So enough scary talk about risk, doom and gloom. Rather, let’s look at different investment vehicles you can use. This is the exciting part of investing; at least it is to me.
Cash, fixed income, property and shares, which are also called shares or stocks are the four main investment classes worldwide.
Below is a table summering the characteristics of each investment class.
|Time Frame||No Minimum||3 years +||5 years +|
These are generalized characteristics and depend on several factors, such as the investment duration. But on average they hold for each class.
Cash is the simplest kind of investment held in a bank savings account. The returns on cash are generally low compared to other more risky investments. But you can withdraw part or all of it at the drop of a hat. That makes cash a very liquid investment. This lends cash to be a good investment vehicle for people with a short term savings goal, or as part of an emergency fund. Cash is not a good investment vehicle for long or medium investments.
To increase the return on your cash, you could consider a fixed-term investment with a bank. This is when your money is locked away for a set time. In return for locking this money away, you get paid a higher return. A possible downside to this is that you cannot access your money without being charged a penalty.
2. Fixed Income
A fixed-income investment has several names like bonds, fixed interest, or government stocks. It is basically an IOU given by an issuer which is often a government or company. You give them your money for a certain period of time, they promise to pay you a certain interest rate, and then once the time is up, they will pay back the initial money.
Often there is a minimum investment size when it comes to buying fixed-income assets. But you can get around this by buying bond funds which have a lower requirement for entry.
Since bonds are held over a certain period, it makes them more suited towards medium to long term investors. You won’t be able to access your money until the period is up. Since the IOU is also between you and the issuer, Fixed income investing is not liquid. To get around this, there are several secondary markets where you can sell your bonds if you need to.
3. Shares and Equity
A share from a company is basically a right to the share of that company future profits. Companies pay these future profits through dividends payments. You may also gain capital value in the share itself if the company grows.
The price of a company shares is also affected by the activity on the share market. For instance, if everyone is selling their shares for a particular company, the share price is likely to go down. There are more sellers than buyers. The reverse is also true. If there is demand for a companies shares and there are few sellers, the price tends to go up.
Because the price of shares can go up and down, they are considered volatile and have a high risk. Shares can make a good long term investment thought.
For many Kiwis, their home is their largest asset which has generally been acquired thought a mortgage. And since people understand how mortgage work, purchasing a rental or investment property comes very naturally.
The downside to owning an investment property is that it does not provide you with much diversification. Since if you already own your home, and add another property, many of your investments are in the property.
Another option for investing in property is to buy into a property syndicate. A property syndicate pools money together from many investors and purchases investment properties on their behalf.
Cash, Fixed income, Shares, and Property are the main investment vehicles you can use, but there are alternatives. For example, you can invest in commodities such as gold, hedge funds, or even foreign exchange. Generally, these are not discussed because they are not well suited for beginner investors and require a certain level of expertise and ongoing commitments.