When it comes to DIY investing in New Zealand it’s hard to look past the InvestNow platform. And there’s a good reason for that. InvestNow has zero fees and you can start investing a minimum investment amount is $50, when part of a Regular Investment Plan, or $250 for one-off investments.
InvestNow is a fund platform that offers you access to a variety of funds to invest in. They have 130 funds and offer term deposits from several major banks. They do not manage any funds- rather they are the middleman between you and the funds. They make their money by charging fund managers to list their fund on the platform.
So with just one account, DIY investors can get access to a large number of funds with no platform fee. The problem is now- which funds do you choose?
How to choose funds on InvestNow
Now, I can’t tell you which funds to choose on InvestNow- that’s up to you. You should decide which funds to invest in based on your risk tolerance and investment horizon. Your Risk tolerance is the degree of variability or volatility in investment returns that you as an investor are willing to withstand. And you Investment horizon is a term used to identify the length of time that you as an investor is aiming to maintain their portfolio before selling all or part of your investments.
The other important aspect of investing is that you should have a diversified range of investments. Both in terms of diversification in different types of assets, and diversification in the asset class itself. It’s generally advised to have some shares, some property, and some cash or bond investments. The mix of each will be determined by your risk portfolio. So if your young and an aggressive investor, like me, you might only have shares and property in your portfolio.
An easy way to get started with your asset mix is by using the Sorted ‘Investor Kickstarter’ calculator. The calculator will ask you a series of questions to then categorise you as a certain ‘investor type’ which will then provide a percentage-based mix of asset classes appropriate for your ‘investor type’.
When I complete the questionnaire I get an ‘Aggressive’ Investor type asset mix
Once you know how you want to allocate your portfolio mix you can go fund shopping-but don’t go crazy. The aim here is to find funds that will fill certain aspects of your investor type. i.e you should choose a share fund, a property fund, a bond fund, and a cash fund- if that is the allocation that you are comfortable with.
So I can’t tell you what funds to choose, but I can recommend some funds for specific reasons. Generally, when I’m selecting a fund I look for funds with a low fee, and that it covers a specific area in my portfolio, and generally, I like passively managed funds to avoid the risk of humans picking the wrong investments. I try not to let past performance weight in on my decisions to much, but subconsciously, it probably still affects my decisions.
What I think you should consider when selecting a fund;
- Low fees
- Complements your investment portfolio
- Preferably Passively managed
Oh and I’d like to recommend that you join KiwiSaver even if only to contribute the minimum each year. Not many InvestNow products offer a guaranteed 50% return.
How Many Funds?
How many funds should you choose? This really depends. You can make a portfolio of two funds and be well-diversified, heck- you could even just skip InvestNow and just join Simplicity privately and only have the one Fund. Simplicity has low fees, however, the minimum investment is high at $5,000. And their $30 annual fee is equivalent to 0.6% – with $5,000 invested.
I’d say you’d like to keep it simple. I’ve tried to stick to as low a number of funds as possible. Although sometimes I get a little carried away fund shopping. I’m had invested in 11 funds on InvestNow at one stage- which was to many for me. Keep it simple.
The more funds you have the harder it will be to figure out how your portfolio is doing and to re-balance your portfolio later. So try to keep it simple- every fund should have a reason for being there. If it doesn’t consider selling it- I know it’s hard to sell if you are investing in the long term, but it just makes things easier.
For I while I was invested in both the AMP NZ fund, and the Smartshares NZ top 50 funds, which invest in the same thing- there is a slight difference, but basically identical. I finally sold it and now my entire portfolio is much simpler to manage. The same thing with the US500 fund and Vanguard, they both overlap heavily.
What I’m saying is that you don’t get diversification necessarily from owning more funds, especially if the funds you are buying into are made up of the same thing. Many of the funds are already diversified in their own right.
So to help you get started out with InvestNow I’ve listed some of the funds that I consider to be good options for different classes of funds.
International Share Funds
First up- International share funds. These should make up a larger proportion of your portfolio- depending on your investor type. The following three funds will give you good exposure to international shares and are considered to have a low fee.
Vanguard International Shares Select Exclusions Index Fund (0.20% Fee)
The Vanguard International Shares Select Exclusions Index Fund seeks to track the return of the MSCI World ex Australia, ex Tobacco, ex Controversial Weapons, ex Nuclear Weapons (with net dividends reinvested) in Australian dollars Index before taking into account fees, expenses and tax.
