Options for investing a bucket of cash

Options for investing
Photo credit: Getty

For people who want to grow their savings, given the worldwide economic slowdown and low-interest rates, currently, there's not much of an incentive.

Short of stowing cash under the mattress, should serious savers grin and bear current interest rates of around 2 to 3 percent, or chase higher returns in the hope for an economic rebound?

The answer lies in risk and return: how much risk you're prepared to take for a potentially higher return in future.  

Leighton Roberts, co-founder of online investment platform Sharesies said that around 72 percent of Kiwis use savings accounts and term deposits as their primary place to hold investments and will be concerned to see their rate of return drop.

"In a low-interest environment, investing your money is likely to give you the best bet at growing your wealth. 

"But it's also important to remember that no matter what you do with your money, having a regular saving and investing habit will put you in good stead," Roberts said.

What's your investment 'type'?

Irrespective of what interest rates are doing, it's important to consider your timeframe and the risk you're prepared to take for a higher rate.  

Do you want a safe place to lock away that house deposit or nest egg, ensuring you come out flush or are you prepared for short-term rises and falls in the pursuit of a higher gain in the future?

To help set you on the right investment path, the Sorted website 'Investor kickstarter' is a helpful tool for checking where you sit on the risk/return continuum. 

A low-risk investor would typically invest in cash and fixed interest investments (e.g. savings accounts, term deposits and KiwiSaver), whereas a high-risk investor prepared to ride out uncertainties for a higher return in future would consider shares (equities) and property.  

The risk versus return equation

David Boyle, head of sales and marketing for Mint Asset Management emphasised that in the current environment, people chasing higher returns need to ensure they understand the risk.  

Given market fluctuations, including changes in fixed interest rates at the roll-over period, Boyle expects that Kiwis haven't seen the bottom of interest rates yet and encourages people to talk to someone qualified to give advice.

"No one enjoys the 'down' periods, it's about getting the balance right for the individual. If you don't understand the risk, don't invest - you've got to be able to sleep at night," he said.

George Carter, managing director of Nikko AM expects that looking forward, investment returns will be lower than in recent years, emphasising that time-frame and attitude to risk should still be top-of-mind for investors.

"The question of what risks you're comfortable with are unchanged, but the environment in which those questions are answered has changed," he said.

Retirees wanting to invest over many years may feel comfortable investing in a higher percentage of shares for a higher expected return - however Carter said this should be weighed up against the potential for financial anxiety if the value of their retirement savings reduces over the short-term.

"If security is essential, an investor has to accept that returns in the short-term are going to be lower now than they have been previously and there's no avoiding that without taking on some form of investment risk," he said.

Carter also suggested that people consider the total return from the investment (after tax and fees) alongside the amount of interest it generates.

Term deposits, bonds and shares

For the risk-averse ('conservative') investor with a lump sum to invest, term deposits provide a fixed rate of return, providing a safe and convenient way to save with a choice of time-frames.

Tony Field, communications manager at ANZ said that choosing term deposits as opposed to managed funds comes down to individual circumstances and risk appetite.

"A term deposit is a good option for short-to-medium term goals, especially for [people wanting] lower risk and a fixed rate of return.

"Investment funds [including KiwiSaver] are more suited to people with a medium-to-long investment timeframe, or for those saving towards a specific goal," he said.

Bonds are another low-risk option, allowing an investor to effectively 'lend' money to a company or Government and receive a fixed interest payment in return.  

For a 'balanced' investor who can tolerate some ups and downs, Roberts said that Sharesies investors typically invest half in cash and bonds and half in shares and property, with an emphasis on shares.

"I encourage [people] to think about whether a balanced portfolio is right for them and dig deeper on why that is the case.  

"Whilst there are definitely cases for more conservative investments, people often miss out on a lot of the upside of growth investments by switching to [growth] portfolios too early. 

"Even 65-year-olds often underestimate just how long their investment horizon still is," Roberts said.

Boyle said that managed funds allow people to access a range of assets, shares and countries that are performance-monitored, adding that combined funds allow flexibility to dial exposure up or down.

A word on fees

Fees can be a source of confusion, and when comparing fund managers, it's helpful to consider the total return (after tax and fees).  

Fees are often applied based on percentage of assets in the fund, meaning that a sliding scale applies based on the amount you invest, typically with management and/or brokerage fees on top.  

Your choice of investment will come down to how you feel about risk, your time-frame and the amount you have to invest.

If you have a lump sum and want to ride out the uncertainty with your balance intact, term deposits, bonds and cash-based managed funds provide a more secure option.

If you're prepared to take on more risk for a higher return in the future, talk to an independent financial adviser. 

If you want to drip-feed savings into a range of investments on a regular basis, many fund managers allow monthly contributions.  Alternatively, DIY platforms such as Sharesies allow you to get started from as little as 1c.