Author Katrina Shanks, CEO Financial Advice NZ. Article originally published in Stuff.co.nz.
OPINION: It’s been 12 months of rough and tumble for those of us who keep a close eye on our shares on the New Zealand stock exchange.
Though the NZX Top 50 index is right now higher than it was a year ago, in between times it jumped around all over the place. From a low of 10,777 last October, it reached a high 12,212 in February this year, with lots of falls and rises between.
A graph of its movement looks like an outline of the Southern Alps.
Those numbers won’t mean a lot to most people (they’re calculated using a lot of different data, including the volume of shares and their value) but they do show just how volatile shares can be in times of high inflation, rising business costs, and an economy struggling to grow.
Though that may be enough to put some people off investing in shares, that doesn’t have to be the case because they can be a great way to boost an investment.
It just depends how you go about it and what advice you get.
There are two basic ways of investing in the New Zealand share market: directly or through managed funds, and you can have an active or a passive approach.
And which way you choose can depend on your own knowledge, the time you have for input, the size of your portfolio, the risk you are prepared to take, what you are trying to achieve, or alternatively who you seek advice from.
Many investment advisers believe the best strategy is a blend of active and passive styles. This can be direct or via managed funds. Combining these two approaches can further diversification and actually help manage overall risk.
When you invest in a New Zealand managed fund, your money is pooled with other investors and spread across New Zealand shares. It’s important to know that the way these assets are selected and managed within the fund can greatly differ, depending on whether the fund is passively managed or actively managed.
Active investment means the shares are specifically selected by the investment manager with the goal of outperforming the market or benchmark such as the NZX50.
This approach can be particularly beneficial in certain market environments, for example during volatile periods where strategic decision-making may help to mitigate investment losses. Active investing does come at a higher cost because you are paying for a team of people researching the stocks and selecting those they believe will perform, and not holding those they don’t believe will perform as well.
There are generally higher transaction costs due to higher trading of stocks. Better returns are expected but not always received.
You can engage in direct active investing yourself. This can be done via DIY platforms such as Sharesies or Hatch, but it’s often better if you have a good knowledge of how the market works and what affects it, of the companies whose shares you buy, and how economic conditions can affect their share price.
Passive investment is a “buy and hold” strategy that provides investors with exposure to a broad market at a relatively low cost.
One of the reasons this approach is low cost is that passive investment avoids the need to perform in-depth research in an attempt to beat the market. Instead, the goal is typically to track an index.
Both passive and active investing can be done by managed funds, exchange-traded funds (ETFs) and listed investment companies. They do similar jobs but you access them differently.
You buy ETFs and listed companies on the stock exchange as you do buying shares in an individual company.
It could be argued you get better diversification and less risk via managed funds, ETF and listed investment companies than you do by owning company shares directly.
This is because it can be harder to get the appropriate diversification because you generally need a larger portfolio to carry out your strategy.
Whether you invest passively or actively through managed funds or direct investments, they should be determined by a whole range of factors such as what are your objectives, timeframes, risk tolerance, understanding of financial markets, time available for research, and the size of your portfolio.
Here are some tips:
- If you have $1000 it is most probably better to invest in a managed fund/ETF or listed investment company because it provides the diversity for you. These funds can be passive or active.
- If you have $10,000 the same principles apply as $1000.
- If you have $200,00O0 to invest this could be enough to provide diversification in direct shares.
In the words of my financial adviser – be sure you do your own research and seek professional advice to make sure your thinking is sound.
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