The purpose of this article isn’t to provide advice about whether financial assets are suitable for you, but to explain some ways you can invest in financial assets in New Zealand.

However, the one thing I’ll note is that financial assets offer some advantages over other sorts of investments such as direct property. As a general rule, they’re:

  • far more liquid (meaning you can turn them into cash at shorter notice, with less cost and uncertainty), and
  • can offer substantially more diversification – you don’t need to have all of your eggs in one basket, which is often the case when most of your wealth is tied up in property.

My comments are more oriented towards investing in shares (stocks), but they apply to other types of financial assets, including fixed interest products such as bonds, and listed property trusts.

Be a stock picker

One way to invest in financial assets is to try to “pick stocks” on your own.

You can do this by using an online brokerage service like ASB Securities, which allows you to buy and sell investments directly.

For some additional cost, you can use a traditional share broker service. If you do, be mindful of how they’re remunerated and what their incentives are before following their suggestions. In other words, ask whether you’re receiving sales spiels encouraging you to trade and pay brokerage fees, or whether you’re receiving advice that’s in your best interests.

To be an effective stock picker, the first thing you need to do is make sure you don’t lose money. Beyond that, you should aim to generate a superior return, after costs, including remunerating you for the risks that you’ve taken and hopefully the time you’ve put in.

If you think you can do this without any research and simply because you like a company, I love your confidence. But I urge you to think again. Even the best company in the world can be a bad deal if you pay too much for it. To succeed in this game, you need to do a lot of research into each investment.

If you stepped onto a tennis court to play Roger Federer or Rafael Nadal, or any professional tennis player for that matter, do you think you’d beat them? Because on the opposite end of your trade, you’re probably playing a full-time professional who has done more research and has better access to tools than you.

If you’re going to pick stocks, I recommend thinking of it as a hobby: and an expensive and time-consuming one, at that. It might give you a reason to read the newspaper and be fodder for conversations over the BBQ, but you shouldn’t do it to make money.

Engage an investment adviser

Another way to invest in financial assets is to engage an adviser (hopefully an Authorised Financial Adviser (AFA)) who can provide investment management services, and invest and manage your investments directly on your behalf.

Many financial planners think of themselves as investment managers and take it on themselves to manage their clients’ portfolios, to try to generate better risk-adjusted returns for their clients than they would generate elsewhere.

You’ll almost certainly be paying your adviser 1% or more of your investment portfolio every year for this service. There will usually be an additional platform fee of somewhere between 0.2 and 0.3% of your funds, to enable them to invest on your behalf. There are also likely to be additional transaction costs such as brokerage when they buy and sell on your behalf.

With some advisers (especially those who work for companies that have their names on the sides of buildings) they may also receive remuneration relating to these transaction costs. Read into their incentives what you will.

Basically, you’re paying the adviser this fee in the hope and expectation that they’ll generate a return that is better than you would have otherwise received, after factoring in the fees they’re charging you.

You may also be receiving high-quality planning services: making sure your investments are in line with your broader circumstances, needs, objectives, values, and priorities, as I describe at the end of this article. But maybe not.

In many cases, you’ll also find a good portion of your funds are invested in managed funds selected by your investment adviser. This is because most investment advisers might be confident in their skills and expertise in one particular area (such as NZ shares) but less so in other areas (such as international shares), and are effectively outsourcing this job to other investment managers. There are, of course, additional fees attached to these managed funds.

Invest using managed funds

An alternative way, which I use myself and recommend for almost all of my clients, is to invest using managed investment schemes, otherwise known as managed funds.

When you invest money into a managed fund, you’re pooling your funds with many other investors, and an investment manager manages these pooled funds for the benefit of all investors.

When you invest in a reputable managed investment scheme, your funds will be held in trust by a third party, and are invested not in one business or share, but across a wide range of asset classes, countries, industries, and underlying investments. By investing in a managed investment scheme, you are diversifying your investments in a way you wouldn’t be able to do on your own.

Investing via a managed investment scheme is a cost-effective way to invest in a diversified manner. When you invest in reputable funds, it is transparent and very easy to do. If you invest in the right type of scheme, you can withdraw some or all of your funds as needed with minimal hassle.

A good way to think about managed investment schemes is that they are a vehicle for investing in a wide range of underlying investments.

Picking the right managed funds is a challenge similar to picking the right shares to trade, especially if you believe in “active” investing: namely, that you believe you can “pick” investment managers who will outperform other managers over time. I don’t believe active investment is currently worthwhile, and this article from The Economist does a decent job of explaining why.

If you subscribe to the philosophy of more “passive”, index-based investing, the task is a lot easier, and there are many managed funds available in New Zealand – such as some of the funds available with SimplicitySuperLife, and via InvestNow.

All of my personal investments in financial assets are with managed funds. Almost all of my recommendations to clients involve investing in managed funds.

In my professional capacity, I see my role as a financial adviser/planner rather than an investment manager. Which means that when I work with clients, the actual fund I recommend is incidental to the broader process we’ve gone through.

This broader process involves helping them get some clarity about out their financial situation (as it stands and also their longer-term trajectory); what their goals and values and priorities are; the risks they’re exposed to and how to manage them; and whether investing in financial assets is appropriate for them (as opposed to, say, repaying their mortgage).

If financial assets are suitable, the exact fund is secondary again to how aggressively they should be invested in light of their circumstances, needs, and objectives – for example, what proportion of “defensive” assets like bonds versus “growth” assets likes shares they should invest in.

But if financial assets are suitable, I will persuade clients that trying to pick stocks on their own isn’t a good idea. For some clients, engaging an investment adviser might be valuable, despite the costs. But for the majority of my clients, investing in managed funds (specifically, low-cost, index-based funds) is the way to go. It’s what I do myself, and it’s also what I’d recommend to friends and family members.

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Sonnie Bailey

Sonnie is an Authorised Financial Adviser (AFA) and former lawyer with experience in the financial services and trustee industries. Sonnie operates Fairhaven Wealth (www.fairhavenwealth.co.nz).

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