Getting started with investing

What makes investing different from saving? While saving is a great way to get started, investing moves things up a gear. Instead of earning only interest through a savings account, investing in products like shares or property could give you a greater return or profit over the long term.

Setting yourself up to invest

Sound investment decisions begin with knowing where you are now and where you want to go, so it's a good idea to consider:

• Your current financial situation
• What you want to achieve from investing
• When you want to achieve this by
• How much risk you are willing to take with your money

There are two broad types of assets; income and growth assets. Income assets include investments such as cash and fixed interest, growth assets include shares and property. Income and growth assets perform differently under the same market conditions. Income assets generally experience less 'ups and downs in value', have potential lower returns and suit shorter investment timeframes. Growth assets generally experience more 'ups and downs' in value, have higher potential returns and suit longer investment timeframes. So many people choose to invest in a mix of these asset classes to achieve a balance of risk and return.

Cash

Investing in cash, such as a savings account, is typically a short-term investment that provides a return in the form of interest payments. Cash investments generally offer a slow and steady return compared to other investments.

Fixed interest

Broadly, there are two types of fixed interest investments:

Term investments: In exchange for depositing your money with a bank for a fixed period of time (like 6 or 12 months) you get a return in the form of interest payments. Typically, term investments (such as term deposits) are a lower-risk, fixed-return investment.

Bonds: A government, council or company (called the issuer) agrees to pay a certain interest rate (called a coupon) when you lend them your money for a fixed term. Many bonds are considered a lower-risk investment. The risk is dependent on a number of factors including the financial strength of the issuer. Unlike term investments it may be possible to sell your bonds early, but the price can fluctuate.

Property

Residential property is a popular investment choice for many New Zealanders. Returns from this investment type can come from rental income and you may also make money if you sell the property for more than you paid for it. Of course, there’s always the risk that the property could fall in value or expenses outweigh rental income.

You can also invest in industrial, commercial and retail property, either directly or through property investment products.

Shares

Buying a share means you are buying a small part of a company. In return you may be paid a dividend. You might also get a capital gain if you sell your shares for more than you paid for them. While returns can often be good over the long term, prices might fall too. If you want to buy and sell shares directly, you need to do it through a NZX-registered company, like ASB Securities.

Investment risk/return profile

The following chart is a quick guide to the risk/return profile for each investment type. It isn’t meant to reflect the actual returns for any particular period, but shows the typical relationship between risk and return for each investment type.