Get Smart About Investing
Some basic things that are useful to know before you invest are:
- Portfolio investing is the way that KiwiSaver funds work. Your savings go into an account, together with other investors' funds, and then it gets invested in a range of different company shares or loans (bonds) or short term loans (like term deposits). Portfolio investing is a good way to spread the risk (diversify) - it doesn’t matter so much if any single company goes bankrupt, because each investment is fairly small. There is still a risk that there will be an economic recession or share market downturn, but you bear less risk from individual companies failing.
- KiwiSaver is a good deal for most Kiwis wanting to save some money. Your employer matches your 3% contribution if you contribute 3%. And the government gives your 50 cents for every dollar you put in. They contribute half the value of your investment, up to $521 if you invest $1042 during the year. But you should know that you can't withdraw your KiwiSaver funds until you are 65 years old, unless you are buying your first home, emigrating or you are in financial hardship.
- Be prudent about your investment because there are always risks from investing your money. Take your time to learn about your options and choose carefully.
You can use this website to invest responsibly. The Fund Finder gives to options to avoid pollution and exploitation and, instead, invest in companies with high social and environmental standards. And research shows that, on average, returns are likely to be as high or higher than traditional investing. See Responsible Investment more information.
This website isn’t giving you financial advice about which investment to choose – only information that will help you make sound decisions. If you’re not sure, you should contact a financial advisor.
Ready to Invest
There are a few steps you should consider before investing. A good source of information is the government's Sorted website.
You probably have several financial accounts. Before you start investing, Sorted suggests that you may want to pay off high interest debts (like credit cards). Also plan carefully.
That’s not always easy to do, but have an idea of what you are investing for – whether it is to buy your first home, for retirement, or for your kid’s education. If you’re in a relationship, it’s good to do this together! This gives you an idea of how much you want to invest, for how long, and how much risk you may want to take on (more risk generally means a higher return).
It is important to set aside money regularly. So if you are able to start when you are 30 years old for example, look at how your investment can grow by the time you retire!
Understand Risks and Returns
When you invest, your money can fund companies through buying their shares (risky but higher returns) or lending them money (less risky, lower returns). It can also be held in a bank (even less risky but very low returns). You need to feel comfortable with the risks you are taking and the returns you are likely to get. This platform has a Fund Finder that enables you to work out your preferred level of risk. You can use that to match to the type of Kiwisaver fund.
Make sure you're in the right fund
If you don’t choose a provider, Inland Revenue will assign you to one of the nine default KiwiSaver schemes. These are generally conservative funds (ie. low risk and low returns). They may be suitable for people near retirement or those wanting to buy their first home within a few years, or those who want to avoid risk. However, if you a longer term investor, staying in these funds over a long period of time may mean that you generally get a lower rate of return than if you were in a higher risk fund.
It is easy to switch KiwiSaver funds. You can use the Fund Finder on this platform, If you want to switch to a different provider, Mindful Money will provide you with a link to their website, fill in the form and it’s done. Your new provider will tell Inland Revenue and arrange for your money to be transferred. The process is really quick online. It takes 10 to 35 days for the funds to be moved into your new KiwiSaver.
Being Prudent about your Investment
Being prudent means taking the time to find out about the options and only investing when you have carefully considered your options.
Investments are often put into different categories, depending on the level of risk:
- Defensive – a high proportion of relatively safe investments (such as cash)
- Conservative – a high proportion of debt (ie. lending) and less shares
- Balanced – a balance of debt and shares
- Growth – mainly shares, generally those on stock exchanges
- Aggressive – some high growth, high risk shares such as small companies
If you are young and saving for the long term, you may choose to accept higher risks (on the basis that the highs and lows even out over time). Those who are approaching retirement generally prefer less risk, to ensure their savings are protected.
Below is a handy guide for which fund is suitable for you, based on the Sorted website.
The level of risk affects your expected returns. This analysis by NZ Treasury shows the variability of annual returns for the period 2010-2014 (% annual return on the left hand scale), and the different returns to each risk class of investment.
Past returns are not necessarily a guide to the future. We have seen downturns and crises before, in New Zealand as well as globally, and there are no guarantees that share prices will continue to rise, or that loans or bonds will produce positive returns. And for those put off by the potential risks of financial investments, it is important to understand that there are also risks in non-financial investments, notably housing. House prices can go down as well as rising (and periodically have).