In 2020 interest rates in New Zealand have plummeted to new lows, that’s great for people taking out a mortgage, but not great for some common types of investment.
But despite how scary some of the interest rates on offer look, it's actually a great time to invest for growth.
Kernel Wealth are investment professionals, offering expert, friendly service for those wanting help with their finances.
Want to make your money work for you but don't know how when term deposits and savings account rates are so terrible? They're here to help.
Dean Anderson, founder and CEO of Kernel, has shared with Newshub his top investment tips for Kiwis in 2020.
Think about when you need the money - now, soon or later? Knowing this narrows down your options
Anderson says there's about $90 billion sitting in on-call bank accounts and the average interest being paid on them is currently around 0.1 percent. There's also around $150 - $160 billion in term deposits, despite most only paying about 1 percent interest.
"If you need access to your funds soon, so a period of one to three years, you are limited in your options and you'll still need to consider term deposits” says Anderson.
When you’re looking at a slightly longer time horizon, however, you open yourself up to more options. Anderson notes that your investment horizon is probably more flexible than you realise. “It's like with retirement - we don't all actually retire exactly on our 65th birthday," says Anderson.
"If you decide you can actually leave that money invested for longer, at least five years, then it gives you far more options to consider. If you want to be maximising your money then you can think about investing it in equities and a well-diversified index fund."
Are you investing for income? If you're after income, you need to choose a bit more wisely
Luckily, New Zealand has a very regulated market and you're generally safe investing your money due to the oversight and protections you'll get.
But investing your money to make an income will require careful consideration.
"You need to be a bit smarter about how you invest into equities, you've got to look at specific sectors or types of investment funds that have a good income string tied to them. These are things like dividend income funds, property and infrastructure," says Anderson.
"You can use those as almost a proxy for a traditional term deposit or fixed income portfolio. These typically have higher dividend yields, so you get good income sources off them. You do have to ride the ups and downs which you don't in a term deposit, but you will have income and a potential for long-term growth as well."
Are you investing for growth? If investing for growth, the world's your oyster
March and April showed us that investments do indeed have ups and downs, but what happened in the months following was a great demonstration of how quickly markets can recover.
History shows that over time, an investment in equities always recover - you just need to be patient.
"The key to successful long-term investing is not touching your portfolio. We get told this time and time again, but it goes against our instincts because we naturally want to look at it and change it”, says Anderson.
"The successful strategy for a long-term investor is just to pick a well-diversified, low cost investment and then leave it be. It's the simplest and most effective way to grow your wealth."
Kiwisaver is an easy, diversified way to get started if you just want something you can just regularly put your money into. For those wanting to create wealth they can access before 65, however, any other well-diversified fund is a great place to start.
Knowing if you need a cash buffer - sometimes you just have to include term deposits or cash, no matter what the interest rate is
The COVID-19 pandemic showed many of us weren't prepared financially for such a shock. Despite the tiny interest, it is a good idea to have a 'just in case' fund set up.
"You won't get a great return on it, but an emergency savings account is important to have aside for when you need it," says Anderson.
"It may be three months' worth of expenses, or it may be $10,000 for a couple - it really depends on your circumstances. If you're younger and have no dependants or mortgage, you probably don't need as big a buffer for people who do. Just make sure you have your emergency fund somewhere separate from your everyday accounts where it may get used for the wrong reason."
However you decide to invest your money, Anderson says the best thing to do is come up with a good financial plan then set and forget, reviewing it just once a year or when your personal circumstances change – not in response to the latest news headlines.
It may be a financially unsettling time but there are plenty of great ways to invest and have your money work for you.
Just so long as you’re patient.
This article was created for Kernel Wealth