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There are many different types of investment. Broadly speaking, they fit into four asset classes:
Within each asset class there are investments to suit different kinds of risk, duration, returns and liquidity. There are also different ways of investing. You can take the ‘DIY’ route and invest directly in one or more of the asset classes. Or, you can invest in a managed fund where fund managers make a wide range of investment decisions for you.
Bank savings accounts The simplest kind of short term (or cash) investment is a savings account. Returns are low compared to other investments, but returns are fairly certain – so your investment won’t drop in value in the short term like others might. You can withdraw part or all of your money whenever you want (total liquidity). This makes them ideal for short term savings goals, or as a place to keep your emergency fund. They’re not a good investment option for medium or long term goals.
Bank fixed term investment You give the bank a lump sum for a set period (a fixed term) usually three, six or 12 months. Your money is locked away for the fixed term. In return, you get a higher interest rate than you could get in a straight savings account.
You may be able to withdraw your money, but you will get a lower rate. May banks now require a month or so notice if you want to break these term deposits.
These can be a good short or medium term investment, depending on interest rates. Interest rates are always changing – sometimes they go through a “high phase” – this is usually a good time to have money on fixed term deposit.
A bond is like an IOU issued by a government or a company. You give them money for a certain period, and they promise to pay it back at a certain interest rate. Bonds lock your money away for a set period of time, but they can sometimes be traded. Generally, they aren’t a good short term investment.
It is important to note that bonds are valued regularly (sometimes minute by minute), so the value of your bond can go up or down. If you are holding the bond to maturity, these price fluctuations may not bother you. However, if you have an investment portfolio that is regularly valued, you will notice these changes in valuation. The changes in valuation are important if you want to sell your bonds.
Many investors invest in Bonds using expert fund managers, through a managed fund.
For most New Zealanders, their largest investment is their home. It’s a special kind of investment – it doubles as the place you live, and it has a strong emotional element. Be careful to separate your emotional ties to your home from your investment objectives. You should think about how much of your net worth is tied up in your home. Would it be wiser to buy a smaller house and spread your money across other investments as well? Check out how your home fits into your retirement plan.
Rental Property Investment
Owning houses rented to individuals can be a profitable investment. Returns from property investment come from rental income, after deducting expenses, and from the increase in the value of property over time.
People debate whether property is a better investment than shares. What’s important to remember is that they’re different forms of investment. If well managed both can provide good long-term results. If not, and without the right knowledge and attention, investment in shares and property can result in significant losses.
It’s easy to see losses on the share market because the prices are available almost daily. Losses on property investment are generally not published, so don’t believe anyone who suggests “you can’t go wrong with property investment”. You need to be particularly cautious of ‘leaky building issues’ in investing in homes as well.
We don’t encourage anyone to rush into investment in shares in particular companies or investment in a particular property. Unless you’re prepared to put the time into understanding and managing the many aspects and issues of property investment, then we suggest you leave it to others.
That’s not to say you can’t benefit from property as an investment. There are several different ways in investing in property – directly or indirectly.
If you’re interested in direct property investment, you can manage the day-to-day administration of your rental property yourself, or use a property management company to do it for you. A property management company takes on the tasks of finding tenants, collecting the rent and bond monies, and attending to maintenance issues etc on your behalf. The fees charged for these services are usually a percentage of the rental income.
For an indirect property investment, you can invest in a managed investment fund that invests some of your money in property. This could be by way of ownership of rented buildings or by way of an investment in shares of public companies, which specialise in property ownership.
This is another option that gives you the many advantages of property ownership without having to find the property and do the hands on management yourself. This type of indirect property investment also makes it easier for the average investor to get the benefits of diversification. Also take a look at direct investment in property.
By investing in shares in a public company listed on a stock exchange you get the right to share in the future income and value of that company. Your return can come in two ways:
Gains may reflect the fact that the company has grown or improved its performance or that the investment community see that it has improved future prospects.
Of course capital losses can also arise.
The price of shares in any individual public listed company can vary from day to day.
On any day some shares may go up in value and some down, depending on how investors view the prospects of each company. And all of the listed company shares in a particular country or industry may increase or decrease in price because of rises and falls in economic confidence or changes in the particular industry. There are a range of complex factors which influence share prices on a daily basis and no one can accurately predict what price listed shares will be in the future.
We know from past experience that some companies will fail and some will flourish.
Overall the long-term trend is for the aggregate market value of listed companies to increase at a rate higher than inflation. Therefore by investing in a wide range of companies operating in a range of industries and countries, an investor has a good chance of making long-term gains. Remember that in assessing the return from shares you need to take into account of dividends received as well as capital gains.
Because of the volatility of share prices (ie the fact that in the short term they may go up or down) it’s not wise to invest funds which you need in the short term, in shares. When you need your money you’ll generally be able to sell your shares, but the price at the time may be below your purchase price. Shares should be used as a long-term investment.
Many investors make their share investments by using expert fund managers.
Different fund managers have different skills and areas that they invest in. Moneyworks assists clients to build a portfolio of managed funds that have a diversified approach to investment.
You can invest directly in term deposits, bonds, shares and property or you can place your money in a managed fund and have full time specialists look after the investment decisions for you.
For some people making their own investment decisions and taking a more hands on approach gives them personal satisfaction and possibly some tax advantages. If you’re interested in direct investment talk to a stockbroker or specialist financial adviser.
Direct investment in shares in specific companies or selected rental properties should only be undertaken if you have detailed knowledge or are prepared to pay for specialist advice. Particularly in the case of property investment, you need to be willing to either spend the necessary time on administration and management, or to pay a property management company to do this for you.
People who want to acquire their own property investment generally have to rely more on their own knowledge and judgement. It’s therefore important to read publications and attend property investment seminars before making any decisions.
Issues you need to consider include the location and type of property (eg city or rural, residential, retail, warehouse, manufacturing, office or special purpose property such as motels or carparking buildings etc), financing and taxation arrangements, price, condition of property and maintenance requirements, lease terms, selection of sound tenants, record keeping etc. Owning a property is like operating a small business. Know the business, put time into the detail and you’ve a good chance of doing well. Rushing in without doing your homework can lead to disaster or at least a risk that you’ll lose some of your capital.
If you want to invest directly in shares or property remember the importance of duration, risk, diversification, returns and liquidity.
Managed fund Investments
In a managed fund your money is pooled with other investors, and a professional fund manager invests it in a variety of investments. Managed funds come in many forms – different funds invest in different types of assets for different objectives.
Some funds target all-out growth and invest more in high risk shares than others – they could rise dramatically or just as easily drop dramatically. These are funds for money that isn’t absolutely vital to your future plans. Other funds look for solid long term growth from a range of deposits, bonds, and shares – a better place for a lump sum intended for your retirement.
Financial advisers can advise you on managed funds that match your investment needs.