Articles on investing

April 2009

Understanding investing

Most New Zealanders invest, one way or another. Troubled times or not, putting your money under the mattress or withdrawing from investing is not a sensible option.

However, changes in the financial landscape can make it difficult to decide how and where to invest your money. How do you respond to:

• lower interest rates?
• increasing bond issues?
• the Government deposit guarantee scheme?
• volatile share prices?
• falls in property prices?
• a fluctuating exchange rate?

In the face of these challenges it's all the more important to go back to investment basics. Especially pay attention to risk in the context of your investment needs and timeframes.

The global financial crisis and recession haven't altered the inherent risk in most investments. However tough economic times can change investor appetite and perception of risk.

The starting point is still to set financial goals. Clear goals help you understand your risk comfort level, how long you need to invest for and whether you need to react to short-term market changes.

Plans to reach these goals need to be grounded in your personal circumstances. Some factors won't have been changed by the recession (such as your age), but others, particularly income (including future income), could be affected.

With interest rates falling anyone who relies on fixed-interest investments for their income may have to reassess either their goals or their appetite for risk.

Some retail investments are covered by the Government guarantee scheme until October 2010. You may feel more secure in those investments while the guarantee is in place.

It is very important to remember that if you change to higher-yielding investments, these usually carry a higher risk.

One option proving attractive to many investors is corporate bonds. The increasing number of companies and local authorities borrowing through the debt markets by issuing bonds to the public is an example of how the recession and financial crisis have also affected the choices available to investors.

This is a global phenomenon driven by, on the issuers' side a desire to diversify debt and overcome tight credit markets and on the buyers' side by the bonds' relatively high returns.

When investing in bonds you should look for overall strength and rating of the issuer.

Share markets in New Zealand and around the world have suffered. People with shares, or looking to invest in shares, can understandably be concerned when trying to make sense of volatile markets. But historically share markets do bounce back and those who withdraw from such markets lose the upside when this happens. So if you are a long term investor you should take this into account.

Whether you're looking at share or bonds, read the offer documents or get independent advice to help you to understand the business of the company, its assets (and how much debt the company has), profitability and how it might be affected by local and international events. It's also important to look at the ranking of bonds, the security behind them, if any, and the term of the investment.

Those shares or bonds are listed on the stock exchange can be sold more easily, have additional regulatory protections and the transparency of the listed market.

For investors who don't have the time or expertise to assess individual investments, managed funds can offer a solution. They differ in the types of investments they manage and in their fees. You should try to understand what you are paying for and compare different funds.

The fortunes of property, share and bond markets affect both managed funds and superannuation schemes because they invest in these assets. The decision here should be whether you are confident to do your own research and have direct investments or whether you prefer to have this work done by a fund manager.

A time-honoured way of managing risk is to diversify investments, both in types of investment and their longevity. Putting money into several investment types helps protect the total portfolio if there is a downturn in one part of the market.

Risk is always present when investing, but by following basic principles risk can be minimised and investors can also maximise their returns over the long term.

Return to articles' index