If you don’t really know what it involves, ‘investing’ can be a pretty intimidating – boring, even – word. Besides, isn’t investing for people who have lots of money already?
Done well, investing can help you build wealth but it’s not limited to the domain of the wealthy. In many cases, people have become wealthy because of investing, but that doesn’t mean they had lots of money when they started.
That’s exactly why investing has the power to turn hundredaires into thousandaires and again into millionaires, because it enables anyone – even folk with only $100 in their savings account – to make the most of compound interest.
Put simply, investing lets you work smarter, not harder, for your money. Renowned investor Warren Buffet defines investing as “the process of laying out money now to receive more money in the future”. He should know; he’s worth more than $80 billion.
Investing enables investors to put their money to work across a range of investment vehicles with the aim of increasing the number of dollar signs you own in the future. It also forces people to figure out what they actually want to do with their money. Spending is easy – and let’s be honest, fun – but while new outfits and fancy dinners might make us feel great in the moment, they probably won’t contribute to our future financial security. Investing, on the other hand, prioritises the future over the present.
Types of Investment
Stocks or shares, bonds, mutual funds, real estate or starting your own business all fall under the umbrella of investing. Some are easier than others, some increase wealth more than others but require more work or knowledge, and some are more about the long-term game – but all have their pros and cons.
Stocks & Shares
Investing in the stock market lets regular people take advantage of the success of a company. This means an average Joe could invest in the likes of Apple and capitalise on its success. What a shareholder earns depends on the price of the shares and dividends that the company might pay, which means that if the value of a share goes down, the return will be lower too.
A bond is when an investor loans money to a company in exchange for a periodic interest payment. They also get their original investment back at the end of an agreed time period.
A mutual fund is managed by an investment manager and lets investors split their finances across a range of investment types depending on their preferences. Some mutual funds can be passive (effectively ‘set and forget’) while others are actively managed by the investment manager who selects specific stocks, bonds or other investments to invest your money into. Active funds are more expensive to the investor.
Property is considered by many as one of the most stable forms of investment out there because even if the property market crashes, it will always recover (even if it’s 10 years later) and you’ll always have an asset that’s worth something.
Generally speaking, real estate requires a large upfront investment (deposit), and often this blocks people from getting into it in the first place, especially in an inflated market. If you’re buying an investment property, your deposit is usually much larger than if it was your own home, however if you already own a number of properties it’s easier to leverage your equity in them to purchase more.
Property has two types of returns: rent paid by tenants and capital gain, or the increase in your property’s value. Investing in property is for long-term gain as house prices rise; it’s not a ‘get rich quick’ scheme. In fact, early on you may experience little to no profit at all when you take into account mortgage repayments, rates, insurance and maintenance. If you sell an investment property within two years of purchasing it, you also have to pay capital gains tax on the profit you make.
Syndication & Crowd-Sourcing
Sometimes, it’s just not possible to invest by yourself. Syndication and crowd-sourcing enable small-time investors to take advantage of the collective by investing much less than they would have if they were doing it themselves. The risk associated with investing is lowered too because you’re not the only one footing the bill so to speak.
The Property Crowd makes it easy and attainable for wannabe homeowners to invest in property by leveraging other people’s investment power too. For as little as $100, an investor can purchase PropertyShares in a property, along with other people. Your proportion of ownership in that property and how much you earn back through rent depends on how much you invested in it in the first place.
Kiwisaver is a voluntary work-based superannuation fund whereby 3%, 4% or 8% of your salary (you choose) is deducted from your paycheck and put into a fund that you can access when you retire or when you want to buy your first home. If you work for a company, your boss also contributes to your Kiwisaver account, plus you can earn tax credits from the government to boost your balance. If you’re self-employed, it’s up to you how you manage your Kiwisaver contributions.
All employees are automatically enrolled in a default Kiwisaver scheme when they start a new job; if you don’t want to contribute you have to consciously opt out. Default schemes don’t generally give investors as good a return as some other schemes so it’s important to do your research and find a fund that you’re happy with. You can also split your investment depending on how much risk you’re happy to take.
Starting Your Own Business
New Zealand is a very entrepreneurial country. Setting up a business or creating a product with the intention of selling it in a few years is a common investment strategy, although one that comes with a fair amount of risk.
The Power of Compound Interest
For your dollar to earn more in the future, you need to take advantage of compound interest – and that involves time and reinvestment. Compound interest is when you take what you’ve earned from your investment portfolio and reinvest it instead of spending it. If you’re a young investor, you’ve got plenty of time on your side to keep reinvesting and seeing possible exponential growth.
Risk & Why You Should Start Investing Early
Investing can be risky, and that’s often the reason why non-investors don’t invest because risk equals losing money. All investing involves risk somehow; the value of stocks can go up and down within a few hours, and a sharemarket crash can result in a lot of people losing a lot of money. Property is similar; the property market can go up and down, and just because you think your property is worth a certain amount, doesn’t mean someone wants to pay you that for it.
Almost always, though, losses will bounce back and that’s where investors often make their success. The secret is understanding how investing can be cyclical (ups and downs occur frequently), not reacting drastically to market movements, and learning the best times to sell shares or property to make a positive return.
The cyclical nature of investing is why young investors shouldn’t be afraid to take on more risk than older investors because they simply have more time for their losses to be recovered should market crashes occur.
5 Things to Consider before Investing
Investing works for some people and not for others, so if you’re wondering if it’s right for you, here are a few things to consider.
- Why do you want to start investing? Establish some goals (for example, you might want to save for your retirement or send your kids to university). You might have different goals for different investment types too. Understand that goals might change over the years depending on risk and return so regularly check up on them and give yourself the flexibility to change them if need be.
- How do you want to invest? What works for one person might not work for another so don’t automatically assume that you need to do what everyone is doing. Decide for yourself if buying property, part of a property, shares or bonds are for you then make your investment portfolio work for your goals.
- How do you handle risk? With all investment comes risk so it’s important to understand if you’re happy to take on risk or would prefer to invest in a more conservative fund. The younger you are, the more equipped you are to embrace risk. If you’re planning to retire in the next 10 years, a more conservative fund might be the best option for you.
- How much do you know about investing? Investing isn’t for the faint-hearted; it’s important to know what you’re doing and why you’re doing it. Take the time to learn about the investment strategies you’re interested in and what makes them better suited to you than others. Don’t be afraid to ask more experienced investors for help; you’ll be surprised at how people like to share their knowledge.
- How much money do you have to invest? A preconception about investing is that you need a lot of money to start, but that’s not true. The Property Crowd lets investors buy PropertyShares (or a proportion of a property) for as little as $100, while Sharesies lets people invest as little as $5 into the sharemarket. Of course, the more you have to invest the more return you’ll see. Reinvesting any returns into your chosen investment vehicle will increase your returns too.
Investing is for Everyone
The idea that investing is for the wealthy is vanishing and instead, average Kiwis are becoming savvier about how to make the most out of their money. To find out how you could invest in the property market without having to fork out tens of thousands of dollars for a deposit, check out The Property Crowd.
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