Where Should You Invest Your Hard Earned Money?

One of the most asked questions, when it comes to investing, is generally along the vein of “I have X amount of dollars, where should I invest it”. And it’s a hard question to answer with just that much information.

There are two other pieces of information that you need to know when deciding where to invest your money.

One being, what is your investment time frame- how long are you looking to invest the money. Or to put it another way- when do you need that money back by.

And two- do you have any other debt that you could pay off instead of investing. If you have high-interest consumer debt you are almost always better off paying the debt off rather than investing. You should also have an emergency fund before you start to invest.

Mortgage debt is somewhat different, especially in today’s climate where you can normally get a better return over the long term by investing, rather than paying the mortgage faster. Although- paying the mortgage off is an admirable goal and can give you extra personal security.

Mortgages today are generally around 4%, so you need about 7% return before taxes for you investment to beat paying down the mortgage. Since the NZX50 has returned an average of 7.8% over the last 69 years, and 9.9% over the last 16 years- Investing can give you a better rater- but it has more risk!

Returns for the NZSX40 and NZX50

Getting Started with Investing

The first thing you’ll need to work out is how long you have to invest your money. This will give you an indication as to where you can invest the money.

Do you need the money in a few years time to replace your car, or to cover the cost of a wedding? Then you only have several years to invest. If on the other hand, you are investing for retirement then you will most likely have decades to invest.

Once you have worked out your investment timeframe you can use the graph below to figure out where you can invest the money.

Where to Invest Your Money

If you have a 1-2 year investment time frame you want to refrain from investing in anything that is risky and stick with savings accounts and term deposits.

If you have a longer time frame, let’s say 6 years, then you want to split between bonds and shares to hedge some of the market volatility in share.

If you are investing for retirement you want to consider having a large proportion in shares, as you still have the time to ride out any market swings.

Now, your investment timeframe does change over time. Say you want to invest for your retirement in 20 years- you should invest most of it in a growth asset such as shares.

However, as your retirement gets closer, and if you need the money right away when you retire, you need to dynamically reallocate your investment away from the high growth high volatility share to the more stable investments.

Less than 1 year

If you only have 1 year until you need your investment money you should stick with either a banks savings account or a short term deposit. The returns on a savings account these days can be as low as 0.1% for an on-call savings account. You can get bonus savings account which requires you to increase the balance every month and not withdraw any tog et the bonus interest. These accounts can get you to about 2%.

Check out all the bonus savings rates from all the major banks on Interest.co.nz

Term deposits can range from 1 month to several years. They do lock your money in, so you really need an emergency fund if you are going down the term deposit road. Generally, if you break a term deposit you forfeit all interest earned. The term deposit interest rates range from 0.5% to 1.9 %for 6 months, up to 3.2% for 9 Months.

Check out all short term deposit rates offered by the major banks on Interest.co.nz

1 to 5 years

If you’re investing for 2-3 years you probably want to term deposits. You need to be certain you don’t need the money before the term is up because you will often lose all interest if you need to break the term and withdraw the money.

Check out all 1 to 5-year term deposit rates offered by the major banks on Interest.co.nz

5 to 7 years

When you have 5 to 7 years to invest you should have some proportion of your portfolio in growth assets like shares, ETFs, index funds, or property. You can only start dabbling in these assets if you have a long investment timeframe as the volatility of returns of these investments is high.

To illustrate why you need a longer timeframe for these assest classes take a look at the graph below of the NZX50 from Jan 2003 to Jan 2019.

NZX-50 2003 to 2019

Take a look at the 3 trendlines.

If you had invested in the NZX50 in Jan 2007 and planned to sell in Jan 2009, you would have lost 33% of your original investment.

If you had invested in the NZX50 in Jan 2007 and planned to sell in Jan 2014, you would have gained 16.8% of your original investment.

If you had invested in the NZX50 in Jan 2007 and planned to sell in Jan 2017, you would have gained +69.8% of your original investment.

So even when you invested just before the finanical crises, you would still have had a positive return after 7 years. This is why the saying “it’s not about timing the market, rather it’s time in the market that counts” comes from.

So in the long run- you will nearly always get your money back if you invest in an index fund like the NZX50 or US500. If you don’t believe me check out my simulations of using actual date from 1949 to 2018. From which I calculated the chances of losing money if you invest in the NZX50.

Odds of Losing Money in the NZX-50 1949-2018- Investing in Index funds is a safe way of gaining good returns on your money.

The graph shows us that if you want to lower your risk you need to invest in index funds for the long run. Like the S&P 500 graph showed. If you are investing for 10 years, you only have a 3% odds of losing money. Those are some pretty good odds!

A similar principle applies to the housing market.

7 year +

If you have 7 plus year to invest you should consider having a large proportion of your investment portfolio in growth assets. With a long time frame, you can expect a positive return on shares and property.

There are certain people who think if you are young you should have 100% of your portfolio in growth assets. And that’s what I am considering at this stage of my life. It’s not for everyone though. It will depend on your tolerance to risk and if you can ride out any downturns and market corrections.

