How to start investing: A beginner's guide to growing your money

• Introduction to investing
• The difference between investing and saving 
• Investment options
• Tips and best practice
• Avoiding common mistakes 
• Ok, I’m ready to invest. What do I do now?

Keen to start investing but not sure how? Maybe you’ve heard friends or colleagues talking about it, or perhaps you’ve been meaning to get around to it for years but haven’t found the time.  

The good news is you’re not alone. Research from the Financial Markets Authority shows just 21% of New Zealanders feel they are in a secure financial position and 45% don’t feel confident in their ability to make financial decisions.¹ 

There are good reasons why many of us who want to start investing haven’t taken the first step. Some may not have the funds, while others may not be confident in their ability to make the right investment decisions. Some may be concerned about the risks associated with investing. 

But the fact is that investing isn't about overnight success or risky gambles. Time is one of the most important factors in investing. The longer you invest for, the more opportunity there is to benefit from the long-term growth potential of investment markets. It’s also important to focus on well-considered goals rather than reacting to short-term market fluctuations. 

Of course, there are no guarantees, but starting earlier - rather than later - can make your money work harder over time. 

Introduction to investing

Let’s start at the beginning and go over a few of the potential benefits of investing.  

First of all, investing allows you to put your money to work. This means you can grow your wealth over time and this can help you to achieve your financial goals. Some common reasons New Zealanders are most likely to invest for include their retirement, a house deposit, a child’s education, or simply for their long-term financial security and stability.  

Generating income is another reason why many people start investing. Investments such as shares that pay dividends or a property that generates rental income can provide a steady stream of income throughout your life.  

Another benefit is protecting yourself against inflation. Over the past couple of years, it’s likely that many of us have become more aware of just how much inflation can eat into our purchasing power, as well as impacting the value of any savings we might have. By earning returns that outpace inflation, investing helps maintain or even increase the purchasing power of our money and ensures that our savings don't erode in value over time. 

The difference between investing and saving

It’s easy to confuse saving with investing, but in reality, they’re different financial strategies that serve different purposes.  

Saving involves putting money aside in a safe and accessible place, like a standard bank savings account where it is protected and can be easily accessed for short-term needs or an emergency. The trade-off for this ease of access is that the interest earned on savings is generally less than the returns from investments, and the main goal is to preserve the capital.  

Investing, on the other hand, involves putting money into things like managed funds, shares or property, with the expectation you’ll get a higher return over the long term.   

In a nutshell, saving is about security and the immediate availability of funds, while investing focuses on growing wealth over a longer period and accepting some level of risk. 

Investment options 

Once you’ve made the decision to begin your investment journey, it’s time to start getting your head around all the different options available to you. From shares, bonds and property to ETFs and managed funds, each comes with different levels of risk, return and liquidity (how easily the investment can be converted into cash). Here’s a rundown of some of the most popular types of investments in New Zealand:  

Term deposits  

Term deposits are a type of savings vehicle where you deposit a lump sum of money for a fixed period of time at a set interest rate. Around 20% of all New Zealanders have them². Term deposits are considered to be a lower-risk investment, as the investment return (via the interest rate) is certain. Typical term deposits will offer higher interest rates than a standard bank savings account, but you usually can’t access your money until your nominated term is up. This can be anywhere from 30 days to 5 years or more.  

Term deposits are generally lower risk than other investment types, but the interest rate you’ll earn is typically lower than the returns you could potentially earn from other types of investments. Some investors like to shift their money into term deposits at times they think returns from their other investments are likely to go down. They’re a good option for people who want to keep money safe for relatively short-term goals, such as a holiday or a new car, but want to earn more interest that they’d get from their standard bank savings account. 

Bonds  

Bonds are issued by governments, councils and companies to raise money as an alternative to a bank loan. They are typically issued for a fixed period with a set interest rate. They are considered less risky than shares and offer a certain return and a lower risk of losing all or part of your investment. Investors who are starting out don’t generally invest in bonds and use bank term deposits as a similar lower risk investment.

Shares (or equities) 

When you own shares in a company you own a part of it. Shares are bought and sold on share markets in every country – in Aotearoa New Zealand our main share market is known as the NZX. The price of shares rises and falls based on a variety of factors, ranging from the general state of the economy to the particular company’s business prospects. Some shares pay out a dividend to their shareholders when they make profits, so they can provide an income to their owners. Because the prices of shares rise and fall, they’re considered one of the riskier types of investment, particularly for investors who have short term goals. Of course, the upside of risk is reward, and while shares can go down in value, they also offer the potential for good returns for investors, particularly over the long term.  

ETFs 

ETFs, or Exchange-Traded Funds, are investment funds that track a share market index, commodity, or basket of assets and can be bought and sold on a stock exchange providing diversification and generally lower fees. Just as investors pool their money in managed funds, the same collaborative approach is applied to ETFs. However, ETFs differ in that they are traded on the share market, much like individual shares. This allows for trading whenever the share market is open, as long as there are willing buyers and sellers. 

Property 

Property is a popular investment with New Zealanders because it’s a tangible asset that you can see and touch. Many Kiwis are property investors via owning their own homes and also by owning rental properties. Rental properties can provide rental income and potential appreciation but also require significant management and maintenance. As we’ve seen in the last couple of years, the value of property can go up and down considerably.  

