Posted December 2017 by NZCU Baywide
Term Deposits? Shares? Property? Which investment is right for me?
At any given time, there's only ever so much you know for certain about your financial future.
One of these is just how uncertain that future can feel.
Lose your job or come face-to-face with unforeseen emergency expenses and you could quickly be thrown off course.
Unfortunately we can't offer you a crystal ball that predicts these hurdles, but what we can provide are numerous other ways to invest in your financial future and ensure these challenges are easier to overcome when they do pop up.
That’s why today we’re exploring 3 of the country’s leading investment options, comparing the risks, benefits, and returns to help guide you through the decision making process.
So whether you’re a retiree looking to boost your savings, or someone who’s only just started their financial journey through life, there’s an option below to suit safe savers through to financial risk takers. This includes:
- How to quickly and easily cut out the risks and rest easy with a term deposit investment.
- What you need to know about the fine line between risk vs reward of the New Zealand stock market.
- The ins and outs of property investment, and how you can use it to supplement your current income.
Let's kick things off with the high returns of term deposits:
1. Limit the risks and maximise your returns with a term deposit investment
Shares, stocks, and property investments all make for risky investments - we discuss these further down the page - which can leave those of you wanting to make a safe, secure investment hesitant to part with your hard-earned cash.
If this sounds familiar, then a term deposit may be what you're looking for.
What is a term deposit, exactly?
A term deposit works much like a savings account, only the money you set aside is locked away with minimal access, for an agreed upon term (anywhere between one month to five years), in exchange for a higher, locked-in interest rate. A rate that’s often much higher than a comparable savings account.
Once the term comes to a close, you can either open a new term deposit and reinvest the final amount, or request that it be paid directly into your account.
What are the benefits?
Term deposits provide New Zealanders with something few others can: a guaranteed return on your investment. In fact, this peace of mind is just one of the reasons that term deposit investments make for such an attractive option. Others include:
- Achieve high returns on your investment
Term deposits often outperform comparable savings account, achieving a much higher return on the money you've set aside.
- Minimise the risks
A term deposit cuts out the sleepless nights spent worrying about a company's quarterly performance report, or the state of the New Zealand property market. Just set your money aside, sit back, and relax as your money does the work for you.
- Guarantee your returns
A guaranteed, measurable return on your investment is hard to find, but that’s exactly what a term deposit's fixed rate provides. With a locked-in rate, you're freed up to plan your financial future with certainty. It's a profit you can - quite literally - bank on!
What are the risks?
There are minimal, if any, risks involved in choosing a term deposit. Instead, there are a few trade-offs you make over a regular savings account in exchange for the higher rate on offer. This includes:
- Limited access to your funds
Once you’ve deposited funds into your term deposit, these are meant to remain untouched for the full extent of the term. This limited access could be tough if you find yourself regularly dipping into your savings.
So, is a term deposit right for me?
Is safety, security, and certainty at the top of your investment checklist?
If so, then a term deposit investment could be the option for you.
While the returns aren't as crazy as shares, stocks, or property, neither are the risks.
More than that, a term deposit protects you from fluctuations in the cash rate, the stock market, or the property market. This makes it the ideal solution if you want to set your money aside without dreading a bad property purchase or misinformed investment.
2. Buy low and sell high with shares and stocks
What do you think of when you hear the word ‘shares’?
If you answered 'Scruffy, old men in business suits shouting on the stock market floor', then you're not alone.
The truth is, there’s more to stocks and shares than being able to shout the loudest.
In fact, chances are you're already playing the stock market without even realising it. That's right! If you have a KiwiSaver scheme, for example, the plan you've chosen could be investing your retirement savings in various shares, stocks, and other investments.
What are shares, exactly?
As the name implies, purchasing shares buys you a small portion - or share - of a company, as well as a portion of any profits the company makes. These shares are usually bought via a share broker, and provide two major returns on your investment:
Dividends are paid out to shareholders - that's you - when the company makes money. You can either accept this as a payout, or use it to reinvest and buy more shares.
- Capital Gains
The other return you can expect is capital gains, which is the act of ‘buying low and selling high’.
Ideally, the shares you purchase increase in value over time, as the company goes from strength to strength. When the time is right, you then sell these shares on at a higher price than you paid, and the difference is your profit.
What are the benefits?
