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Understanding investing, part two: How to plan

How to stop procrastinating and actually (finally) get on top of investing. Because there’s a good chance that if you’re reading this, you don’t know a single thing about it. 

Read the full series here.

In part one, we covered some of the basic things you need to know about investing – why do it? How hard is it? And what options are realistically available? In part two, we’re going to lay out a plan of action which involves asking yourself some simple but very important questions.

What’s the money for?

Is it for a new car, a home deposit, or retirement 30 years down the track? Depending on your goal, investing in an asset like shares may or may not be right for you, hence why it’s important to be clear and realistic about what you want to achieve from your investment.

“Think of your investment goal like a holiday,” says Tom Hartmann, managing editor of Sorted. “Where are you going? Where do you want to get to? Once you figure that out, you can figure out the right vehicle for you.”

When do you need it?

Once you have a goal in mind, it should become reasonably clear how long you’ll want to invest for. Broadly speaking, investments can be divided into three time frames: short term (three years or less), medium term (four-to-nine years) and long term (10 years or more). That means, for example, if your goal is to reach $4,000 in three years time for a big holiday, then you’ll be wanting to look for investments best suited for a short period of time.

How much risk are you willing to take on?

If you’re looking for returns in the short term you probably want to dial back your risk into more conservative investments such as bonds since “less risk means more of a chance that your money will be there when you need it” explains Hartmann. But if you’re in it for the long haul, generally you can afford to take on some riskier investments such as shares. Taking on more risk means more potential for higher returns, but it’s best to have time to ride out any dramatic ups and downs. With that said, if you’re uncomfortable with the idea of volatility – as many discovered back in March when Covid-19 caused balances to plummet – save yourself from the stress and choose a safer option.

How much of my money should I invest?

Again, the answer to this is closely related to your risk appetite. If you’re the type who likes having a “safety net” just in case something unexpected happens, such as a car repair or redundancy, then you probably don’t want to invest that portion since you’d want it to be liquid (aka immediately available to you). But for the rest of your savings, investing them might just be the best choice.

“You don’t want [the funds you don’t immediately need] to just be sitting in a savings account because it’s likely that inflation will eat away at it and by the time your interest is taxed you’re getting next to nothing, so you’re absolutely rolling backwards if it’s just sitting in a savings account,” says Hartmann. Remember, investing will always entail some level of risk – you just have to think hard about how much you’re willing to take on to grow your money.

OK, I’ve figured out my goal, time frame and risk level – now what?

Once you’ve decided on what you actually want out of investing, you’re pretty much ready to take the plunge and choose your investment vehicle. Nowadays there are hundreds of options you can choose from ranging from online platforms to bank-provided managed funds and more. We’ll try and provide an overview of some of the main ones for new investors to consider which will be covered in part three.


Read more:

Understanding KiwiSaver, part one: The basics


Read the full series here.




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