Securing your financial future requires more than just keeping your money somewhere safe. If your regular cash flow leaves you with enough resources to set some aside each month, choose investment as the smarter, more proactive, and effective approach to growing your wealth.
How and where to allocate your investment dollars is the question. There is more than one way to invest, and each promises a different rate of return correlating to the degree of risk involved.
Here, we will help you decide which investment vehicle best suits your needs and circumstances by breaking down four common asset classes: cash, real estate, shares and bonds.
Aside from keeping your money in regular savings accounts, you could maximise your returns by investing instead in a term deposit. Unlike regular bank accounts, term deposits are more stringent in terms of allowing withdrawals, at least within an agreed-upon period of time.
While your money is locked in, it will accrue interest. When the term comes to a close, you can either have the final amount paid into your regular account, or you can use the money for new investment.
Cash assets are typically the easiest investment option, because they allow you to keep your wealth liquid (easy to access). They also have a low-risk profile, which can give you greater peace of mind.
The biggest threat to your investment is if your bank fails due to financial trouble. However, this is unlikely, especially if you invest with an established and reputable bank.
Before you invest, it always pays to research your financial institution’s credit rating with agencies such as Standard & Poor’s, Moody’s and Fitch Ratings, for a clearer picture of its financial health. Most banks post these ratings on their websites. For example, here is a link to Kiwibank’s ratings.
However, being low risk means the potential returns for this type of investment are lower compared to other investment vehicles.
For some investors, real estate is an attractive option, because you can see where your money is going — that is, into a tangible asset such as a house, office space, or a commercial building.
The process is simple enough: work with competent and experienced real estate agents, lenders and lawyers to buy a property that best suits your goals. The property type and its location are crucial to the returns you can expect from your investment, so the process requires careful consideration and planning.
On top of rental returns, in recent years, one of the main drawcards of property investment has been capital gains, due to the rise and rise of NZ house prices. However, those returns are no longer a given, and you should always go into property investment fully aware of its many potential costs and risks, and of your legal responsibilities as a landlord.
Investing in shares means owning a piece of a business or corporation. Shares are units of equity in a company and are commonly known as stocks.
When you choose this type of investment vehicle, your returns can come in the form of capital gains, when the value of your shares increase. You can also earn a portion of the company’s profits, or dividends, which are typically distributed to shareholders every three or six months, depending on the company.
In the short term you can claim capital gains by selling your shares at a profit if they increase in value, but you can also play the long game, as historically many shares have increased in value at a higher rate than inflation.
Investing in shares offers high potential returns, but there are risks of loss, too. This investment vehicle is one of the most vulnerable to sudden price fluctuations, depending on the company’s performance and profitability. If a company fails, your shares can become worthless.
Needless to say, success with shares depends on your investment choices, so working closely with a financial adviser is the smartest way to go about it.
When you invest in bonds, you lend your money to the government or to a corporation. In return, you get a fixed rate of interest. Currently, Kiwi Bonds require a minimum investment of $1,000 and come in six-month, one-year, two-year and four-year maturities.
While the value of a bond depends on how the market is performing, these investments are relatively stable and deliver reliable rates of returns. Compared to shares, bonds are less volatile. For some investors, bonds are a safety net in portfolios that also include risky investments in the share market.
Between government and corporate bonds, the latter have a higher risk profile, but can offer better returns on your investments. Government bonds are lower risk, but can have more limited rates of return.
The golden rule of investing: never keep all your eggs in one basket
While this post intends to guide you toward the best investment option to suit your investor type, it’s also important to remember the general rule of thumb when it comes to smart investing — diversification.
Choosing just one or two investment vehicles is the practical route if you’re just starting out on your investment journey. Over time, however, your goal should be to expand your investment portfolio with a combination of different types of assets.
That way, you are distributing your resources across assets exposed to various risk profiles. In case one or two of your investments fail, you are not liable to lose all your wealth in one fell swoop.
Enjoy reading this article?
Sign up to receive more news like this straight to your inbox.