When will your investment reach a peak or take a dive? It’s impossible to predict, as no one knows how markets will perform. To ensure you’re not over exposed to risk but not to miss out on growth, the key to successful investing is diversification.
Lets take a look at three different scenarios.
David and Aroha
David and Aroha are both in their mid 30’s living in Wellington with their 2 young children. David is an employed IT Consultant while Aroha works part time teaching. They have a $380,000 home loan with no established savings or retirement funds.
David and Aroha’s main priority at this stage is to reduce their debt. So they’ve put a stop to any unnecessary spending and wherever possible avoid using their credit cards to make purchases. As a result, they’re slowly building up a rainy day savings fund. Their goal is to have easy and instant access to approximately 3 months of income.
Although they only contribute a small amount each week to this account, it’s amazing how quickly untouched savings can increase. Their parents suggested they invest into Bonus Bonds, but they’ve decided they’re better off looking at a savings account with low fees and compounding interest.
David and Aroha have also been paying $100 a month into savings accounts for their children’s education. Although this may seem prudent, a wiser choice would be to direct this $1,200 towards their hefty home loan to reduce their overall interest costs, saving them money. The debt should be their first priority. The sooner it’s paid off; the sooner they can consider ways to help their children financially.
It’s a long road to financial independence for David and Aroha but they’re making progress. They need to stick at it and keep their eyes on the prize. If they do, they should be in a position to set themselves up for a comfortable lifestyle.
TOP TIP – Your financial plan needs to be flexible so adjustments can be made as and when your circumstances change.
Martin and Stacey
Martin and Stacey are in their early 50’s living in Napier. They’ve owned a successful retail business for the last 12 years. They have a $75,000 home loan plus a freehold rental property in Taupo and have started to save into shares. Their 2 adult children both live and work in Christchurch.
Martin and Stacey started investing a few years ago off the back of Government asset sales. They now have shares with Meridian Energy and Genesis which have done very well in line with the energy market overall. However, they’ve started to feel wary of being fully invested in a small sector of New Zealand and are keen to start diversifying their regular savings into different investments.
The world’s finances are constantly fluctuating and a lot economic information available is quite complex and can be confusing. As a result, Martin and Stacey have found it difficult to decide on how to structure their investment portfolio.
With so many opportunities worldwide, Martin and Stacey don’t have the time or knowledge to complete the necessary research. So they’ve sought the advice of a financial adviser and completed an investment profile to help them figure out what they want to achieve. As a result, they’ve chosen a balanced portfolio spread across some stable income assets and some higher risk, higher return growth assets, and will be saving regularly into this portfolio.
Martin and Stacey are discovering that although diversification can sometimes seem boring and less than inspiring, the balanced approach is more likely to help them achieve their financial goals in the long term.
TOP TIP – New Zealand makes up just 0.2% of the world’s economy. Don’t be afraid to look overseas at investment opportunities and always seek expert financial advice.
Robert and Marilyn
Robert and Marilyn are mid 60’s and have recently retired. Robert was a lawyer in Auckland while Marilyn raised their fami-ly. They have 3 children and 7 grandchil-dren. They are debt free, own 2 rental properties and have substantial funds on deposit for retirement.
Robert and Marilyn have revolutionised the way they communicate when it comes to their finances. Not long ago, Marilyn had no idea about their investments nor had anything to do with any financial decisions.
They remedied this by sitting down to discuss their financial goals and what they wanted to achieve from their investments, both for retire-ment and short term. Marilyn now understands their investment portfolio and how it is structured to ensure all their bases are covered.
They now have accessible cash funds at their disposal, covering them in case of an emergency, for excesses on their health insurance or if the car breaks down. Travelling is important, so there’s funds available allowing them to visit family overseas on a regular basis. They have secure income protecting them against inflation that will supplement their NZ Super for the rest of their days, and when they do pass away, they’ve set aside funds and assets for their children to inherit.
By having a long-term investment strategy, they’re achieving all their financial goals. They’ve got the income they need and lifestyle they love, and are happy knowing that they will eventually pass some of their wealth down to their children. Diversification has served them well and helped them achieve true financial independence and all the security that brings.
TOP TIP – Put your financial goals to paper to know exactly where your retirement is heading.
Thank you to Tim Fairbrother from RIVAL Wealth for providing this article.
This information is of a general nature and this is not intended to be personalised financial advice.