AMP Capital All Country Global Shares Index Fund (0.39%)
The AMP Capital All Country Global Shares Index Fund invests in a passively managed low tracking error portfolio managed against companies listed on the MSCI All Country World ex Tobacco Index. The Fund’s objective is to provide a return that closely matches the return of the Index, fully hedged to the New Zealand dollar.
Smartshares US 500 Fund (0.34%)
The US 500 Fund invests in the Vanguard S&P 500 ETF, which is designed to track the return on the S&P 500 Index. The Vanguard S&P 500 ETF invests all, or substantially all, of its assets in the financial products included in the S&P 500 Index. You can invest in this fund directly with Hatch to lower the fee to 0.03%.
New Zealand Share Funds
The next is a New Zealand share fund. It’s easy to overindulge in NZ funds because we recognise and know the underlying companies more so than some of the other funds. A majority of NZ funds will hold companies like Fisher & Paykel, Spark, Auckland International Airport, Chorus, Z Energy, and Port of Tauranga.
But you need to remember that New Zealand is a small place, and even though these companies are all in different sectors- which give a level of diversification, they are all operating in the New Zealand market. So some consider even 20% in NZ funds to be too much if you are trying to go for diversity. We only have 0.1% of the world’s population, so our portion of the world’s economy is close to that number too.
I have a number of NZ share index funds but can only recommend one- because even if you buy an NZ top 50, an NZ Small Cap, and an NZ dividend fund, chances are there will be major overlaps in what makes up the funds. I mean there are only just over 150 companies on the New Zealand exchange and limited ways to skin a cat. I mean the likes of Infratil and Mercury make an appearance in almost all NZ share funds.
For this reason, I now think the AMP fund is the best because it has the lowest fees- it is a managed fund and not an index fund, but there’s no reason to look past the Smartshares Index funds either.
AMP Capital Capital NZ Shares Fund (0.33%)
The New Zealand Shares Fund is a diversified portfolio of predominantly New Zealand shares constructed with the aim of outperforming the S&P/NZX 50 Index. The fund will generally be overexposed to companies which have a sustainable competitive advantage, good growth outlooks, the ability to grow earnings faster than revenue and which can grow without a strong reliance on raising additional capital.
Smartshares NZ Top 50 Fund (0.50%)
The NZ Top 50 fund tracks the S&P/NZX 50 Portfolio Index which is made up of 50 of the largest financial products listed on the NZX Main Board.
Smartshares NZ Mid Cap Funds (0.60%)
The NZ Mid Cap Fund invests in financial products listed on the NZX Main Board and is designed to track the return on the S&P/NZX Mid Cap Index
Smartshares NZ Dividend Fund (0.54%)
The NZ Dividend Fund invests in financial products listed on the NZX Main Board and is designed to track the return on the S&P/NZX 50 High Dividend Index.
To get some diversification in your portfolio you might want to include a property fund- Property funds can behave differently to the wider share market and can provide inflation protection. Although if you are looking at a New Zealand or Australasian property fund, and you are invested in an NZ fund, then you might be introducing some overlap in your allocation.
AMP Capital Australasian Property Index Fund (0.42%)
The AMP Capital NZ Property Fund is a passively managed portfolio which provides access to Australasian property investment opportunities through a single fund. It aims to generate medium to high returns over the long-term by investing in listed property securities in New Zealand and Australia. Contains Kiwi Property Group and Goodman property trust which are also contained in most NZ funds.
Smartshares NZ Property Fund (0.54%)
The Smartshares NZ Property ETF invests in property assets listed on the NZX Main Board and is designed to track the return on the S&P/NZX Real Estate Select Index. Contains Kiwi Property Group and Goodman property trust which are also contained in most NZ funds.
International property funds seem to be slightly more expensive than the NZ ones. There are a few that are below 1% on InvestNow, although I haven’t looked into them at all.
Harbour Real Estate Investment Fund (0.72%)
Harbour Real Estate Investment Fund is an actively-managed fund that invests in listed companies that derive their economic value predominantly from owning or controlling real estate.
Pathfinder Global Property Fund (1.00%)
The Pathfinder Global Property Fund is designed to provide a liquid and currency-managed global listed property exposure, including an allocation to New Zealand. Shares are screened on environmental, social and governance criteria.
