How to Invest, Why to Invest

So why should you invest?

Well here is how much a bank savings account rate can offer you in New Zealand via the comparison site Finance.co.nz:

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These rates are similar worldwide (via Halifax in the UK):

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For example, If you put $10,000 into your savings account which had a 2.10% interest rate and then added $100 per month for 30 years this would be how much you could earn:

  • Initial Deposit: $10,000 + $100 per Month over 30 years = $46,000
  • 30 years Interest Rate: 2.10% p.a. 
  • Deposits Plus Interest After Tax: $61,253
  • Interest gained: $15,253 (Free money)

Investing

This is a marvelous blog post by Passive Income who has done some great work and calculations to review how much of a return you would receive investing in the NZX 50 Index (The top 50 companies in NZ).

Over the last 5 years the NZX would have returned, on average, 8.85% on your investment.

NZX50

Remember that calculation above, well here it is for an investment in the NZX 50 for 30 years:

  • Initial Deposit: $10,000 + $100 per Month Savings Period = $46,000
  • 30 years Interest Rate: 8.85% p.a.
  • Deposits Plus Interest After Tax: $168,570
  • Interest gained: $122,570 (Free money)

If the markets were to continue as they have done for the last 5 years you would make a staggering $107,317 gain if you had invested in the NZX 50 rather than placing the money in your savings account.

But aren’t stocks risky

People do lose money on the stock market. However, these people tend to be in it for the easy, fast money (which rarely works).

Historically, stocks have increased greatly since their beginning. We just have to look a the S&P 500 (Similar to the NZX 50 which tracks 500 US companies) which on average since 1928 returned 7% per year (adjusting for inflation).sp-500-historical-chart-data-2018-08-13-macrotrends

As you can see there have been several times when the markets have dropped. These include the Wall Street crash in 1929 which lead to the great depression and most recently the 2008 crash due to the financial crisis. However despite all this there is still an average return of 7%. Compared to that 3% we may receive via our bank accounts.

The best way to begin investing is to be in it for the long haul. There will be some downs, but the ups far outweigh this.

Don’t expect to get rich quickly, this is not a lottery ticket, this is an investment.

So where do I sign up?

I recently started with a company called Sharsies in New Zealand.  They allow investors with even small amounts of money to begin investing with them. Sharsies allows you to lodge an initial deposit and then contribute what you can, when you can.

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Sharsies invest your money into an ETF (Exchange traded fund). So rather than investing in each company individually, your money is pooled together with other investors into a group of companies. If you wanted you, would be investing in all of the NZX 50 companies combined. (There are may other investment opportunities available such as investing in the Top US, Australian, European and Asian markets)

Sharsies blog has a really helpful analogy for how ETF’s work:

“Imagine you go to a market (NZX) and buy some fruit. Buying individual fruit is like buying shares. You pay the price for each piece of fruit.

An ETF is like buying a basket of fruit. You get all the different types. These can be grouped by theme, like a colour or a season. In short: An ETF is a pool or basket of investments that trades on an exchange.”

This is really helpful for investors starting out with little knowledge of how trading really works (Like me).

The benefit of this type of trading is that your investment is steady. It would be unheard of for all 50 companies in the NZX 50 to fail, therefore you have much more security in your investment.

If you are not from New Zealand, there will be similar companies available to you too such as Vanguard in the USA.

Keep an eye on the blog for more helpful tips

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