There are many investment opportunities in New Zealand. If you’re looking to grow your money, you need to make some good decisions. With the right investments, you can set up a nest egg for retirement or college, and start enjoying more of your free time. Here are some of the top places to invest your money in New Zealand.
Many people who start investing for the first time wonder where they can get started and how to begin. Knowing where and how to get started, however, doesn’t mean you’re ready to hit the ground running. The truth is that there’s a lot of information out there regarding investing and these tips will help get you started the right way.
Index Funds
What are they?
- When investors buy an index fund, they get a diverse selection of many shares in one bundle. This avoids the need to purchase the shares individually. The index fund directly invests into companies that fall within its investment criteria.
- Investments are ‘passive’. This means there isn’t a fund manager actively buying and selling shares trying to pick winners, so the management costs are much lower.
- You can invest in almost anything with index funds. Want to invest in the Australian share market, top 500 America companies, or New Zealand’s top 20 companies? There are funds for all of that, and a lot more.
Difficulty to invest and manage: Easy
Risk: Low to medium
Potential return: Low to Medium
Pros & Cons
- Pros: Index funds make investing easy and remove the need to research individual companies – the index buys and sells shares on your behalf and never deviates from the investing strategy. And research shows that, in most instances, markets out-perform the vast majority of individual shares in the long run so an index fund should beat an actively managed fund (see below). Finally, index funds charge as little as 0.10% p.a. in management fees, whereas some actively managed funds charge as much as 2% p.a.
- Cons: There is no downside protection – when the market index sinks, as was the case in 2020, the fund’s value sinks with it. An actively managed fund may sell off everything to avoid further losses. An index fund rides the ups and downs exactly like the index itself.
How to start investing in index funds: Our Index Funds guide has more details, as well as five popular index funds from platforms such as Sharesies, Hatch and InvestNow.
Related guides: Index Funds andSimplicity Investment FundsA MoneyHub User explains:
“I thought of myself as an active investor, but the events of 2020 changed my approach. I now invest in some actively-managed funds and index funds with five or six different managers. This suits my needs, and I have exposure in New Zealand, Australia, Asia, Europe and America. I like index funds for their low fees but also trust the managers I’m with to pick winners”.
– Arthur, Auckland
Go for (a little bit of) gold
Prices of gold, a popular investment in times of tumult, have been soaring. Gold tends to move in a different direction from equities. You can buy physical gold, shares in mining companies or gold exchange traded commodities, which track gold prices. But Adrian Lowcock, chartered wealth manager for Willis Owen, suggests no more than five per cent of your portfolio.
Don’t ignore your pension
No, it’s not sexy. But if you have spare cash to invest, use at least some of it to take advantage of the ultra-generous tax breaks that come with pension contributions.
Bank Deposits (Cash)
Difficulty: Easy
Potential risk & return: Low
Bank deposits are as easy as it gets. Put your money in a bank account or term deposit and get paid interest according to the interest rate being offered. Bank deposits will give you low returns, but are low risk, making them ideal for saving money for the short-term or for storing your emergency fund.
Key risks: This is one of the safest places to put your money, but in the unlikely event that your bank gets into financial trouble, you could lose some or all of your money. And with low risk you’ll get low returns – which might not be enough to beat the rate of inflation.
$ needed to get started: $0.01 for most savings accounts, at least $1,000 or more for term deposits
How to invest: Open a savings account, Notice Saver account, or term deposit with your bank.
Peer-to-Peer Lending
What is it?
- Also known as crowd-lending, peer-to-peer websites are financial platforms that match individual borrowers to investors.
- Investors lend their money at above-market interest rates directly to borrowers looking for personal and business loans.
- There is risk – if a borrower doesn’t repay, your peer-to-peer investment can be reduced. However, this risk is minimised by the platforms pre-checking and verifying borrowers.
- The platforms also manage the day-to-day loan repayments and collections process for overdue loans. Bad debt, which arises when a borrower doesn’t repay the loan, is deducted from your investment.
- Peer-to-peer lending usually appeals to investors who want a higher return on their money than what a bank or term deposit offers while retaining a cash investment.
Difficulty to invest and manage: Low to Medium (some platforms ask you to select and fund the borrower, while others auto-lend to those that meet the guidelines of investor profile)
Risk: Medium
Potential return: Low to Medium
Pros & Cons
- Pros: You can own a small part of a business that you believe in, and many opportunities are positioned within a specific community. If the business does well, you can sell your shares to a new investor or receive money if the business is sold.
- Cons: Most peer to peer lending is unsecured – you may not get back what you put in if the borrower defaults. Also, you can’t withdraw your money early.
How to start investing in peer-to-peer lending: Visit the Squirrel and Lending Crowd reviews to see current investment opportunities.