Bond and Cash Funds and Term deposits
Bonds and Cash funds are considered a defensive asset class because they are typically less volatile than some other asset classes such as shares. Many investors include bonds in their overall portfolio mix as a source of diversification to help reduce volatility and overall portfolio risk.
But, do you need bonds and cash in your portfolio? Again I think this is a question only you can ask and it depends on your risk tolerance. Generally, more aggressive- fewer bonds. Risk-averse investor, more bonds.
Bonds, Cash funds, and Term deposits can help smooth out the ups and downs of more volatile investments such as stocks. Some bond funds to consider are;
Smartshares Global Aggregate Bond Fund (0.30%)
Invests in the iShares Core Global Aggregate Bond UCITS ETF, which is designed to track the Bloomberg Barclays Global Aggregate Index in NZD. The iShares Global Aggregate Bond UCITS ETF seeks to track the investment results of an index composed of global investment-grade bonds.
AMP Capital Hedged Global Fixed Interest Index Fund (0.39%)
The AMP Capital Hedged Global Fixed Interest Index Fund is a passively managed low tracking error portfolio managed against companies listed on the Bloomberg Barclays Global Aggregate Index. The Fund’s objective is to provide a return that closely matches the return of the Index, fully hedged to the New Zealand dollar.
But if you have a mortgage like me- I don’t think its worth having any bonds or cash funds. You should just divert the proportion you have allocated to bonds and cash to pay off your mortgage faster.
- If you have a mortgage you are short bonds and cash- you want the official cash rates to go down.
- If you have bonds and cash in your portfolio you are long bonds and cash- you want the official cash rates to go up.
You shouldn’t be both be short and long on an investment class, which is what I think is happening if you invest in bonds and cash while having a mortgage.
The way I see it is that when the official cash rate rises, bond prices rise. And when the official cash rate falls, bond prices fall. This is because when interest rates rise, investors can get a better rate of return elsewhere, so the bonds need to improve upwards to attract new investors. But, I’m not an expert in bonds or mortgages- so my logic might be flawed.
If you look at it another way, if you have a mortgage of say 4%, you need a return from bonds and cash funds greater than 5% to break even. You need your after-tax return to be greater than 4%. From my research, not many bonds and cash funds will provide you with a greater return than 5% consistently.
So you are better off diverting any funds that you are going to invest in bonds and cash towards paying off your mortgage faster. Paying your mortgage is a guaranteed 4% savings on interest.
InvestNow in a Nutshell
So that’s it. InvestNow in a nutshell.
Selecting funds can seem like a difficult choice, and that you need all the information before selecting a fund. I would argue if you are just starting out with a small amount- just start with any low fee, passively managed index fund. It’s better to just start investing than to do nothing. Over time you will learn more and more, and you can always change later. Most likely, your investment strategy will change over time anyway.
I started off investing in 2014 with RaboDirect- At that time, I didn’t really have a clue. I figured the best way I’d learn is to just have skin in the game. Rather than becoming overwhelmed by information paralysis. So I opened an account and made my first mistake. In hindsight, my first mistake was selecting funds based on past performance, rather than selecting funds to fit my asset allocation (which at the time I did not have). The funds I had invested in were;
- Nikko AM Core Equity Fund- 0.98% fee
- OneAnswer SAC New Zealand Share- 1.84% fee
- Fisher Funds NZ Growth Fund- 2.35% fee
- Nikko AM Concentrated Equity Fund- 1.84% fee
So four funds selected on past performance, no real regards for fees or underlying assets. If you actually look into these funds- they are all invested in NZ shares. So even with four funds, I didn’t have much diversification, although at the time I felt like I did.
I was fortunate that two things happened. One is that RaboDirect was sold to InvestNow- and my account was merged into the InvestNow platform, and two- I started reading MMM.
The one piece of advice from MMM that took me a while to learn from those early years was that the only thing that is guaranteed with an investment fund are fees. And I stupidly choose funds with high fees. The fees were: 0.98%, 1.84%, 2.35%, and 1.84%. All very high.