- Diversifying can limit the risks
Some investment options present limited room for adjustments, but that's not the case with shares. With a national - and international - stock market at your disposal, you're free to diversify your investments among companies big and small, in any number of industries.
The freedom to diversify your investments limits the risk, and ensures that one misstep or under-performing stock won't leave you knocking on debt's door.
- You're able to start small
You don't need much to buy your first shares. In fact, the barrier to entry is relatively small when compared to the other options we're exploring today. Depending on the shares, an initial investment of as little as $30 could see you on your way.
What are the risks?
If you're considering shares, you need to know that this is all easier said than done.
Shares aren't always this straightforward.
In fact, they present a number of risks that you need to be aware of:
- Returns aren't always guaranteed
Just because you take the time to weigh up your options and invest in a company you feel is a safe bet doesn’t guarantee a sizeable return. Or a return at all, for that matter!
Any return on your investment is tied to the performance of the company. Profits that come in under their projected goals, slow growth, or other financial difficulties could see the share price plummet and, in turn, negatively affect any returns you’d been banking on.
- Significant losses are a possibility
More than your returns being smaller than expected, there’s also a very real possibility that you could lose everything you’ve invested. Full stop. If the company folds, goes out of business, or otherwise strikes an irreversible hardship, you could find yourself out of pocket as the share prices plummet.
So, are shares right for me?
The realities of the stock market can be stark.
After reading up on these risks, there's a chance you're more reluctant than ever to take the New Zealand stock market for a spin.
The truth is, market volatility isn't going anywhere soon. It’s just some companies are more susceptible to risks than others.
The question of risk vs reward is one that only you can answer. Just make sure you shop around, read up on sharemarket tips and guides, and check in with the experts before you put all of your financial eggs in the one basket.
3. Reap the short and long-term rewards of a property investment
The dream of one day owning a home is as Kiwi as it gets, which might be why property remains such a popular investment option:
If someone’s going to buy a home, then someone also needs to sell it to them, right?
So why not have that someone be you!
What is an investment property, exactly?
Before you start your life as New Zealand's newest property investor, you need to understand the risks you're taking, the mistakes you could make, and the complexities of what you’re getting into. Long-term capital growth, flexibility, and additional revenue streams make this a popular option, but there’s also a rather high barrier to entry you’ll need to hurdle.
By now you've probably guessed what this is:
Getting your foot in the door - pardon the pun - requires some hefty capital investment, so you need to know how you'll afford it:
- Will the money come out of your savings?
- Maybe via a home loan?
- Or perhaps through a personal loan, or with money from a like-minded friend or family member looking to split the risks - and profits - and invest with you?
How you’ll pay for your investment property is one thing, but why you’re doing it is another:
- What are your goals?
- Are you wanting to supplement your current income with a high cash flow property?
- Or maybe you want to invest in something long-term that you can update or add value to via home renovations?
- Perhaps you just want to invest in your retirement via property that has good, long-term capital growth prospects so when the time comes to settle down you’re sitting pretty?
All of these questions and more need to be answered before you sign on the dotted line.
What are the benefits?
- Versatility is the name of the game
Whether it’s a cheap renovation project or something with more immediate potential, property is one of the most versatile investment options out there.
For example, just because you purchase a property doesn’t mean it has to sit empty, for ten, twenty, or thirty years. Instead? You could create additional income streams that supplement your current job by renting the property out well before you consider selling later down the track.
What are the risks?
- Property bubbles are made to burst
Chances are you’ve heard of a property bubble before, right?
And what’s the one thing most bubbles do?
Like all other forms of investment, property isn’t immune to risks. Just how risky your investments are depends on your current finances, and how much you're willing to put down in the hopes of making a gain.
So, is property investing right for me?
Making a start in property can take some hefty capital investment - especially at a time like this with house prices at record levels - but with the right people, advice, and advisors, there’s nothing stopping you from making a go of it.
Risk management really is the name of the game. If you're going to do this, you need to do it the smart way, speaking with experts about the state of your finances and ensuring today's investment isn't tomorrow's regrettable purchase.
Today is the next best time to invest in your future
From playing the stock market to renovating run-down properties right through to setting your money aside in a term deposit, there’s no shortage of ways you can invest in your future. Which option is right for you depends on your goals, your current finances, and just how many risks you’re willing to take in order to achieve them.
Either way, there’s nothing standing in your way when it comes to making an investment today that will help you secure your way of life tomorrow. Now’s the perfect time to start!