The language of investing can seem difficult. There are many options. And all the rules about what you should do, when, can seem confusing.
But investing doesn’t have to be hard. It’s great to be in there, learning how rising and falling markets affect your KiwiSaver or other investments – perhaps including some individual shares bought through online platforms. But you don’t need to be watching daily or even monthly price changes. And you certainly don’t need to be buying, selling or moving your money around in reaction to market movements. The hands-off investor often ends up with more than the busy one.
You should keep track of your investments, and check every now and then that they are still appropriate for you. But that’s all.
Four ways to keep your investing simple
1. Use managed funds including KiwiSaver
The fund manager selects a wide range of investments, so you don’t have to.
And as discussed earlier, fund managers do a lot of the work for you, keeping track of dividends and interest earned, and making any decisions to be made by shareholders.
Of course it’s fine if you prefer to buy your own shares. But it is undoubtedly more work. For tips on DIY share investing see the FMA’s ‘Share this’ guide.
Note that if you are under 65 and you use KiwiSaver, you won’t be able to access the money, under normal circumstances, until you turn 65 or use the money for a first home. So you might prefer to use non-KiwiSaver managed funds. However, over-65s can access their KiwiSaver whenever they want to.
2. Invest regularly
It works better to invest a certain amount weekly or monthly than to try to pick when it’s a good time to deposit or withdraw money.
If you’re an employee in KiwiSaver, your regular contributions will be taken care of by your employer. For others in KiwiSaver it’s great to set up a regular transfer from your bank account to your KiwiSaver provider. The same applies to other managed funds or online investment platforms.
There are two advantages to this:
You don’t have to think about when to invest.
You benefit from what is called dollar cost averaging.
How does dollar cost averaging work?
Let’s say you’re contributing $100 a month into a KiwiSaver or other managed fund. When you deposit money, the manager uses it to buy units in the fund for you.
If the investment markets have been performing well lately, the units might be worth $20. Your $100 will buy five units.
But later the markets fall, and the units are worth just $10. That means your $100 will buy ten units.
You buy more units when they are cheap and fewer when they are expensive. This reduces your average price. Great!
What if you have a lump sum? Is it better to drip-feed that into, say, a managed fund, to take advantage of dollar cost averaging? The mathematicians say ‘No’ because, more often than not, you’ll make more in the fund than if you leave some money in a bank account for a while.
But if you get your timing wrong, and move the whole lot into the fund right before a market downturn, you will be really annoyed. To avoid the chance of that, it’s good to drip-feed the money into the fund in three or four lots, perhaps a month apart.
3. Take little notice of the performance of different funds
That seems crazy. Of course you want to invest in managed funds that will perform well. But which ones are they?
The problem is that looking at which funds did well in the past is no help. Research shows that past performance is no guide to the future. In fact, top-performing funds in one period quite often do badly in the next period – perhaps because they are higher-risk.
Here, Mary says ‘take little notice’ rather than no notice at all. If a fund has repeatedly performed badly it may be because of poor management, so it’s best to avoid it.
4. Find easy-to-read and easy-to access information about investing
Websites like the FMA’s site, fma.govt.nz and sorted.org.nz have heaps of information written in a jargon-free way.
NZX, the company that runs the stock exchange, has several resources in the ‘Investing’ section of its website.
The NZ Shareholders’ Association offers education, courses and events.
Some universities run share clubs.
How to choose a managed fund
So how should you choose a managed fund, if it’s not by past performance? As Mary says in Myth #4, go for a fund that charges low fees. Research shows they perform just as well, on average, as funds that charge high fees.
This tool includes scatterplots showing different KiwiSaver funds’ returns and fees. Start by looking at all the defensive funds over five years. Whenever I’ve done this – over different time periods – I’ve found that the high-fee funds don’t necessarily have higher returns.
Now try it for conservative funds, then balanced, growth and aggressive funds. Sometimes it might look as if high-fee funds do better in one fund type.
But sometimes it’s the opposite, with low-fee funds doing better. In general, there seems to be no correlation between fees and returns.
You may also want to take ethical considerations into account when choosing a fund. The Mindful Money website will help you with this, at mindfulmoney.nz
What you do need to do with your investments
1. Before making any investment, read the disclosure documents.
For example, if you’re investing in a managed fund, read its Product Disclosure Statement (PDS), quarterly updates and annual report, which will be on the provider’s website. For shares and bonds, check out the company’s annual reports and financial statements, and the PDS on newly issued shares.
These documents are usually fairly short and written in clear language.
2. Read the personal statements from your provider, telling you about your particular investment.
Your KiwiSaver annual statement includes an estimate of your savings at retirement and how much that’s likely to mean in weekly spending money.
Note that the numbers are adjusted for inflation, so if it says, for example, that your savings are likely to total $200,000 at retirement, it will actually be an amount that buys as much as $200,000 buys now. And if it says weekly spending of, say, $200, you will be able to buy as much as $200 buys now.
Check these numbers. If you would like to have more savings at retirement, you need to do one or more of:
Increase your contributions into KiwiSaver.
Switch to a higher-risk fund that is likely to grow faster - although it will be more volatile.
Switch to a fund that charges lower fees.
Plan to retire at an older age than 65.
Choose an additional investment to KiwiSaver. Consider talking to an adviser to help you develop a financial plan that works for you.
3. Set up your investments depending on when you plan to spend the money.
If it’s within less than three years use bank term deposits or a defensive managed fund. If it’s within three to ten years use high quality bonds or a balanced fund. And if it’s more than ten years away use shares, property or a growth or aggressive fund.
Once a year cast your eye over this. For example, if you are approaching the time when you’ll spend the money on a first home or in retirement, gradually reduce your risk.
4. If you find you can’t cope with a market downturn that temporarily reduces your savings, do not move your money to a lower-risk investment at the time of the downturn.
As long as your investment is well diversified, perhaps in a managed fund, it’s almost certain to recover in time, although it can sometimes take a few years
But if you find this is all too nerve-wracking, consider gradually reducing your risk. The best way to do this is to divide your money into three or four lots. Move the first lot at the time, the second lot a month later, and so on. That way you won’t end up moving all the money at what turns out – in hindsight – to have been a bad time.