Different Types of Investments
There are many different types of investment. Broadly speaking, they fit into four asset classes:
- Cash
- Fixed Interest
- Shares
- Property
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.
It’s often easiest to think of cash as the money you hold in your day-to-day or savings account. It generally earns a low return, but it is highly liquid, meaning you can access it easily when you need it.
Within an investment portfolio, cash usually plays two roles. The first is practical. A cash account often receives interest, dividends and other income, and is used to pay fees, expenses and withdrawals.
The second role is strategic. Some portfolios include a cash allocation invested in very short-term, high-quality instruments such as bank bills or securities close to maturity. These are held primarily for liquidity and stability rather than return.
At times of market uncertainty, or when suitable investment opportunities are limited, portfolios may hold higher levels of cash. Similarly, when there is uncertainty in your own financial situation or upcoming spending needs, holding more cash can provide flexibility and reduce pressure to sell other investments at the wrong time.
Term deposits
The most familiar form of fixed interest investing is a term deposit. You lend money to an organisation, usually a bank or finance company, for a set period. In return, you receive interest and the repayment of your capital at maturity.
Interest rates on term deposits are influenced by several factors, including the Official Cash Rate in New Zealand, the broader interest rate environment, the cost of borrowing offshore, and supply and demand for funding.
Interest paid during the term versus at maturity
One important distinction is whether interest is paid regularly and compounded, or paid in full at maturity. Rates advertised as “paid at maturity” can look more attractive at first glance, but often result in a lower effective return than a slightly lower rate paid and compounded over time.
Other types of fixed interest
In addition to term deposits, fixed interest portfolios may include government bonds, high-quality local authority stock, and investment-grade corporate bonds. These are typically selected and managed by specialist fund managers who trade and adjust holdings as market conditions change.
Because a core objective is to avoid permanent loss of capital, it would be unusual for a fixed interest portfolio to hold securities below investment grade.
Fixed interest investments are valued daily and marked to market, so their value can move up or down. While the mechanics can be technical, the underlying principles remain consistent: focus on quality, future cashflow, and diversification.
For those investing directly, understanding credit ratings is essential. The key question is whether the issuer is likely to repay your money when it is due.
In addition to term deposits, fixed interest portfolios may include government bonds, high-quality local authority stock, and investment-grade corporate bonds. These are typically selected and managed by specialist fund managers who trade and adjust holdings as market conditions change.
Because a core objective is to avoid permanent loss of capital, it would be unusual for a fixed interest portfolio to hold securities below investment grade.
Fixed interest investments are valued daily and marked to market, so their value can move up or down. While the mechanics can be technical, the underlying principles remain consistent: focus on quality, future cashflow, and diversification.
For those investing directly, understanding credit ratings is essential. The key question is whether the issuer is likely to repay your money when it is due.
Bonds - for more information from the Financial Markets Authority about how Bonds work - download their booklet below
Credit ratings
If you are investing in fixed interest directly, one of the most important things to understand is credit risk. Put simply: what are the chances the issuer repays you in full and on time?
Credit ratings are an independent assessment of the issuer’s ability to meet its obligations. Ratings can apply to an organisation as a whole, and they can also apply to a specific bond or debt issue.
As a general guide, “investment grade” starts at BBB- (or Baa3) and above. Lower ratings indicate higher risk. Higher risk can mean higher returns, but it also increases the chance of losing money, particularly in a default.
A key point: credit ratings can change. That is why diversification matters, and why fixed interest portfolios are usually built with a strong focus on quality.t.
When you invest in shares of a listed company, you are buying a stake in that business and its future earnings. Returns typically come from two sources: dividends paid from profits, and changes in the share price over time.
Share prices move daily. Some companies perform well, others disappoint, and some fail altogether. Prices are influenced by company performance, industry conditions, economic confidence and investor expectations, many of which change frequently and unpredictably.
It is normal for share markets to experience periods of volatility. Over shorter periods, prices can move sharply in either direction. Over longer periods, the aggregate value of well-diversified share markets has tended to grow faster than inflation.
Because of this volatility, shares are generally more suitable for long-term investing. If you need to access money in the short term, the price at which you sell may be lower than what you paid.
Many investors access shares through managed funds, where professional fund managers build diversified portfolios across companies, industries and countries.
Direct investments
You can invest directly in term deposits, bonds, shares and property, or you can invest through managed funds where investment decisions are made on your behalf.
Some people enjoy taking a hands-on approach and making their own investment decisions. This can be satisfying, but it requires time, discipline, and a willingness to accept the risks involved. In some cases, specialist advice is essential.
Direct investment in individual shares or property should only be undertaken if you have the knowledge to assess risks properly, or are prepared to pay for that expertise. Property investment, in particular, involves ongoing administration, maintenance, tenant management and compliance.
Owning property is closer to running a small business than holding a financial asset. The detail matters, and rushing in without proper homework can lead to poor outcomes
Managed fund investments
In a managed fund, your money is pooled with that of other investors and invested across a range of assets by a professional fund manager. Funds are designed for different objectives, timeframes and risk levels.
Some funds target higher growth and accept higher volatility. Others focus on preserving capital and generating income. The right mix depends on how important the money is to your future plans and when you expect to use it.
Managed funds can provide diversification, professional oversight and administrative simplicity, particularly for long-term retirement savings.
Your home
For most New Zealanders, their home is their largest asset. It’s a special kind of investment because it is also where you live, and it comes with emotional attachments.
It helps to step back and look at how much of your net worth is tied up in your home, and how that fits with your wider retirement plan. In some cases, a smaller home and more diversification elsewhere can provide more flexibility.
Rental property investment
Owning houses rented to individuals can be a profitable investment. Returns come from rental income (after expenses) and changes in the value of the property over time.
Over the last few years, property prices in New Zealand have fallen in many areas and the pace of recovery may be slower than people are used to. That makes it even more important to focus on cashflow, costs, and your ability to hold the investment through a flat or falling market.
The key questions to ask yourself are:
How am I going to make money out of this investment?
How am I going to take money out of this investment? (particularly if you are looking at a syndicated property trust investment)
People debate whether property is a better investment than shares. The important point is that they are different forms of investment. If well managed, either can contribute to long-term results. If not, or without the right knowledge and attention, both can lead to significant losses.
Losses in shares are obvious because prices are visible every day. Property losses are less obvious because they are not constantly priced, but they still happen. It’s also worth being cautious about building quality and ongoing maintenance, including the risk of costly defects.
We don’t encourage anyone to rush into direct property investment without doing the homework. It takes time, judgement, and a willingness to deal with the practical realities of tenants, vacancies, maintenance and compliance. There are also indirect ways to invest in property through managed investments, which can reduce the day-to-day workload and improve diversification.
Moneyworks NZ Ltd
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Regulatory Information: Moneyworks is a Licensed Financial Advice Provider (FSP15281), and AML Reporting Entity and is supervised by the Financial Markets Authority.