Managed Funds  

Managed funds are pooled investments where a professional manager makes investment decisions on behalf of investors. They typically select a mix of investments, which can include various types of shares, bonds, real estate assets, or even alternative investments like commodities or private equity. Diversification is one advantage of investing in a managed fund. If your managed fund contains many shares, it means your risk is spread across all the shares rather than concentrated in one place as it would be if you invested in a single company. place as it would be if you invested in a single company.  

Managed funds can offer the flexibility to invest for a range of different goals, and the freedom to access your investment when you choose. Many investors use managed funds to achieve financial goals that will occur well before they retire, such as their children’s education, home improvement projects, starting a business or simply for their ongoing financial security.  

KiwiSaver 

The majority of Kiwis are already investors in a managed fund via their KiwiSaver investment. KiwiSaver schemes are the most common type of long-term investment for New Zealanders to save for their retirement. Generally, your money is locked up until you turn 65. However, there are some life circumstances in which you can make early withdrawals such as withdrawing funds for your first house deposit or for significant financial hardship. 

There are a lot of ways to contribute to a KiwiSaver member account. If you’re an employee you can choose to contribute 3%, 4%, 6%, 8%, or 10% of your gross salary or wages straight into your KiwiSaver account.  

One of the significant advantages of joining KiwiSaver as an employee is the contribution from your employer, which involves the possibility of them matching your personal contributions up to 3%. This can amplify your savings efforts. 

KiwiSaver members may also be eligible for a government contribution. If you are contributing to a KiwiSaver scheme, you could be eligible for up to $521.43 towards your KiwiSaver savings annually. You will need to meet certain criteria, including contributing a minimum of $1,042.86 yourself between the period of July 1 and 30 June in the preceding year. 

Key principles of investing 

There’s certainly no shortage of advice out there for new investors. But most people would agree that when it comes to managing your investments effectively, there are a few fundamental tips that apply to almost anyone.  

First, set yourself clear goals. Understand what you are investing for, whether it's retirement, a home, education, or something else, and tailor your strategy accordingly. If your goal is to pay for a wedding in the next few years, a shorter-term option such as a term deposit may be more appropriate. For your retirement, the investment horizon will likely be much longer-term. By setting your goals, you’re also defining your investment profile — this is a combination of your goals as well as your time horizon and your risk tolerance. Another way to think about it is like your investment ‘personality’.  

Next, diversify. Where possible, spread your investments across different asset classes such as shares, bonds or real estate, to reduce risk. Many of us have heard stories of people ‘losing everything’ when their sole investment disappears. The more diversified your portfolio is, the less likely you are to have this happen to you.  

Finally, invest little and often. Making regular investments of smaller amounts of money can be a powerful way to help you achieve your financial goals. Here are some of the benefits:  

1. Dollar-cost averaging: The goal is to manage risk by investing a fixed amount of money at regular intervals. When you invest regularly, any movement in the unit price  (which is the price of one unit with one unit price for each fund you invest into) of your investment ends up having less effect on the value of your investment as the price averages out. 
2. Remove the worry: Investing little and often encourages discipline and helps separate emotions from investment decision making. Trying to time the market is difficult and usually emotionally driven, setting and forgetting your investments mean you automatically invest regardless of the whether the price is high or low.  
3. More accessible: Regular investing is a good way to slowly build up your portfolio no matter how much you have at a given time. The key is to get into the investing habit as soon as you can and small monthly contributions are a great way to start. 

Avoiding common mistakes  

The most common mistakes people make when investing, particularly if they are new investors, are failing to follow the tips in the previous section:  

1. Investing without a clear strategy or goals can lead to a lack of direction and coherence in the investment portfolio. This means you can make inconsistent or conflicting decisions that don't align with your financial needs or long-term plans. In the worst-case scenario, a lack of a clear investment strategy can result in significant financial loss or missed opportunities for growth. 
2. Failure to diversify means that if your particular investment or sector performs poorly, your entire portfolio suffers. It also means you might miss opportunities for growth in other areas. If your investments are well diversified, it means you can make gains in one area while another might be underperforming. 
3. Avoid making emotional decisions. If you’ve ever bought a house, this is probably the most common piece of advice you’ll have been given. It’s true for any type of investment – market fluctuations can be stressful, but making impulsive decisions based on emotions can be detrimental to long-term goals. Basically we’re only human – our innate fear of losing money can cause panic selling during market declines, while greed can lead to impulsive buying when prices rise. Maintaining a long-term perspective and avoiding constant monitoring of your investments are 2 ways to avoid this investing pitfall. 
4. Overreacting to market fluctuations is another common mistake investors make all the time. This is basically because we’re humans – our innate fear of losing money can cause panic selling during market declines, while greed can lead to impulsive buying when prices rise. Maintaining a long-term perspective and avoiding constant monitoring of your investments are 2 ways to avoid this investing pitfall.  

It’s important to understand that every investment carries some level of risk. If you buy shares in a company that underperforms, the value of your investment will likely decrease. Property value can be affected by things like interest rates, location, or even climate change.  

Typically, investments that carry higher risk can offer the potential for higher returns. While lower-risk investments generally offer more modest returns. Understanding and managing risk through diversification, careful selection of investments and other strategies, is a critical part of investing.

Ok, I’m ready to invest. What do I do now? 

If you think you’re ready to start investing beyond your KiwiSaver investment, that’s great news. But before you make any decisions about where you invest, you should set investment goals and think about your appetite for risk. If you’re looking to take your next step, you could check out our article on setting investment goals. You can also use our fund finder to understand more about your own appetite for risk and how that influences which MAS investment scheme is right for you.