Author Katrina Shanks, CEO Financial Advice NZ Article originally published on Stuff.co.nz.
Recently, as the cost of essential items has spiralled out of control, headlines have started to turn to a new threat: inflation.
A combination of rising petrol prices and a shortage of shipping and containers worldwide resulting in exorbitant freight rates means few parts of our economy are left unaffected. The price of everything seems to be going up.
The pressure on household budgets is obvious, and if you are lucky enough to have investments, where does that leave them? And what’s your next best move to at least protect them against inflation or even enhance them?
One of the keys to investing is staying ahead of the rate of inflation, and it’s for that reason investment decisions should be made with inflation in mind.
The pressure goes on when inflation is running high, and it’s a matter of assessing your risk when deciding where to put your hard-earned money.
Risk can be determined by completing a risk profile and is also directly related to when you’re going to need the money you’re investing. Are you approaching retirement or a long way from that? Can you afford to lose money on an investment in the short term?
If you have not completed a risk profile, do so now to obtain a better understanding of your risk tolerance and how and where you should be investing.
The key thing to remember is inflation erodes gains made from savings, whether it be cash or fixed-interest savings such as bonds, while benefiting those who invest in property or shares, which have a higher rate of return (and also a higher risk). Someone described the erosion of savings as inflation “stealing” from savers, and it’s hard to disagree.
So, let’s look at how you can best protect your hard-earned money by examining the four main places to invest it: cash, fixed interest, shares and commercial property.
Cash in the bank is a great asset, especially if you think you may need access to it with short or little notice. Right now, savings account interest rates are quite low. But as mortgage interest rates increase, so will the interest offered on savings accounts, so it pays to keep your eye open and shop around for the best deal.
Cash is not necessarily a good long-term investment, and will unlikely perform well compared to shares and commercial property, but it can form part of a diversified investment portfolio, and tends to suit those with a safer, more conservative approach. Many KiwiSaver and managed funds have a portion of their portfolio in cash as part of their diversification policy.
Fixed interest investments are similar to cash, in that they have lower risk. And like cash, there is a lower return.
They are almost as safe as you can get. Bonds are the best-known fixed-interest investment. They are where you invest with central government or local councils, who use your money to build infrastructure such as roads or water assets. When the bond matures, say between five and 10 years, you get your investment plus interest.
Bonds are typically part of a diversified portfolio that also offers shares, property and cash, and often form part of balanced or conservative KiwiSaver or managed funds. A bit like cash, they are usually favoured by those who don’t need their cash in a hurry but need to know it’s safe.
There are different ways you can invest in shares, depending on your circumstances and risk appetite. You can buy part-shares in many companies on platforms such as Sharesies or Hatch, or in exchange traded funds (ETFs), or you can buy whole shares.
Shares give you a piece of a company, and in return you are entitled to some of its profits by way of dividends and from the growth of the company if it has appreciated when you sell the shares. The great thing is they’re easy to buy and just as easy to sell, and you don’t need a lot of money to start, especially if it’s via a platform where you can invest small amounts for part-shares in companies owned by lots of people. It’s a great way of starting.
When you’re more confident, you can graduate to bigger amounts in a particular company. You don’t have to invest huge amounts but if you add to it regularly, your investment will grow and with the growth of the company you get the benefit of both forms of gains. Buying shares in this way can be a good long-term strategy, where you ride the lows and highs of the market while your company (hopefully) grows over time.
ETFs and managed funds are a basket of shares held in different companies across a variety of industries and countries, so your risk is spread. Each ETF is run by a fund manager who makes all the decisions for you.
In all cases you have to pay a fee or brokerage, and these can vary so it pays to check.
Remember, there are experts who can help you find the right investments to help meet your needs and goals and understand your risk tolerance.
This can be a good investment because it usually generates good income from rents that will help pay off your mortgage while the value of the property increases. One of the biggest benefits is being able to use the property to gain leverage (by borrowing against it) to buy another one.
The trick is buying the right property at the right time, ideally with a tenant with a long lease. If you do that, then commercial property can be a good long-term investment. Values may fluctuate but if you are prepared to wait, then the rewards will likely come.
One downside is it can take a while to get your cash out if you need it for something else. You have to find a buyer for the price you want, and that can take months. The other downside is you will need access to capital to fund the investment. These downsides can be overcome by investing in ETFs or managed funds that own several commercial properties.
Residential property investment is a different story. Recent government moves to slow down the rate of house-price growth, supply starting to meet demand, and changes to what investors can claim and the change in tax rules make this investment not as attractive as it was previously.
The essential thing with investing is to know how much risk you are willing to take. The chances of higher returns also come with higher risk. And then understand how your investment will perform in times of inflation. And don’t forget that markets have gone through times of high inflation before, like in the 1970s, but many of us have not experienced high inflation or had to adjust for this.
In the words of my adviser: Stay calm. Plan. Diversify. Be agile. And enjoy life.