We caught up with Kiwibank Chief Economist — Zoe Wallis who shared what an investment horizon is, and why it’s important to know yours. Here’s Zoe…
Does it matter if I’m investing for a year or ten years?
Absolutely!
There are a few important things to think about when investing. A key one is the length of time you can leave your money invested for. Generally, this has a big impact on the type of things you invest in.
One example that often catches people in NZ out, is ending up in default ‘conservative’ funds when they sign up for Kiwisaver.
Choosing a conservative fund might be a good outcome if you’re 60 and looking to use that money soon. But if you’re 25 and not looking to use that money for 40 years then you’re much better off in the long-run being in a ‘growth’ fund.
The same theory applies to your Sharesies investments.
What do these labels mean?
You can see in Sharesies, all investments come with a ‘conservative’, ‘balanced’ or ‘growth’ label — this indicates the type of portfolio an investment might suit.
Investments that are labelled conservative, tend to suit relatively low risk portfolios and don’t experience as big gains or losses over time as those funds labelled growth. This means that you’re unlikely to lose much money in a conservative fund over time, but also that your gains may not be as large.
If you can handle the greater ups and downs (also known as volatility) from growth assets, then over time they tend to outperform other asset types. But if you know you’ll need the money in the next couple of years, then a conservative investment is probably a better option.
Generally, the longer you can leave the investment before you want to touch the money, the more risk you can take.
How do I work out my investment horizon?
Here are a few rules of thumb that might help with your investment choices:
- Short-term — likely to use the money within the next 2–3 years. Look at ‘conservative’ options like bonds, term deposits or savings accounts. If you’re prepared to take some risk then you could invest up to 20% of your money in a ‘balanced’ fund.
- Medium-term — likely to take your money out in the next 3–10 years. Look at a mix of ‘balanced’ and ‘growth’ funds. But it’s also still a good idea to keep some (say 20–40%) of your money in bonds or similar assets.
- Long-term — likely to leave your money invested for over 10 years. Look mostly at riskier assets such as ‘growth’ stocks, although good to keep a small amount (say 10–20%) in ‘conservative’ assets in case you end up needing to take some money out earlier.
A side note: Before you invest, make sure you keep about 3–6 months of rainy day money set aside in an easy-to-access savings account.
One of the other major factors to help decide what you should invest in, is how comfortable you are with taking risk. If you haven’t already, check out the investor quiz over on Sorted to find out what type of investor you are.
Thanks Zoe 🙌!
We’re planning to catch up with Zoe regularly. So if you have any questions you’d like to ask, just add a comment and we’ll bring them up in our next chat. If you want to keep a closer eye on all things economic, you can follow Zoe on twitter.
Sharesies is making investing easy for everyone. To get started, sign up on our website. And to stay up to date with what we’re up to, follow us on Facebook and Twitter.
