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W & K

Common Investment Myths

Not knowing how to go about it is one of the main reasons why people don’t invest, along with many misconceptions about investing. Here are some of the most common myths and why you shouldn’t believe them:

  • Investing is only for people with a lot of money: Diversified managed funds make investing easy for smaller amounts. Most funds will accept a low initial deposit (around $1,000), which can be added to by regular monthly contributions. Even small regular amounts can grow to a significant sum over a few years. The success of KiwiSaver is a classic example with many people not initially having any investments, and now these same people may have KiwiSaver balances north of $50,000.
  • Investing in shares is risky: Providing you have a well-diversified share portfolio, the key risk you face with shares is the risk of how long you need to remain invested to generate a good return. The share market moves in cycles with an upward trend over the long term. A well-diversified portfolio held for the long term is unlikely to result in loss of capital. The easiest way to obtain a well-diversified share portfolio is to invest in shares via well performing managed funds.
  • Investing in bank deposits is safe: All investments carry some aspect of risk, and with bank deposits the biggest risk is that of loss of purchasing power of your money through inflation. If you invest $10,000 on term deposit today for five years, the $10,000 you receive in five years’ time will not buy the same amount of goods and services that it can buy today. Five years’ worth of inflation at 2%, would see the buying power of your original $10,000 being worth the equivalent of $9,039. Bank deposits in New Zealand are not guaranteed, so there is the potential risk of a bank defaulting on your money.
  • You should pay off your mortgage before you start investing: Paying off your mortgage as quickly as possible is a good idea, but so is getting into the habit of investing through regular contributions to an investment fund. KiwiSaver is usually the obvious starting point other than having an emergency fund at the bank.
  • You need to be an expert to be an investor: There are many investment products available that make investing easy. A good financial adviser can recommend something appropriate for you.

We believe that investing should be a simple and enjoyable process. Yes, there is some paperwork to begin with. Initially there will be data collection to provide the factual basis of your current financial position, what your investment goals and objectives are, and how your assets are currently protected. A risk profile assessment is also necessary. The adviser should then be able to prepare a readily readable and understandable investment plan for you. There will also be a need to satisfy the regulatory requirements of Anti Money Laundering and Counter Terrorism legislation.

From there on, your investment life should be relatively simple and straight forward. Invariably there will inevitably be periods when your investments are not performing as well as you would like. Likewise, there should also be periods when your investments are performing well above your expectations.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.