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Retirement savings - investment

New Zealand society is skewed towards house buying. But you don’t have to buy a house. You could decide to invest instead. So how do you go about investing? And what's the appropriate level of risk?

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Traditional wisdom is that the longer the investment, the higher the risk you can afford to take. However, some commentators argue the global financial crisis has changed the rules. So what are your options?

Buying vs renting

Shamubeel Equab, Principal Economist at the New Zealand Institute of Economic Research, says that in the current housing market buying often doesn't make financial sense – and he is a renter himself. But that doesn't mean he's throwing his money away: "If you’re disciplined, you can use the difference between your rent and a mortgage to invest."

A growing number of households are renting rather than buying.
A growing number of households are renting rather than buying.

The key word is investing. Kiwis aged 65 and over have had low poverty rates in the past, despite a heavy dependency on New Zealand Superannuation (NZS). This is because most of them are freehold homeowners; people paying rent or mortgages after retirement have much higher rates of poverty.

But a growing number of households are renting rather than buying – and they need a retirement income apart from NZS because after they stop work they still have to pay rent.

The rash of high-profile finance company collapses has made Kiwis cautious about investing. They’ve favoured bank term deposits and property over the more volatile sharemarket. But with the right knowledge and advice, investing can be a worthwhile strategy.

What sort of investor?

Sort out your goals and the level of risk that won’t keep you awake at night before you start investing.

How long do you intend to invest? Younger people will be investing essentially through to retirement. So they may want to maximise their returns by going for aggressive, "growth" or "risky" investments such as shares early on – and holding on to them through the inevitable downturns. But some commentators suggest a more balanced strategy may work better following the global financial crisis.

Tip: You should try to diversify as much as you can by spreading your money over different types of investments (See "asset classes" in the jargon buster below).

Do you need access to your invested money? Some of your investments will mature at different times and can offer different levels of access: some can be broken into before their time is up with a penalty, others can be re-sold before they mature. But investments should only be broken or cashed up in cases of genuine need.

Risk tolerance
All investments come with an element of risk: the higher the risk, the higher the return you might expect. The key question is: how much risk are you willing to live with? There's no point keeping awake at night with worry. So make sure your investment plan suits your personality.

However, not all risks are worth taking. Make sure you understand your investment and stay active in monitoring it, even if you have had professional advice. After all, it's your money – your adviser or fund manager will still be paid whatever happens. But if your investment bombs, your money's gone.

Tip: If it looks too good to be true (such as returns that are out of line with the rest of the market) it probably is!

Next you need to think about the different kinds of investments. We outline 3 of the most common, from conservative through to the most volatile.

Fixed-interest investments

You lend a sum of money to a financial institution, a company, or a government for an agreed period of time. In return, the borrower pays you a set rate of interest. This can be paid in 3 ways: at regular periods through the investment term; compounded (calculated regularly and added to the principal); or in a lump sum at the end of the investment. The types of fixed interest available depend on the financial institution offering the investment and include term deposits, PIE accounts, bonds, and debentures.

Tip: Always check the credit rating of a company issuing debentures, which are the riskiest type of fixed-interest investment. Avoid investments that are not investment grade (this means having a rating from a recognised rating agency above BBB-).

Unlisted managed funds

Managed funds pool money from many investors which is invested by a professional fund manager. They offer economies of scale, a range of investment mixes, and the convenience of having a professional manage your investments and take care of the paperwork. They can also offer access to the sharemarket for ordinary investors; on your own, it's difficult to build up a truly diverse share portfolio for less than $100,000.

But there are drawbacks. Our 2008 report on managed funds found that over a 10-year period none of the funds did better than a bank term-deposit. This was because of weak markets, the effect of exchange rates, and high fees.

Tip: Always read a managed fund's prospectus and investment statement. You should also get independent professional advice.

Shares and listed managed funds

Shares represent a "share" in the value of a publicly listed company. They're bought and sold in the sharemarket and can generate returns in 2 ways: through capital gains (as the value of a company rises, so does the value of its shares – but values can also fall); and sometimes through dividends (a share of the profits generated by the company's activities). Dividends can be distributed as cash or as additional shares.

Shares are volatile. Over a short period they can be disastrous. But over the long haul – 20 to 30 years – shares have historically delivered the best “real” returns, taking inflation into account. However, there has been much debate in the financial industry over whether shares are still a wise investment (see “A share in the spoils?” below).

Managed funds can be listed too, which offers the benefits of a pooled investment at a lower cost.

Tip: Never borrow money to invest in the sharemarket.

A share in the spoils?

