Different Types of Investments
There are many different types of investment. Broadly speaking, they fit into four asset classes:
- Cash
- Fixed Interest
- Shares
- Property
Within each asset class there are investments to suit different kinds of risk, duration, returns and liquidity. There are also different ways of investing. You can take the ‘DIY’ route and invest directly in one or more of the asset classes. Or, you can invest in a managed fund where fund managers make a wide range of investment decisions for you.
It is often easiest to think of cash as similar to the money you have in your day to day account or your savings account. It gets a very low return but it is quite liquid - ie you can access it easily.
For investment strategies, in your portfolio, you are likely to have a day to day cash account that collects all your interest, dividends and income, where the taxes and fees are paid from.
You may also have a 'Cash' investment - where the fund manager is investing in short term investments like 90 day bank bills, and investments that are close to maturity, but that are also quite liquid. These are invested for their liquidity and a short term investment return and income.
If there is uncertainty in the markets, your fund manager might hold more cash in their portfolios, or if there aren't any investments that they feel are currently worth investing in, that match the funds strategy. If there is uncertainty in your financial planning or investments, your adviser might hold a higher amount of cash in your investments.
Term Deposits
The type of fixed interest that you are likely to be most familiar with will be Term Deposits. You loan your money to an organisation (usually a bank or a finance company). They undertake to repay you your capital in the future (depending on the time frame that you selected), and interest along the way.
There are many factors that will influence the interest rate that they give you, including what the Official Cash Rate is set at in New Zealand, what the market outlook is, how much the organisation has to pay for borrowing funds overseas, and general supply and demand.
Interest paid regularly and compounded versus being paid at maturity
The important thing to know about term deposits is that there is a difference between whether you are paid interest monthly or quarterly, with it being compounded, and if the interest is paid at maturity. The numbers for the interest rate 'paid at maturity' are often more attractive at first glance, but are generally lower than if you took the lower interest rate and have the funds compounded quarterly.
Moneyworks uses term deposits within our investment portfolio's for clients, at different times, these can be long term term deposits, or short term, depending on the market outlook.
Other types of fixed interest
The main type of fixed interest investments that Moneyworks clients invest in include Government Stock, High Rated Local Authority, Bank and Government Bonds and Bank Bills. We give the responsibility of choosing these investments to specific fund managers that have expertise in these areas. The fund managers will continually trade these investments, again depending on the market situation and outlook, and the quality of the offerings available.
As one of Moneyworks core goals is for you to have no permanent loss of capital, it would be very rare for you have a holding of a fixed interest investment that is rated below investment grade.
These fixed interest investments are continually 'marked to market', so the value of the investment will change (potentially minute by minute). There are many technical aspects of investing in fixed interest - but the key rule of 'buying quality', buying for future cashflow' and 'diversification' hold.
Bonds - for more information from the Financial Markets Authority about how Bonds work - download their booklet below
Credit ratings
If you are wanting to invest in fixed interest yourself, there are many things that you need to know, one of the most crucial is how credit ratings work. www.interest.co.nz have an excellent explanation - check it out here.
The key is making sure that the issuer is actually going to repay your money when it is due - which requires a Baa3, BBB- rating depending on the organisation that has rated the issue. These ratings can be applied to the organisation as a whole, but are commonly also applied to a particular issue of debt.
By investing in shares in a public company listed on a stock exchange you get the right to share in the future income and value of that company. Your return can come in two ways:
- Dividends paid out of the profits made by the company.
- Capital gains made because you’re able at some time to sell your shares for more than you paid
Gains may reflect the fact that the company has grown or improved its performance or that the investment community see that it has improved future prospects.
Of course capital losses can also arise.
The price of shares in any individual public listed company can vary from day to day.
On any day some shares may go up in value and some down, depending on how investors view the prospects of each company. And all of the listed company shares in a particular country or industry may increase or decrease in price because of rises and falls in economic confidence or changes in the particular industry. There are a range of complex factors which influence share prices on a daily basis and no one can accurately predict what price listed shares will be in the future.We know from past experience that some companies will fail and some will flourish.
Overall the long-term trend is for the aggregate market value of listed companies to increase at a rate higher than inflation. Therefore by investing in a wide range of companies operating in a range of industries and countries, an investor has a good chance of making long-term gains. Remember that in assessing the return from shares you need to take into account of dividends received as well as capital gains.Because of the volatility of share prices (ie the fact that in the short term they may go up or down) it’s not wise to invest funds which you need in the short term, in shares. When you need your money you’ll generally be able to sell your shares, but the price at the time may be below your purchase price. Shares should be used as a long-term investment.
