it’s essential to know. Investing works best when you understand the basics. For example, if you invest $10,000 and it makes a 10% return in the first year, your investment is now worth $11,000 and you have earned $1,000. If during the next year it makes another 10% return, you earn $1,100. You earn $100 more in the second year because of compound interest – interest earned is re-invested into the original investment and interest is earned on that new amount, so you are earning ‘interest on the interest’. This accelerates your investment returns.
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Invest for the Short Term, Medium Term or Long TermThe purpose of your investing activity drives your investing goals in the short-term (1–3 years), medium-term (4–9 years) and long-term (10+ years). If your goal is to save for your retirement as you are under 40, this is likely to be a long-term goal. You’ll need to work out how much you want to retire with before budgeting what to set aside every week or month.
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Understand that there are THOUSANDS of investment choices within New Zealand - don't rush inInvesting is a big industry, and New Zealand is not short investment options. To begin with, every bank offers investment options such as managed funds, term investments and KiwiSaver funds. Beyond banks, many financial institutions provide investment options – these include share market investment platforms such as ASB Securities and First Direct; Managed Funds platforms such as Sharesies, InvestNow and Simplicity are numerous. There are also longstanding schemes like Bonus Bonds which continues to be popular. The residential property market (i.e. buying a house to rent it out) is a new nationwide favourite as well.
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Understand the fact that past results NEVER indicate future investment returnsMany investments loudly proclaim their past returns – you’ll see lines like “12.50% average annual return for the last five years”, but this is not a guarantee of future results. If you are looking at the marketing materials that show previous wins, understand this does not mean you will earn this. It may be less, it may be more.
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Make regular investments - avoid saving up chunks to investIt may be tempting to save up a nice round number of dollars to invest, but you will save more if you make regular, small contributions. Many investment platforms don't require you to invest a large amount, so even a $10 contribution will help you in the long term. The only thing you'll need is the discipline to invest consistently regardless of market conditions - knowing a dollar invested can become two dollars for your future will help develop a habit of regular investing.
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Determine Your ‘Investor Type’
Your relationship with money is personal, and what investments are best for you is unique. We are fans of Sorted.org.nz's investor profile tool which asks nine questions to determine if you are low-risk investor ("defensive" or "conservative") or a high-risk investor ("growth" or "aggressive"), or somewhere in the middle ("balanced"). While your investor type may change over time, determining your profile before you invest will let you make the best decisions.
We've borrowed the definitions from Sorted below to help you understand what investor type you may be.
A defensive investor:
A conservative investor:
A balanced investor:
A growth investor:
An aggressive investor:
We've borrowed the definitions from Sorted below to help you understand what investor type you may be.
A defensive investor:
- Requires investments to be protected to minimise ups and downs in value
- Is prepared to accept lower long-term returns
- May need regular income from their investments
A conservative investor:
- Looks to minimise ups and downs in the value of their investments
- Is prepared to accept lower returns
- May need regular income from their investments
A balanced investor:
- Tolerates some ups and downs in the value of their investments
- Can achieve good returns over the long term
- Needs minimal income from their investments
A growth investor:
- Accepts significant ups and downs in the value of their investments
- Can achieve high returns over the long term
- Needs minimal income from their investments
An aggressive investor:
- Accepts extreme ups and downs in the value of their investments
- Can achieve higher returns over the long term
- Does not need regular income from their investments
Investment Red Flags
The old saying ‘if it sounds too good to be true, it probably is’ could well be the most important consideration when it comes to choosing an investment.
Ponzi Schemes – Wellingtonians were badly caught out by the recent Ross Asset Management scam, losing hundreds of millions of dollars. Ponzi schemes have one thing in common – the investment returns are ALWAYS positive and ultimately fictitious and fraudulent.
Banned Company Directors and Bankrupts – if you have heard about an investment opportunity promising great returns that is not marketed by respected institutions, at the bare minimum get details about who is behind it. Usually, such schemes are fronted by banned directors or bankrupts – you can check their names to see if they are indeed either here and here.
Initial Coin Offerings (ICOs) and Cryptocurrency – In late 2017, the New Zealand government’s financial markets authority stopped New Zealand's first ICO from going any further based on some fishy claims by its promoter. Find out more on the risks of investing in blockchain technology projects.
Investment seminars – Dubious characters all over the country host investment seminars which promise to make everyone rich beyond their wildest dreams. If the seminar is selling a specific product, the reality is that hefty fees will be required upfront and almost certainly you’ll be ripped off. The most popular approach is to ask yourself, ‘do I need to pay a lot of money to have access to the knowledge?’ – if the answer is yes, be wary.
Investment and trading software – like investment seminars, this usually includes schemes like FX trading and futures trading among others. The Australian Government’s guide to avoiding being ripped off is an excellent resource.
Ponzi Schemes – Wellingtonians were badly caught out by the recent Ross Asset Management scam, losing hundreds of millions of dollars. Ponzi schemes have one thing in common – the investment returns are ALWAYS positive and ultimately fictitious and fraudulent.
Banned Company Directors and Bankrupts – if you have heard about an investment opportunity promising great returns that is not marketed by respected institutions, at the bare minimum get details about who is behind it. Usually, such schemes are fronted by banned directors or bankrupts – you can check their names to see if they are indeed either here and here.
Initial Coin Offerings (ICOs) and Cryptocurrency – In late 2017, the New Zealand government’s financial markets authority stopped New Zealand's first ICO from going any further based on some fishy claims by its promoter. Find out more on the risks of investing in blockchain technology projects.
Investment seminars – Dubious characters all over the country host investment seminars which promise to make everyone rich beyond their wildest dreams. If the seminar is selling a specific product, the reality is that hefty fees will be required upfront and almost certainly you’ll be ripped off. The most popular approach is to ask yourself, ‘do I need to pay a lot of money to have access to the knowledge?’ – if the answer is yes, be wary.
Investment and trading software – like investment seminars, this usually includes schemes like FX trading and futures trading among others. The Australian Government’s guide to avoiding being ripped off is an excellent resource.
Financial Advisors - What You Need to Know
The financial advisor environment in New Zealand is somewhat misunderstood, so we've prepared a summary below to walk you through what a financial advisor is, who uses them and how they are paid, along with some tips of what to ask them should you decide to meet with one.
Our guide to Financial Advisors outlines all you need to know about their role in your investing.
Our guide to Financial Advisors outlines all you need to know about their role in your investing.
