Note: I'm not too familiar with investment funds and how they work.
Answer:
As a conservative investor you certainly have chosen one of the safest investments around. You're also getting a pretty decent interest rate to boot. RaboPlus has a triple A (AAA/-1+) rating from international ratings agency Standard & Poors, which means it's rated safer than the New Zealand government.
Having said that, investments in the bank are usually seen as a shorter term end for most people. The reason is that the interest rates on offer are usually lower than inflation and the spending power of your money slowly erodes.
I once read an argument in the Motley Fool Investment Guide, a book published by the website Fool.co.uk, that over a couple of decades it was more risky to put your money in the bank than it was to spread it across stock market-based investments. The reason for this is that if they are well chosen, your stock market investments should return more than a bank investment.
That is where managed funds come in. These funds, also called mutual funds in the United States and unit or investment trusts in the United Kingdom, are pooled investments. They take the money from large numbers of people and invest that money in the stock market, commercial property or other type of investment vehicle. The advantage of putting money in an investment fund is that you then have a professional manager making the stock-picking choices, and your risk is spread across a large number of companies. If for example you had put $1,000 into one single company, which then takes a fall in value, your capital is hit hard. In a managed fund your money is spread across say 20 or even 100 companies, and if one gets in trouble, you will lose a far smaller proportion of your investment on paper.
Another advantage with managed funds is that you can get a slice of markets that would otherwise be difficult to enter, such as commercial property, Asian stocks, or gold and silver.
Financial planner and author Susanna Stuart of Stuart + Carlyon Financial Planners says she encourages even her most conservative clients to put 20% of their money into stock-market based funds to ensure that their portfolios don't erode in value.
Kiwi investors aren't always, unfortunately as educated as they should be about risk. Many an investor that trusted the recently collapsed finance company Bridgecorp invested in its debentures because they knew its name. The company didn't have a hope of gaining an "investment grade" rating from one of the big international agency such as Standard & Poor's or Moody's. Yet those same investors would think that shares are somehow dangerous in comparison.
Finally, educating yourself about investment matters makes sense for your long term wealth. For a beginner I recommend either of the following two books:
Get Rich Slow by Mary Holm or
Get Your Head Out of the $and, by Lisa Dudson.
The latter is best for people who suffer from money myths and fantasies or regularly overspend. If this is not you, then you may find Mary Holm's book more useful.
Question: Both my wife and I, born in 1971, have arrived in NZ only 10 months ago and have found reasonably good jobs. Together we earn $90,000 gross per annum. We have two beautiful children aged 2 and 4 years and live on the North Shore (of Auckland). We rent a house for $380 a week in Hillcrest.
Within the next 6 months I'll receive about $60,000 to $70,000 tax free.
I think we would like to stay another 1-5 years in Auckland (on the Shore) and then maybe go somewhere more quiet.
What is the best thing to do with the money?
- Buy a house to live in on the Shore and use some/all of the money as a deposit
- Keep renting and buy an investment property with some/all of the money to get on the property ladder?
- Put all the money in the bank? Stock market? Managed Funds?
Answer: Oh to have a crystal ball. If you keep out of the property market and values rise against all expectations then you'll kick yourself. Unfortunately no-one can ever know for sure because financial markets defy logic. They also typically overshoot and undershoot at both ends. If we have hit the top of the property market cycle already then it's likely that prices may drop back, and there could be some good bargains out there for the picking. I certainly know of a number of successful property investors who have sold their worst performing properties and are sitting cashed-up waiting to pounce on bargains.
The difference is that they are professional property investors and own their own homes as well as a portfolio of properties. When it comes to buying your own home it's a lifestyle choice and as you point out you have two children who you want to create a home for, rather than living in rented accommodation. I came back from overseas in 2003 with two children and bought in 2004 at what I thought to be highly inflated prices, although thankfully I was proved wrong. The reason I bought was because I needed somewhere to live and wanted the quarter acre Kiwi dream, not first and foremost to make a capital gain.
One big difference between your situation and mine is that you can't be sure where you are going to be in two years time. Both property and stock market investments need a long-term horizon of five plus years. People who think they can time markets in the short term are often proved wrong and market slumps usually shake a few of them out.
I spoke with financial planner and author Susanna Stuart of Stuart + Carlyon Financial Planners for her opinion and she believes that in most cases property ownership comes before stock market and managed funds investments. The exceptions may be where someone can use your capital to build up wealth rapidly in a business. In that instance it may make sense not to buy.
If, however, you're only going to stay in your own home briefly, it might simply be worth putting the money in the bank says Susanna. As she points out, quite rightly, you could get 8%p.a. on-call with RaboPlus. Yet assuming the house you're renting is worth about $500,000, then your landlord is only getting a 4% gross rental yield on his or her investment.
If you want to buy your own home in Auckland and keep it as a rental property once you move out of the big smoke you should be looking for a good rental property, not one that you personally would aspire to live in. The two are not necessarily the same thing.
Finally I would recommend that if you're new to New Zealand that you read a couple of local investment books. I can recommend:
Get Rich Slow by Mary Holm
The Complete Guide to Residential Property Investment in New Zealand by Lisa Dudson and Andrew King.
Where to Live in Auckland, also by Stephen Hart
Your Family Fortune by Susanna Stuart.
Twenty Good Summers by Martin Hawes
Diana Clement
Independent Financial Commentator