Many Kiwis approach investing with preconceived notions that can hinder their success. It’s crucial to separate fact from fiction. This article debunks common investment myths prevalent in New Zealand, giving you actionable insights to make informed and profitable decisions.
Myth 1: Investing is Only for the Wealthy
This is perhaps the most pervasive myth. The reality is that you don’t need a fortune to start investing. Thanks to advancements in technology and accessibility many platforms let you start with as little as a few dollars. Think about a spare $50 a week – that could be the start of a robust investment portfolio over time.
What to do instead: Explore micro-investing platforms like Sharesies or Hatch. These platforms allow you to buy fractions of shares, making it easier to diversify your portfolio even with limited funds. Consider investing in Kiwisaver, where your contributions are supplemented by employer contributions and government incentives. Even small, consistent contributions can grow significantly over the long term. Focus on learning about dollar-cost averaging, where you invest a fixed amount regularly, regardless of market fluctuations. This strategy helps reduce the impact of volatility and can lead to better returns over time.
Myth 2: Property is Always the Best Investment in New Zealand
New Zealand has a strong cultural affinity with property investing, often seen as the safest bet. While property can be a solid investment, it’s not always the best, especially considering the high barriers to entry, ongoing maintenance costs, and fluctuating market conditions.
What to do instead: Don’t put all your eggs in one basket. Diversify your investments beyond property. Consider stocks, bonds, and managed funds. Factor in the costs associated with property ownership: mortgage repayments, property taxes (rates), insurance, and maintenance. These can significantly impact your return on investment. Research the rental yield in your area. A low rental yield might not justify the investment. Be aware of legislation impacting landlords, such as tenancy law changes. The Residential Tenancies Amendment Act 2020 introduced significant changes impacting landlords. Also, remember property is relatively illiquid – it takes time to sell if you need access to your capital.
Myth 3: Kiwisaver is All the Investing I Need
Kiwisaver is a fantastic retirement savings scheme, and participation is highly recommended. However, relying solely on Kiwisaver may not be enough to achieve your long-term financial goals. It’s designed for retirement, and accessing those funds before retirement is generally restricted.
What to do instead: Treat Kiwisaver as a foundation, not the entire house. Assess your risk tolerance and choose the appropriate Kiwisaver fund type: conservative, balanced, or growth. Your risk tolerance and time horizon should dictate your fund choice. Consider supplementary investments to complement your Kiwisaver account. This could include investments in shares, bonds, or managed funds. Think about your financial goals beyond retirement. Do you want to buy a house sooner, travel extensively, or retire early? Kiwisaver alone might not get you there. Regularly review your Kiwisaver contributions and ensure they are sufficient to meet your retirement goals. Consider increasing your contribution rate if possible.
Myth 4: You Need to Be an Expert to Invest in the Stock Market
The stock market can seem daunting, filled with complex jargon and fluctuating prices. Many people believe you need specialized knowledge to succeed. This isn’t true. While understanding the basics is important, you don’t need to be a Wall Street guru to participate.
What to do instead: Start with index funds or ETFs (Exchange Traded Funds). These are diversified investments that track a specific market index, like the NZX 50. This simplifies investing and reduces risk. Use online resources and educational materials to learn about the basics of investing. Many websites and platforms offer free courses and tutorials. Consider using a robo-advisor. These platforms use algorithms to build and manage your investment portfolio based on your risk tolerance and financial goals. Don’t try to time the market. Attempting to predict market fluctuations is notoriously difficult, even for experts. Focus on long-term investing and stay the course. Understand the difference between investing and speculation. Investing is about building wealth over the long term, while speculation involves high-risk, short-term bets.
Myth 5: Investing is Too Risky
All investments carry some degree of risk, but risk can be managed and mitigated. The perception of risk often stems from a lack of understanding and knowledge. Doing nothing is also a risk – the risk of your money losing value due to inflation.
What to do instead: Understand your risk tolerance. Are you comfortable with potential losses in exchange for higher potential returns, or do you prefer a more conservative approach? Diversify your portfolio. Don’t put all your money into one investment. Spreading your investments across different asset classes reduces overall risk. Invest for the long term. Short-term market fluctuations are normal. Focus on the long-term growth potential of your investments. Do your research and understand the investments you are making. Don’t invest in something you don’t understand. Consult a financial advisor if you need help understanding and managing risk.
