Investing can be a great way to help further your goals in life. Grow your knowledge with these investing basics.
2020 has been the year of change for many Kiwis as various Covid-19 lockdowns disrupted our daily routines. Covid's impact continues to be felt in different ways - it's all part of coming to grips with our new normal. How's Covid-19 changed your long-term plans? Have you, like many Kiwi's rethought how you save and invest to help make your long-term plans a reality?
Whether you’re new to investing or picking up where you left off – here’s some key things to consider before putting your cash to work.
1. Have a goal
What do you want your investment to do? Is the end goal something concrete like a property or is it more about dipping your toe in the water to see what investing is like? Having an end goal in mind is a great motivator to stay on track. For instance, you might want to invest to buy your first home without using KiwiSaver or otherwise plan for the trip of a lifetime when international travel allows.
Having a clear goal also helps you decide on the two fundamentals of investment: your risk tolerance and investment timeframe.
2. Know your risk tolerance
Consider this: If your investment is worth $10,000 today but is worth just $9,000 tomorrow, how would you feel? Sick to the stomach or relatively calm? Generally, with more risk, comes more reward – but if you’re losing sleep about your investment then it probably isn’t right for your risk tolerance.
If you’re not sure what your risk tolerance is, think about how you managed your KIwiSaver account over March and April during the impact of Covid-19. If you saw your balance drop but stayed the course and chose to do nothing, you’re likely to have a higher tolerance for risk.
If a drop in balance led you to switch your KiwiSaver money to a lower risk fund such as cash or conservative, chances are you have less tolerance for risk.
3. Decide your investment timeframe
Ask yourself - how long until you want to cash out your investment? For shorter-term timeframes (less than 5 years), you might want to look at an option such as a conservative managed fund. Although it doesn't have the potential to grow as much over the long-term as balanced or growth managed funds, they’re not as volatile so the journey on the way is likely to be less bumpy.
If you don’t expect to need your cash for at least 10 years, growth managed funds, individual stocks or property may be more suitable investment options.
4. Have a plan
Are you investing as a one-off to see how your initial contribution grows – or planning to contribute more regularly? Both approaches are valid, but you should run a few calculations to make sure what you’re putting in is likely to make your goals a reality.
A tool like Sorted’s savings calculator lets you play with different rates of return, and additional contributions to give you a good feel for what you may come out with after a few years.
5. Understand what inflation means for your investment
Put simply, if you have a trolley full of groceries, inflation means that over time, the cost of those groceries has increased. Why? If your savings aren’t getting a return that keeps up with inflation, you’re actually losing money because the value of your money in real terms is decreasing. You can’t buy as many things for the same amount of money.
When you’re looking at your investment options, it’s important to understand the impact of inflation on your investments, so that your hard-earned savings aren’t being eaten away by this apparently invisible force called inflation. For instance, if your term deposit is offering a return of 1%, but inflation is 2%, your investment is actually losing value.
If you’re concerned about the impact inflation is having on your term deposits or savings account and are looking for alternatives see how term deposits compare to manage funds.
6. Expect volatility
If 2020 has any lesson for investors, it’s to expect the unexpected. While the market recovery from the initial impact of Covid-19 has been relatively quick according to historical standards, we are not out of the woods yet. Covid-19 shows just how quickly volatility and new disruptions can impact your investments.
If you’ve got your goal and plan in place (and stick to it), you’re more likely to come out of volatile periods on the right track.
7. Understand the jargon
The world of investing as lots of words that aren't familiar to everyday people. Coming to grips with the lingo can be challenging. We unpack a few of the more common terms you're likely to come across when you invest.
- Asset allocation
Investments such as KiwiSaver or managed funds usually invest in many different assets including shares, fixed interest, and property. Your asset allocation is the split of those types of investments.
- Fixed interest
A type of investment where cash is invested for a fixed return, e.g. a term deposit.
- Managed funds
A type of investment where a firm invests money on your behalf via an asset allocation. KiwiSaver is a form of managed fund.
The type of fund you choose to invest your money into, e.g. growth, balanced or conservative funds. The level of risk will vary depending on your mandate.
Investing in the ownership of a property, return comes as a share of the rental income the property generates.
How much your investment has either grown (or shrunk) over a time period. For instance, if you invested $100 a year ago and it’s worth $110 today, your return is 10%.
The chance that your investment will increase or decrease in value. Fixed interest has lower risk, shares are higher risk investments.
Owning a slice of a company, you can receive a slice of the profits in the form of dividends.
If you’d like to further your investment journey, learn how Kiwi Wealth’s Managed Funds could be a great way to start as long-term, managed funds usually generate greater returns than term deposits.