Different types of investments

So now you have an idea of the different types of investments are suitable for different investing time periods. It’s also essential to understand each of these different types of investments. Then along with your risk tolerance and the time frame you have, you can decide which is right for you and your investing goals

Savings Account

The inner workings of a Savings accounts are generally well known- so I don’t have much to add about them. Just remember with bonus savings accounts that you can lose your bonus interest very easily if you break their terms- so keep an eye out for that.

Term deposits

Term deposits are where you invest a sum of money with a bank and earn interest for a fixed period of time. Think of it as renting out your money for a period of time. At the end of that period, you get your original money back and interest to boot.

For example- if the bank offers you a 2.99% p.a for 12 months term deposit- this means that the bank will return 2.99% per year on your money. You will generally receive the interest at the end of the 12 months, and you can’t access the money during those 12 months without breaking early and losing all interest.

Term deposits are a low-risk investment, and as such the returns reflect that. You can expect anywhere from 2% to 4% in today’s climate.

Check out what term deposits are on offer by the major banks on Interest.co.nz

Bonds

Bonds are where you loan your money to a company or government who provides you with a fixed return which is usually (but not always) higher than what a bank’s term deposit will offer.

For example, you can buy bonds in companies you know like Contact Energy, Sky City, and Z energy who may offer a return of between 3.00% to 6.00 p.a.

Check out what bonds are on offer from major companies on Interest.co.nz

There are a few ways to get your hands on bonds- you will have to go through a stockbroker. Check out the guide on how to buy and sell bones. The other way- which means you don’t own the bonds directly- is to invest in a bond fund offered by several of the fund managers, such as the Superlife NZ bond fund ( which is actually the Smartshares NZ Bond Fund), or the Smartshares global aggregate bond fund– which is offered through InvestNow too.

Bonds are also called Fixed Interest, or Securities.

Property

Property investing is built into the kiwi psyche. Generally, you invest in a property for two reasons. One- you are looking to increase the value on the capital of the land and building. Two- you are looking to create an income stream from the rent.

For you to get a mortgage on an investment property you typically need a 35% to 40% deposits for the property upfront. This is not always achievable for many investors. So another option to get into property investing is to buy into a property fund offered by many of the fund providers.

The difference between buying into a property directly or a property fund is that you don’t have the leverage of the banks working with or against you. There are several property ETFs available such as the NZ property ETF and the Australian property ETF from Smartshares

So investing in one property provides you with leverage- amplifying the gains, but also amplifying the losses. Directly investing gin property is also riskier than a property fund as you are investing directly into one property, rather than multiple properties.

Shares

When you buy a share, you are literally buying a piece of a company – the more you buy, the more of the company you own. Generally, if you buy shares you believing the price will go up over time. Or, you buy them for the dividend return to provide you with income.

Shares are not without risks – the price goes up and down every day, and in a given week your investment may fall in value, but remember that you don’t make or lose any actual money until you sell your shares. It’s all on paper.

And generally- over the long term- the share market increases. This is not to say that all individual shares will go up in the long term. This is why if you are investing in shares you need to have a diverse portfolio of different companies that aren’t in the same business. For example, investing in several power companies doesn’t provide you with much diversification.

If you are invested in multiple shares you might want to consider a tracking platform such as Sharesight to help you track how your shares are performing. They even link directly to many NZ sharebrokers.

Peer to peer lending

Peer-to-peer lending has been around in New Zealand since 2014. Read my post on Peer to peer lending to learn more.

Peer to Peer lending is a type of investment where you lend to a platform, such as HarmoneyLending Crowd or Squirrel Money, who then lends your money directly to borrowers. You get a higher return than that offered by banks, and lenders get lower interest rates than offered by banks.

You manage who you lend your money to on the platform. Some platforms have automatic lending facilities, while others you will have to log on to lend.

To minimise the risks of an individual loan defaulting, you lend money in smaller lots or units, which are normally around $25 to $50. So for anyone loan will have many investors investing at once.

The terms of these loans are normally 3 to 5 years and are either secured or unsecured loans spending on the platform. It’s hard to say what the interest rate you should expect from peer to peer because it depends on which grade of loans you invest in. From personal experience, I have been achieving around 10% return on P2P lending.

Funds and ETFs

Funds and EFTs come in many forms. The basics are the same – you buy ‘units’ in a fund, which is made up of many underlying investments. For example, the Vanguard international exclusion fund from Invest now has over 3000 different companies. So your investment is spread over all these shares- giving you a lot of diversification.

The overall performance of the fund (i.e. the gain) depends on the performance of all of the investments that make up the fund. Funds usually charge annual fees to operate. This fee can range from 0.10% to over 2.5% of the value of your investment. A passively managed fund generally have lower fees than actively managed funds.

There may also be entry and exit fees for certain fund. For these reasons, and that the underlying investment generally shares, funds often form part of a long-term investment strategy.

Other

There are other investment opportunities out there such as purchasing and operating a business or cryptocurrency, gold and precious metals, futures trading, but each of these will require you to do your homework.


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