Myth 6: You Must Time the Market to Make Money
Attempting to “time the market” – buying low and selling high – is a risky and often unsuccessful strategy. Even professional investors struggle to consistently predict market movements. Missing just a few of the market’s best days can significantly impact your returns.
What to do instead: Focus on time in the market, not timing the market. Dollar-cost averaging is your friend. Consider the long-term gains. Don’t panic sell during market downturns. Maintain a long-term perspective and avoid making emotional decisions based on short-term market fluctuations. Have a well-defined investment strategy and stick to it. Regularly rebalance your portfolio to maintain your desired asset allocation.
Myth 7: Cheaper Investments Must Be Better
While keeping costs low is important, focusing solely on the lowest-priced investment isn’t always the best strategy. Cheap investments may come with hidden fees, limited features, or lower-quality investment options.
What to do instead: Compare the total cost of ownership, including fees, commissions, and other expenses. Consider the value you are receiving for your money. Does the investment offer access to a wider range of investment options, better customer service, or more advanced features? Research the investment provider and ensure they are reputable and trustworthy. Read the fine print and understand all the fees and charges associated with the investment. Don’t sacrifice quality for price. Choose investments that align with your investment goals and risk tolerance, even if they are slightly more expensive.
Myth 8: Past Performance Guarantees Future Results
Past performance is not a reliable indicator of future results. Market conditions change, and what worked in the past may not work in the future. Relying solely on past performance can lead to poor investment decisions.
What to do instead: Focus on fundamental analysis. Consider the underlying factors that drive investment returns, such as economic growth, company earnings, and industry trends. Look at the long-term track record of the investment, but don’t rely solely on it. Diversify your portfolio to reduce the impact of any single investment’s performance. Be aware of market trends and changing economic conditions. Regularly review your investment strategy and make adjustments as needed.
Myth 9: Ignore Your Investments – They’ll Take Care of Themselves
Investing is not a completely passive activity. While a buy-and-hold strategy can be effective, it’s important to monitor your investments and make adjustments as needed. Ignoring your investments completely can lead to missed opportunities and unnecessary losses.
What to do instead: Review your portfolio at least annually. Track the performance of your investments and compare them to your benchmark. Rebalance your portfolio to maintain your desired asset allocation. Update your investment strategy as your financial goals and risk tolerance change. Stay informed about market trends and changing economic conditions. Don’t be afraid to seek professional advice if you need help managing your investments.
Myth 10: Alternative Investments Are Always Too Risky for Kiwis
Alternative investments, such as hedge funds, private equity, and venture capital, are often perceived as being too risky for the average Kiwi investor. While these investments can be more volatile and less liquid than traditional investments, they can also offer the potential for higher returns.
What to do instead: Understand the risks and rewards of alternative investments before investing. Make sure you understand the fund, the manager, and what could go wrong.
Be aware of the illiquidity of many alternative investments. Consider the higher fees typically associated with alternative investments. Start with a small allocation to alternative investments and gradually increase it as you become more comfortable. Consider investing in alternative investments through a managed fund or investment trust. Some platforms like NZX provide access to some alternative investments. This can provide diversification and professional management.
Ensure that it aligns with your overall portfolio goals and risk tolerance.
Myth 11: Investing in Individual Stocks is a Sure Way to Get Rich Quick
While the allure of picking the “next big thing” and achieving rapid wealth through individual stock investments is strong, it’s a high-risk endeavor. Successfully picking individual stocks requires significant research, analysis, and a degree of luck. The vast majority of individual investors underperform the market average.
What to do instead: Start with diversified funds. If you feel that you’d like to invest in an individual stock, devote a small proportion of your larger investing effort toward these individual stocks that you find interesting.
If you choose to invest in individual stocks, do your homework. Understand the company’s business model, financial statements, and competitive landscape.
Be prepared to hold your investments for the long term. Don’t be swayed by short-term market fluctuations.
Consider using a stop-loss order to limit your potential losses.
Diversify your stock investments across different sectors and industries.
Myth 12: Ethical Investing Means Sacrificing Returns
Some investors believe that ethical investing, also known as socially responsible investing (SRI) or environmental, social, and governance (ESG) investing, means sacrificing financial returns. The misconception is that considering ethical factors limits investment choices and reduces profitability.