Sure I need to sell the higher funds- but what I did instead was to buy lower fee funds and hold the higher-fee funds. I went fund shopping a bought funds with low fees- bear in mind that my idea of low fees at that time was below 1%- since all my previous funds were higher than that. Being on Invest now gave me a large selection of funds to choose from. So in May 2018, I was invested in;
- Nikko AM Core Equity Fund- 0.98% fee
- OneAnswer SAC New Zealand Share- 1.84% fee
- Fisher Funds NZ Growth Fund- 2.35% fee
- Nikko AM Concentrated Equity Fund- 1.84% fee
- Vanguard International Shares Select Exclusions Index Fund 0.2%
- Smartshares – NZ Mid Cap Fund (NS) (MDZ) 0.60%
- Smartshares – Total World Fund (NS) (TWF)0.56%
- Smartshares – Europe Fund (NS) (EUF) 0.55%
- Smartshares – NZ Top 50 Fund (NS) (FNZ)0.50%
- AMP Capital NZ Shares Index Fund 0.39%
- Smartshares – US 500 Fund (NS) (USF) 0.35%
- ANZ Growth Fund KiwiSaver 1.11%
Learn by Doing
Again- my ideas was to learn by having skin in the game- so it may look like many funds- but the actual amount invested was small- I was dipping my toes in. At that time I had more than 56% of my portfolio in P2P lending- again not very diversified.
So the number of funds had exploded to 11- with the main aim of minimizing fund fees- but I was always hesitant on selling funds. But in July 2018 I bite the bullet and sold all my funds with fees above 1%. So down to 7 funds. Then I started to look into diversification and asset allocation. And I’m still learning about it today.
I sold the Total world and Europe funds- in favour of investing more into Vanguard’s funds (yes I bought both early on- because I wanted to learn about the difference in hedging and non-hedging. Again- skin in the game motivates me to learn). And I sold the SmartShares NZ top 50, just last month, in favour of AMP capital NZ fund.
But I also bought a property fund to increase my diversification- the AMP Capital Australasian Property Index Fund, and since I’m nearing $50k in Vanguards, I bought AMP Capital All Country Global Shares Index Fund. This is because I haven’t run the numbers on tax efficiency on FIF over $50k when compared to other funds like the Global share fund.
Changing Investment Strategy
I also started reading up about dividend investing- some people are convinced that is the way to go. Again, skin in the game- the only way to motivate me to learn- purchased the Smartshares NZ Dividend fund. Similarly with Bonds- I got cold feet after a twitter conversion on my aggressive portfolio and decided it was time to learn about bonds. So I now own AMP Capital bond fund.
So that is how I ended up with 11 funds- Sounds like a lot, but some don’t have a significant amount of money invested in them. They are there for me to learn. The majority of my portfolio is in Vanguard (about 40%)
My strategy has always been to start off with a small amount and just invest it. Then over time, you will have to learn. I didn’t know anything at all amount investing in managed or index funds when I started. I just knew that I needed to be investing. So I jumped in and over time I have started to become more conformable in what I am aiming for in terms of asset allocation. And over time I will start to cull funds- I just need to get over my fear of selling. I will probably end up with a combination of the Vanguard funds, AMP capital NZ fund, AMP capital property fund, and the AMP capital global fund.
Too Many Funds?
I don’t think it’s necessarily a negative to have too many funds in your portfolio- if all the funds have been chosen for a specific purpose. But if you have multiple funds that overlap- they don’t really add any diversification to your portfolio- rather, they only increase the time it takes to manage your portfolio. Extra funds only increase management time if you are like me and track the performance over time. You could have many funds and set and forget. It wouldn’t necessarily increase your portfolio management time.
Where a smaller number of funds is an advantage is when you are re-balancing your portfolio. Say for example you want to stick to a 80%-10%-10% in International shares, NZ shares, and Property, and you are invested in 3 funds that cover these areas, then when it comes time to re-balance- it’s easy just work out what percentage each one is, and sell any that are overweighted and buy the ones that are underweighted. With multiple funds cover the same assets allocation, say International shares, you need to decide whether you are going to sell shares in Vanguard or AMP capital global.
Over the time that I have been investing, and writing my blog I have learned that you should keep your investments simple but deliberate. Focus on low fees and allocation to match what type of investor you are. And don’t be afraid to change your strategy, or what funds you hold over time. The final point is the one I still need to become comfortable with.
And finally, I write these posts as a way to learn. They are my opinions and the facts presented here are correct to the best of my knowledge, but I’m only human. You should do your own research when you are selecting your investment funds.
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