The No. 1 personal finance question being asked online is “I have $XXX in saving, where should I put it?” or “What should I do with my term deposit?”. People who are unfamiliar with personal finance usually have no idea where to investment their money except term deposit and property (Oh, the old Kiwi dream). While property seems out of reach and interest rate on term deposit are hitting all time low, Kiwis are looking for another way to invest for their future.
Before you jumping into the world of investing…
You should put your money to invest after you pay off your consumer/personal debt, join KiwiSaver, and have an emergency fund. I believe you are not in the position of investing if you still haven’t got your financial basic sorted out.
The most important question
The first thing you’ll need to work out is How long can you leave the money in the investment? or how long before you will need to use that money?
If you are saving for a new car in 3 years, then 3 years is your answer. If you are saving for retirement and you are 30, 10+ years will be your answer.
Make sure you have money set aside for emergency before you invest. You don’t want to be in a situation where you plan to invest in the stock market for 8 years, some emergency happen in year 2 and you are forced to sell your investment at a loss.
Once you’ve worked out the time, apply that to the graph below.
Let’s say if you plan to invest for 6 years, according to the graph, you may want to consider invest 60% of that money into growth assets such as stock, property, ETF, and index fund, while the other 40% investment into Bond or Dividend stocks.
If you invest for your retirement in 20 years, you may want to have a portfolio with 5-10% bond and the rest with stock.
On the other hand, if you wish to use the money to buy a car in 2 years. It’s best to put it in a term deposit.
Break down your plan
You may have multiple plans for your money, such as $3000 for travel next year, $12000 for a new car in 30 months, and $20000 for the first home in 8 years.
You need to apply those plan individually to the graph.
$3000 travel fund in saving account
$12000 car fund in term deposit
$20000 in a 10:90 mix portfolio while you keep adding more into the investment every month.
I will explain the basic idea of this graph, the mix of investment and how to apply risk tolerance in the next post.
The timeline and investment ratio on the graph are based on my own study and conventional wisdom. Investment suggestion is based on neutral risk tolerance. Investment product listed on the graph are based on popularity, ease of access in New Zealand and a bit of personal preference.
Just a reminder, this graph is for GENERAL ADVISE ONLY. Your own situation may be different. Please thoroughly research everything you read here and seek professional advice if you need to.