The best investments
Regardless of what the best investment or investment mix is to meet your needs, creating wealth by investing is one of the cornerstones to helping you and those around you to achieve your desired milestones in life. This is because there are only two ways to create wealth: work for it and save what you don’t spend, or have investments work for you.
If you were to work hard and keep all your savings under your mattress or buried somewhere, you'll never have more money than what you save. By investing, you're getting your money to grow by earning a return on what you invest and/or by buying and selling assets that increase in value (such as shares, property, managed funds, or a business).
To achieve this, the key is to have a wealth creation plan, so you can turn concepts into measurable steps on your journey to financial freedom and security. Just as no two people are the same, no two wealth creation strategies are the same. Therefore we offer a wide range of investment solutions to generate the result you need for your future, to match your investment profile, and phase of life.
Most people are familiar with the old saying that "past results are no guarantee of future performance". While this saying remains as valid as ever, before examining what might be the best investment for you moving forwards, it's useful to understand how different investments have performed in the past - and how they’ve fared in comparison to each other. There surely isn't a clearer way to see this than by reviewing this complimentary resource, The Periodic Table of Investment Returns. Global investment heavyweight Mercer compile this resource annually, and have kindly given us permission to display it. The resource shows the annual returns for all major investment asset classes, ranked from best to worst across each of the last 10 years. After reviewing this 'periodic table', several crucial investing lessons are very clear:
- Investment returns in any single asset (such as New Zealand property, shown in dark green on the table) are unpredictable,
- There's a need to keep at least some investments in low risk/low return investments to smooth out the peaks and dips of high risk/high return investments, and
- The importance of diversification!
Before making any investment decisions, it's also important to consider a range of matters specific to your personal situation and goals, including:
- How much do you have available to invest? After setting aside some as an accessible fund for emergencies.
- Unless you're retired already, how much can you keep investing? Regularly contributing to an investment means it will grow from two sources: your contributions and the Return On Investment (ROI). In the simplest terms, this offers you the chance to double your gains.
- How long can you keep your funds invested? The longer you’re willing to invest for, the more investment options you’ll have and the more your investment has a chance to grow. Compounding interest means that your money will grow exponentially faster every year it stays invested. Given enough time, your investment earnings (or interest) will grow to a larger sum than your original sum or ongoing contributions.
- How much effort are you ready and willing to put into your investment? This can have a massive impact on the investments you choose. For instance, a small side business can be a great investment, however businesses only succeed if significant time and effort is dedicated to running them well.
- How much risk are you willing to take? This is possibly the most important question of all, as if you want bigger returns you'll have to take bigger risks. This is a balancing act, and the perfect mix is different for everyone.
To help you select the best investments to meet your needs, some examples of the diverse range of options available are below.
Term deposits with your bank are very similar to depositing funds in a savings account, except that your funds are locked in, which means you have to wait until the end of the term before you can access your deposit. Because of this, you'll get a slightly higher rate of return than if the deposit was left in a savings account.
The investment period for term deposits can be as short as 30 days, though banks will nearly always offer better rates for longer periods and large sums. It's important to note that in New Zealand, any deposit held in a bank, including term deposits, are no longer guaranteed by the government.
As term deposits are such a low risk investment, you can also expect extremely low returns. To illustrate this, the graph below shows different growth paths of a $10,000 investment made in December 2010. The black line shows reinvested rolling six-month term deposits (cash), while the other lines show a range of different managed fund investment choices over the same period. (Managed funds are described in detail further down this page). Importantly, these figures are shown after all taxes and any fees are paid.
While acknowledging that past performance does not indicate future returns, the graph below shows quite clearly that anyone investing solely in cash or term deposits over this period achieved a significantly lower return than if they’d invested elsewhere.
A bond is a fixed income investment in which an investor loans money to an entity (typically a big corporation such as Auckland Airport, or government such as the Government of New Zealand) which borrows the funds for a defined period at a variable or fixed interest rate. When you buy bonds, you'll know exactly how long you need to wait and you'll be guaranteed a certain rate of return.
Each bond will usually have investment periods of a few years, sometimes more. The good thing is that you'll know the exact investment period upfront, before you put in any funds. Both risk and return are very low for bonds, so if you’re a conservative investor and are happy with a lower rate of return, bonds may suit you. Though your investment can't be expected to make big gains, at least you’re unlikely to lose anything. At the very least, you can expect to get an interest rate that’s higher than what you'd get in a savings account or term deposit.
Property investment remains a favourite for most New Zealanders. This is mainly because directly investing in property has great tax advantages and, unlike most investments, can be leveraged for maximum return. Improvements can also be made to the property to increase the value. Property investment does have risks and drawbacks such as being hard to sell, usually requires a large initial sum, and often lacks diversification. Like any investment, to mitigate the risks and maximise the advantages, property investment requires careful planning and analysis before any moves are made.
Property investment usually suits investors who have plenty of capital (funds to invest or existing equity in their own home), robust cash flow, a high-risk tolerance, a long investment time frame, and are interested enough in property to pay close attention to their investment. As our experienced Authorised Financial Advisers are nearly all property investors, their first-hand experience and the tools they have available means they can work with you to either start or keep growing your investment property portfolio. Milestone Direct also broker property investment mortgages, so can assist you every step of the way.
For those aiming to retire with a robust passive income flow from investment property, calculating the investment yield on each property is crucial to understanding the current or intended income that will be received.