Many investors make their share investments by using expert fund managers.
Different fund managers have different skills and areas that they invest in. Moneyworks assists clients to build a portfolio of managed funds that have a diversified approach to investment.
Direct investments
You can invest directly in term deposits, bonds, shares and property or you can place your money in a managed fund and have full time specialists look after the investment decisions for you.
For some people making their own investment decisions and taking a more hands on approach gives them personal satisfaction and possibly some tax advantages. If you’re interested in direct investment talk to a stockbroker or specialist financial adviser.
Direct investment in shares in specific companies or selected rental properties should only be undertaken if you have detailed knowledge or are prepared to pay for specialist advice. Particularly in the case of property investment, you need to be willing to either spend the necessary time on administration and management, or to pay a property management company to do this for you.
People who want to acquire their own property investment generally have to rely more on their own knowledge and judgement. It’s therefore important to read publications and attend property investment seminars before making any decisions.
Issues you need to consider include the location and type of property (eg city or rural, residential, retail, warehouse, manufacturing, office or special purpose property such as motels or carparking buildings etc), financing and taxation arrangements, price, condition of property and maintenance requirements, lease terms, selection of sound tenants, record keeping etc. Owning a property is like operating a small business. Know the business, put time into the detail and you’ve a good chance of doing well. Rushing in without doing your homework can lead to disaster or at least a risk that you’ll lose some of your capital.
If you want to invest directly in shares or property remember the importance of duration, risk, diversification, returns and liquidity.
Managed fund Investments
In a managed fund your money is pooled with other investors, and a professional fund manager invests it in a variety of investments. Managed funds come in many forms – different funds invest in different types of assets for different objectives.
Some funds target all-out growth and invest more in high risk shares than others – they could rise dramatically or just as easily drop dramatically. These are funds for money that isn’t absolutely vital to your future plans. Other funds look for solid long term growth from a range of deposits, bonds, and shares – a better place for a lump sum intended for your retirement.
Financial advisers can advise you on managed funds that match your investment need.
Your home
For most New Zealanders, their largest investment is their home. It’s a special kind of investment – it doubles as the place you live, and it has a strong emotional element. Be careful to separate your emotional ties to your home from your investment objectives. You should think about how much of your net worth is tied up in your home. Would it be wiser to buy a smaller house and spread your money across other investments as well? Check out how your home fits into your retirement plan.
Rental Property Investment
Owning houses rented to individuals can be a profitable investment. Returns from property investment come from rental income, after deducting expenses, and from the increase in the value of property over time.
The key questions to ask yourself are
- How am I going to make money out of this investment? and
- How am I going to take money out of this investment? (particularly if you are looking at an investment in a syndicated property trust investment).
People debate whether property is a better investment than shares. What’s important to remember is that they’re different forms of investment. If well managed both can provide good long-term results. If not, and without the right knowledge and attention, investment in shares and property can result in significant losses.
It’s easy to see losses on the share market because the prices are available almost daily. Losses on property investment are generally not published, so don’t believe anyone who suggests “you can’t go wrong with property investment”. You need to be particularly cautious of ‘leaky building issues’ in investing in homes as well.
We don’t encourage anyone to rush into investment in shares in particular companies or investment in a particular property. Unless you’re prepared to put the time into understanding and managing the many aspects and issues of property investment, then we suggest you leave it to others.
That’s not to say you can’t benefit from property as an investment. There are several different ways in investing in property – directly or indirectly.
If you’re interested in direct property investment, you can manage the day-to-day administration of your rental property yourself, or use a property management company to do it for you. A property management company takes on the tasks of finding tenants, collecting the rent and bond monies, and attending to maintenance issues etc on your behalf. The fees charged for these services are usually a percentage of the rental income.
For an indirect property investment, you can invest in a managed investment fund that invests some of your money in property. This could be by way of ownership of rented buildings or by way of an investment in shares of public companies, which specialise in property ownership.
This is another option that gives you the many advantages of property ownership without having to find the property and do the hands on management yourself. This type of indirect property investment also makes it easier for the average investor to get the benefits of diversification. Also take a look at direct investment in property.
Moneyworks NZ Ltd
P: 0800 225 621
E: contact@moneyworks.co.nz
P O Box 1003, Cambridge 3450
Licensed Financial Advice Provider - FSP 15281
Regulatory Information: Moneyworks is a Licensed Financial Advice Provider (FSP15281), and AML Reporting Entity and is supervised by the Financial Markets Authority.