It is easier than ever to start investing. Online platforms give access to pretty much anyone with a bank account. But how much money do you need to get started? What do you need to know before you invest?
Here’s the good news: you don’t have to have a lot of money stashed away before you start investing. The not-so-good news is that it’s easy to just jump in thinking you know what you’re doing, and it can be hard to find good advice.
Before we dive in, this article is not financial advice. It is to inform and educate about getting started with investing so you can make better decisions.
Investing online - what you need to know
Online shares investment platforms like Sharesies, Hatch and InvestNow have become popular in recent years. Some platforms have a minimum of $500 to get started, while others have no minimum at all. You can literally get started as long as you’re 16 years old and have a bank account. Got $20 a week? You can invest online.
Online investing makes saving accessible to more people, which is awesome.
So, is it worth trying?
Since these platforms are relatively new to NZ, there’s not a lot of performance data to report on. But in other places, online trading has been around since the early 2000’s.
- One of the first studies conducted in the US showed that when people switched to investing online, they tended to trade more often and more speculatively, with an average 3% less profit than the market. The folks that traded most frequently underperformed the market by 6.5%. Ouch.
- A more recent study in Europe looked specifically at trading habits on mobile devices. When investors used smartphones, they bought more risky assets with higher volatility. They often based investment decisions on past performance, with 68% of purchases for assets that had recent above-median returns. Maybe our phones feel more recreational than real-life?
- In NZ, almost ⅓ of online investors choose their online investments because of FOMO, making rash decisions based on emotion. And less than 8% sought advice from a financial adviser. While it’s great to see more people investing, we can’t let our hearts make decisions that affect our wallet.
It’s easy to see how we might be inclined to trade more often when the information is conveniently available any time at our fingertips. Plus we are constantly connected to social media that might pressure us or play on our emotions. We might be influenced by our friends or co-workers, who are no experts themselves.
The bottom line is to be aware of what you’re getting into and don’t base investments on emotion. Get informed, get advice - and maybe put your phone away when you go to the pub.
KiwiSaver - the easiest way to start investing
If you’re employed, you can get started investing in KiwiSaver as soon as you receive your first paycheck. The minimum contribution is just 3% of your pay, and your employer must match that 3%. You can increase your contribution rate up to 10% of your pay. It’s that simple to get started.
If you are unemployed or are self-employed, you can sign up through a provider. You can choose to pay your contributions directly to your provider or you can set up an automatic payment to Inland Revenue.
Either way, to get the most out of your KiwiSaver, you need to be careful in choosing your fund and provider. Funds vary in risk level and which one is appropriate for you depends on your goals and timeline. Lower risk funds will generally remain more stable, so you are likely to see a slow and steady growth in your balance. Investing in a higher risk fund means your balance will have greater fluctuation, so they are more appropriate for meeting longer-term goals where you can ride out the ups and downs.
Your provider invests your funds on your behalf, so you want to make sure you know what your money is supporting and if it lines up with your ethics. You can also look at the long-term rate of returns to see how your provider has performed compared to other providers in the past. While this doesn’t mean they will continue to perform that way, it is good to factor in when making your decision.
What to know before you invest
No matter what investment you are looking into, there are some important questions to ask yourself before committing.
- What are my goals?
What you plan to do with the money is the first item to consider. If your goals are short-term, stable investing makes more sense - you don’t want to be ready to access your funds and suddenly see a big drop in balance. On the other hand, if your goals are longer term, you stand to benefit from higher risk investments with the potential for a better return over time.
- Does this investment match my acceptable risk level?
Can you tolerate ups and downs in your balance? Are you willing to risk losing money if it means you might make more in future? It is critical to invest appropriately for your risk type. There is a level of risk in every investment.
- What is the liquidity of the investment?
Liquidity refers to how quickly your investment can be turned into cash. Savings accounts are high-liquidity because you can usually access your cash immediately. On the other end of the spectrum would be things like property, which take time to sell.
- What fees or additional costs am I facing?
No matter what you are investing in, the fees and costs should be transparent. You have to balance out the fees against your expected returns and see if it is reasonable. What services are you getting in exchange for your fees? Also, be aware of taxes.
BetterSaver Makes it Easy for Kiwis to Get Financial Advice
The sooner you start investing, the more you stand to gain. Just make sure your decisions are made based on sound advice specific to your situation, not what your friends or a random person on the internet says.
The team at BetterSaver is here to guide you for one of your most important investments: KiwiSaver. We are committed to providing independent expert advice to all Kiwis. Get in touch or take our Fund Finder quiz and give investing a go.