What to do instead: Recognise that ethical considerations can align with long-term value creation. Companies that prioritize sustainability, responsible governance, and positive social impact may be better positioned for long-term success.
Do some research, and then be sure you’re investing in firms whose activities are something you can support wholeheartedly.
Many studies have shown that ESG investing can deliver competitive returns. Explore investment options that align with your values, such as companies with strong environmental records, positive social impact, or good governance practices.
Use resources like Mindful Money to help you identify ethical investment options in New Zealand.
Engage with companies you invest in to advocate for responsible business practices.
Remember that ethical investing means more than just avoiding certain sectors; it’s about actively supporting companies that are making a positive impact.
FAQ Section
Q: How much money do I need to start investing?
You can start investing with very little money. Platforms like Sharesies and Hatch allow you to buy fractions of shares, meaning you can invest with as little as $5 or $10. The key is to start small and invest consistently.
Q: What is Dollar Cost Averaging (DCA)?
Dollar-cost averaging is an investment strategy where you invest a fixed amount of money at regular intervals, regardless of the price of the asset. This helps to reduce the impact of volatility, as you buy more shares when prices are low and fewer shares when prices are high. Over time, this can lead to better returns than trying to time the market.
Q: What should I do if the market crashes?
Market crashes can be unsettling, but it’s important to stay calm and avoid making rash decisions. Don’t panic sell your investments. Instead, review your investment strategy and ensure it still aligns with your long-term goals. Consider using a long-term strategy. If you are still contributing, think of crashes as a buying opportunity.
Q: How often should I review my investment portfolio?
You should review your investment portfolio at least annually, or more frequently if your circumstances change. This allows you to track the performance of your investments, rebalance your portfolio, and make adjustments to your investment strategy as needed.
Q: What is diversification?
Diversification is the practice of spreading your investments across different asset classes, sectors, and geographic regions to reduce risk. By diversifying your portfolio, you can limit the impact of any single investment’s performance on your overall returns. It’s a cornerstone of risk management.
Q: Do I need a financial advisor?
Whether you need a financial advisor depends on your individual circumstances and investment knowledge. If you are comfortable managing your own investments and have a good understanding of financial markets, you may not need an advisor. However, if you are new to investing, feeling overwhelmed, or have complex financial needs, a financial advisor can provide valuable guidance and support. New Zealand requires financial advisors to be registered, it’s recommended you check the Financial Service Providers Register to verify the registration of your financial advisor.
Q: What are managed funds?
Managed funds, also known as unit trusts or mutual funds, pool money from multiple investors to invest in a diversified portfolio of assets. Professional fund managers make investment decisions on behalf of the fund. Managed funds offer a convenient way to diversify your investments and access professional expertise.
Q: What are ETFs?
ETFs (Exchange Traded Funds) are similar to managed funds but are traded on stock exchanges like individual stocks. They typically track a specific market index, sector, or commodity, offering diversification at a low cost. ETFs are a popular choice for investors looking for a simple and cost-effective way to gain exposure to a broad market or specific investment theme.
Q: What are the tax implications of investing in New Zealand?
Investment income in New Zealand is generally taxable. The specific tax implications will depend on the type of investment and your individual circumstances. Common taxable investment incomes include interest from bank accounts, dividends from shares, and capital gains from the sale of assets. It’s advisable to consult with a tax professional to understand the tax implications of your investments.
Q: What is Kiwisaver?
Kiwisaver is a voluntary, work-based savings scheme designed to help New Zealanders save for retirement. Contributions are typically deducted from your salary, and your employer also contributes. The government may also provide contributions. Kiwisaver funds are generally locked in until retirement, with some exceptions, such as for first-home purchases. It’s an automatic enrollment system that can be opted out of.
References
Financial Markets Authority (FMA) – fma.govt.nz
Sorted.org.nz – sorted.org.nz
Reserve Bank of New Zealand – rbnz.govt.nz
Don’t let these myths hold you back from achieving your financial goals. Start your investment journey today with knowledge and a clear strategy. Research your options, understand your risk tolerance, and take the first step towards building a secure financial future in New Zealand. Consider starting by visiting Sorted.org.nz, a great unbiased resource to help you with your financial decisions.
