Types of Investment
There are many different types of investment. Broadly speaking, they fit into four asset classes:
- Short term deposits
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.
Here is a brief description of each type of investment:
(1) Short term deposits
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.
(2) Bond Investments
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.
(3) Property Investments
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.