Stocks (often called shares or equities)
When you buy shares, you’re buying a part of a company. This gives you certain shareholder rights, such as the right to receive dividends and the right to vote on company matters like appointing or removing directors. The market price for a share depends on how well investors think the company is performing. This is usually based on the company’s profit, the dividends it pays to shareholders, it's potential for growth, the risks it’s facing, and the general impression of the company. Over the long run, most commentators, including international investment research powerhouse Morningstar, agree that international shares are expected to perform better than any other investment. When this is combined with the high risks associated with shares, they can be a great investment option for long-term investors who are keen on large returns, have plenty of time to spare for research and monitoring, and don't mind accepting large risks.
If this is you, you'll have to put a lot of time, energy, and effort into directly managing the stocks. This includes learning about markets, learning about each business you’ll be investing into, reading annual reports, attending annual meetings, and closely monitoring the performance of each stock. This can pay off with some great potential returns, but this is balanced with; a higher risk of loss, and the time required to research companies and track performance. New Zealand's Financial Markets Authority (FMA) has published an unbiased and independent guide "to enable people to be better informed about investing in shares and understanding the risks involved".
While shares can be purchased and sold in minimal numbers, even the lowest price online brokers usually charge brokerage fees that only reduce relative to the sum invested when more than $10,000 worth of shares are traded. This, and the need to diversify by investing in multiple stocks at once, means that most people aren't suited to this type of investment until they have a significant sum to invest.
Our free resource, The Periodic Table of Investment Returns, displays the annual returns for various asset classes (types of investment), ranked from best to worst for each of the last 10 years. Download the PDF.
Your own business
Increasingly, many people are seeking ownership of their own business as a long-term investment. Because of the huge variations in different businesses, the initial sum required could range from multi-millions to purchase an existing business, to a few hundred dollars to begin a start-up. If you're looking at starting or buying a business, keep in mind you'll probably need enough funding up-front to cover more than the initial costs for unforeseen expenses and a lack of cash flow during the initial stages.
Being self-employed is well-suited to those who have; plenty of financial backing, a high-risk tolerance, time to dedicate to the business, strong willpower, industry experience, and a few years to spare to get the business sustainably profitable. Of course, having your own business is the highest risk investment strategy of all. But, if you're willing to take the risk, put in the work, and push through inevitable setbacks, it could be the best investment you ever make. If you fit this description, please let us know and we can send you our booklet titled "So you want to be self-employed?"
KiwiSaver is a voluntary retirement scheme designed by the New Zealand government to help Kiwis invest for retirement. The great benefits of KiwiSaver, including a yearly tax credit of more than $521 per year, make this a ‘must have’ investment, however, strict withdrawal criteria apply. This means this investment can most often only be accessed at eligibility age for New Zealand Superannuation, or to put toward a first home.
KiwiSaver Schemes are typically invested in a diversified array of stocks and bonds, and many KiwiSaver Schemes also include a portion of investments in property.
For most people, KiwiSaver’s strict withdrawal criteria means that it works best as just one component of a comprehensive investment solution. Even so, it’s still key to find a good KiwiSaver provider and check up your provider every so often.
Managed funds are a simple, diversified, low maintenance investment that offer different risk and return options to suit your needs. Just like KiwiSaver, some managed funds have investment choices of 100% shares to suit those who are after big returns and don't mind taking on more risk. Essentially, most managed funds are invested the same way as a typical KiwiSaver Scheme, where investors funds are held in trust, then invested into a diverse array of investments.
Most managed funds have no (or very low) minimum investment amounts and can be contributed-to and withdrawn-from at will. The simplicity and flexibility of managed funds mean that they're becoming increasingly popular. This is especially as most New Zealanders now understand the way KiwiSaver investments work, and understand that KiwiSaver's strict withdrawal criteria means that most people shouldn't invest more into KiwiSaver than they have too.
In New Zealand, the most commonly used managed funds have significant tax advantages - enabling investors to pay as much as five percent less tax. Most managed funds are very simple, and mean the investor won't need to have an accountant or complete a tax return.
Just like KiwiSaver, many managed funds are better than others, so it pays to do your research before investing.
Owing to factors such as improved medical care and diet, your typical life expectancy is now significantly longer than your parents and grandparents. This means that when you retire it can be difficult to ensure that your investments last as long as you do. Annuities were created to eliminate this risk, called 'longevity risk'.
An annuity is an investment that pays out a fixed stream of payments to you, for life. Regardless of what happens to interest rates or financial markets, the income you get is insured and guaranteed for life, no matter how long you live. Milestone Direct have a special relationship with New Zealand’s first and largest provider of modern annuities and have helped many Kiwis establish a robust income, guaranteed for life.
While several investment types have been covered above, there's a vast array of financial solutions and products available to enable you to reach all manner of financial and lifestyle goals. These include:
- Directly investing in shares and bonds
- Retail managed funds
- Wholesale investments
- Property investment
- Superannuation schemes
- Combined investment and insurance products
- Your own business
To cut through the complexity of this mind-boggling array, and to ensure you construct a suitable mix of investments to suit you, it's essential that you seek advice to identify the best way or ways forward. Part of us keeping things simple for you is reminding you that most often the investment isn’t the important thing: the investment is simply a vehicle to get you where you want to be.
As we’re not a fund manager and aren’t owned by an investment provider (unlike some financial advice firms) our team of Authorised Financial Advisers can implement well-diversified investment portfolios to meet anyone’s needs, while considering your desired returns, tolerance to risk, and tax circumstances.
Ultimately, the best investment or mix of investments for you may be very different to the most suitable investment for someone else. While we haven't explored all options here, we've hopefully helped you understand some the main investment options available so you can decide which may suit you. Only you can take the next step and take action by investing to reach your milestones in life.
For a complementary, confidential, and no obligation consultation with an Authorised Financial Adviser, call 0508 MILESTONE (0508 645 378) or leave your details and query below. We'll respond within one weekday.