Since the 2008 global financial crisis, the economic and financial landscape has changed. A recent survey of master trusts by Eriksen and Associates (actuaries and investment strategists) has shown that conservative funds have outperformed riskier growth funds. Jonathon Eriksen says this is a sign of economic uncertainty in global markets – which he says may never return to the highs seen in previous decades.

The New Zealand Exchange’s report on asset-class performance shows international shares to be the worst performers in the past 2 decades. However, New Zealand shares performed much better, with a 7.3 percent return a year over a 20-year period. These results may be influenced by the period chosen and, of course, the past may not be a guide to the future.

Case study: Gemma

Gemma is 34 and working as a senior policy analyst for the Ministry of Health. She rents an apartment in central Wellington. Over the years she has saved $75,000. She has decided against using the money for a house deposit because of high central Wellington prices. She would also be buying alone and is concerned about servicing a mortgage on a single income. Instead, she has invested the money.

She’s investing to generate income for her retirement. However, she is unsure how best to invest the money and how much risk she's comfortable with. She has consulted a financial adviser for advice on how she should invest and has been given 2 possibilities: one based on a medium-level risk tolerance; and the other on a high-level risk tolerance. These charts (below) show the different allocations.

The investments in Gemma's portfolio have been purchased through a “wrap” platform. This gives her access to wholesale funds she would otherwise have needed more capital to invest in. But be careful – wrap platforms also cost money, which may increase the cost of investing. However, managed funds also have costs. Make sure you receive full disclosure of all the fees before you invest.

In Gemma's case, the fees differ depending on the risk level. This is because the higher-risk portfolio requires more active management than the medium-risk one. The fees are calculated as a Management Expense Ratio (MER), which is an annual percentage. The wrap platform will cost another 0.14 to 0.30 percent on top.

The major difference between the 2 portfolios is in the proportion of what’s called “tier one” fixed-investment products, which are very low risk. They are just over a third of the medium-risk portfolio while they’re a mere 8 percent of the high-risk version.

New Zealand and Australian shares, which made up just under a quarter in the medium-risk portfolio, come to almost a third in the high-risk. Cash and property stay the same in both, while the high-risk scenario gives Gemma slightly more exposure to international shares.

Whichever option she chooses will depend on how comfortable she feels with the respective levels of risk, and the difference in possible return between the 2.

Asset allocations for Gemma
These allocations have been created for a fictional profile and are not intended as financial advice. They're simply 2 examples of investment allocations that could be appropriate for our profile.

Everyone has unique financial needs, and there are many ways investments can be allocated. For example, Gemma's portfolio could have used a managed fund instead of a wrap platorm, or a different mix of asset classes. There's also no provision for life insurance and KiwiSaver in Gemma's investments – she's already taken care of these.

All financial plans should be regularly reviewed. The one constant in life is change: financial plans should be flexible enough to adapt to changes in personal circumstances.

These asset allocations were provided by Simon Hassan, authorised financial adviser and Director of Hassan & Associates. His disclosure statement is freely available upon request.

His company's website is www.hassan.co.nz.

Report by Amanda Lyons.

Jargon buster

Investment is filled with jargon. Our jargon buster clarifies some of the financial terms used in this article.

A group of securities (investments) that have similar characteristics, behave similarly, and are controlled by the same laws and regulations.

A document containing key information to guide your investment decisions.

"Umbrella" superannuation schemes made up of many individual employer schemes.

A collection of investments owned by the same individual or organisation.

A document containing detailed legal and financial information that may not always be included in the investment statement.

A company that’s traded on the sharemarket. This allows the market to determine the value of the company through the trading of its shares.

Investments with a financial value. The value comes from ownership in a publicly traded company (shares) or receiving interest from lending money to a government or corporation (bond).

When the price or value of an investment isn't predictable.

An administrative service for investors that allows them to invest at a wholesale level that wouldn’t otherwise be open to them.

Financial advisers

Since 2011 financial advisers have come under greater regulation, offering consumers more protection. They are now required to:

There are 3 categories of adviser.

  1. Authorised financial advisers (AFAs)
  2. Registered financial advisers (RFAs)
  3. Qualified financial entities (QFEs).

Each category requires its own level of qualification and can advise on different types of financial products. The Financial Markets Authority has detailed information on what these categories mean.

Tip: Advisers offering their advice for "free" may be getting commission from particular companies, which can affect the independence of their advice.


Shares must be bought and sold through a broker. Brokers are regulated under the same legislation as financial advisers (the Financial Service Providers Act 2008) and are also required to register on the Financial Services Provider Register either under a business or as individuals. Brokers don't provide financial advice and are paid through commissions on buying and selling shares, or through time-based fees for their services.