Related guides: Peer to Peer (P2P) Lending in New Zealand
Watch those fees
The cost of investing dents your returns. Mike Barrett, of consultancy The Lang Cat, says if you invest £100,000 over 30 years, the difference between a one and two per cent charge is more than £100,000 in lost value.
Crowdfunding Equity Investments
What is it?
- Crowdfunding occurs when an investor buys shares in a private company that lists on a crowdfunding website such as Pledge Me or Snowball Effect.
- Investments are made during a ‘campaign’; the company looking for investment promotes its positive future with financial statements and strategy documents, known as an ‘investor memorandum’. This information helps a potential investor decide whether or not the business is worth the risk.
- Equity crowdfunding offers shares to anyone willing to risk the money the specific company is asking for investment. Usually investors put in between $100 and $10,000 (or more) in the hope that the investment will be successful.
- Investors are repaid when the company is sold or when new investors want to buy shares at a higher price later on.
Difficulty to invest and manage: Low to Medium
Risk: High
Potential return: Low to High
Pros & Cons
- Pros: You can own a small part of a business that you believe in, and, assuming it stays in business, receive personal updates about the company’s journey. If the business does well, you can sell your shares to a new investor or receive money if the business is sold. The founding shareholders may also offer to buy your shares later on.
- Cons: Crowdfunding equity offers are extremely high risk and investors should be comfortable with losing all of their money. Investors need to be realistic and only invest money that they are 100% happy to lose.
How to start investing in Crowdfunding campaigns: Visit the Pledge Me or Snowball Effect websites to see current investment opportunities. Before investing, make sure you understand that the money you put in won’t be able to be cashed out for some time. You may also find it difficult to find a buyer of your investment unless the company’s prospects improve.
Related guides: Equity Crowdfunding Review
And avoid exit fees in particular
Crypto is a very risky area, but last year Christie’s recorded the most valuable art auction ever on a blockchain, which is the technology underpinning Bitcoin et al, and said it reflected a growing interest across the art world.
Start investing early – even with small amounts
The eighth wonder of the world, according to Einstein, is compound interest. That’s one of the reasons investing in equities is so powerful if you reinvest dividends. Those who understand it earn it; those who don’t pay it.
Buyer beware
Rare watches, fine wine, vintage cars – all lucrative markets. Also, full of fakes. Just because Rolex Daytonas are generating big returns, doesn’t mean that particular Rolex Daytona will generate a big return.
Your home may not be the bulletproof investment you think it is
Buying your own property is a form of investment – one that will likely save you money as mortgages are cheaper than rents at the moment – but don’t assume house prices will always go up.
Real Estate
What is it?
- Investing in real estate usually involves buying a rental property.
- You’ll usually need a 20% deposit of the purchase price, and/or security over your existing home.
- Once you own it, you rent it out to tenants, either directly or via a managing agent.
- Real estate investors make their money from having rental income pay off the mortgage, as well as benefiting from any capital gain (i.e. increase in house price).
- As an example, if you purchase a property for $500,000 with a $100,000 (20%) deposit, and later sell it mortgage-free for $800,000, the gain of $700,000 is largely tax-free.
Difficulty to invest and manage: Medium to High
Risk: Medium to High
Potential return: Low to High
Pros & Cons
- Pros: You invest in something you can see, improve and understand. There tends to be a rentals shortage in key areas of New Zealand, so demand can be sustained. House prices historically increase in New Zealand (but this is no guarantee of future returns).
- Cons: Rental properties cost a lot to fix, and the outlay needs to be paid upfront. For example, new roofs or drainage issues can cost tens of thousands of dollars. Further to that, law changes mean rental increases (and removing problematic tenants) has become harder. There’s also the issue of not being paid rent which can make keeping up with mortgage payments near-impossible and can compromise your investment significantly.
How to start investing in real estate: Do your research – the size of the investment (and commitment) is significant, so you’ll need to be extra careful. We suggest reading this comprehensive guide, written specifically for the New Zealand market.
Related guides: Renting a Home Directly to Tenants vs Using an Agent, Investment Property Loans and Landlord Insurance.
Don’t get cocky
There is skill involved in making money, but also blind luck. The investor’s worst enemy is his ego. Oh, and bragging about your investments? That doesn’t endear you to anybody.
Beware the busting of the second dotcom bubble
All those tech companies running big losses to secure explosive growth? Proceed with caution.
Know an investment banker
Be an investment banker
Conclusion
Real Estate is a great way to invest money if you have a high level of risk tolerance. Real estate has historically produced good returns over time, but it does involve a certain amount of risk. Real estate is a highly illiquid investment and there may be a lack of suitable properties easily available to purchase at any given time. Real estate investing doesn’t expose you to the insane volatility that you see in things like stocks or options trading.