If you’re thinking about investing, it’s important to understand some basic principles, so you can make sure the investments you choose are right for you. Some investments earn more than others. Some are riskier than others. Some are good for long term savings but aren’t so good if you’re saving for short term goals, like an overseas trip or a deposit on your first home.
Good investors also don't put all their eggs in one basket. They develop a diversified portfolio of investments. This means they have investments which are spread across the four main “asset types”:
• Short term deposits – savings accounts, term deposits etc – often called “cash”.
• Bonds – you lend a government or company some money and they promise to repay it after a certain time, at a certain interest rate.
• Property – for many people, their home is their biggest investment but “property” can include rentals, a bach or commercial property.
• Shares – essentially you buy a small stake in a company and may be entitled to receive regular dividends.
There are two main ways of getting into these investments. You can take the ‘DIY’ route and invest directly, by choosing and buying the investments yourself. Or, you can invest in a managed fund where you pay fund managers to invest your money for you.
So, how do you decide what type of investment to go for? Try following these four steps:
Step one
Work out your “investment profile” – what you want out of your investment and how much risk you feel comfortable with.
Step two
Find the types of products or schemes that suit your profile.
Step three
Get good quality financial advice or information. You can get investment advice at financial institutions like banks, or brokers, or from an independent adviser.
Step four
Compare products, then make your choice.
The Investing section of the Retirement Commission’s free and independent website
www.sorted.org.nz has tools and information to help you through this process. Sorted is packed with helpful information, tools and calculators to help you manage your personal finances.
