Investing can seem scary, especially if you are just starting out. But investing wisely can have a significant impact on your financial future.

Not investing can cost you

Simply saving money without investing can mean that thanks to inflation, your money actually decreases in value over time. Inflation is the rate at which the general level of prices for goods and services rises and, subsequently, the purchasing power of your money decreases. For example, if you have $100 today and the inflation rate is 2%, then the following year, you will need $102 to buy the same amount of goods and services. The longer you save your money without investing it, the less valuable it becomes.

On the other hand, investing involves buying assets that can either grow in value or produce regular income. These assets can include stocks, bonds, shares, real estate, and other types of investments. You put your money to work for you, harnessing the power of compounding returns.

The earlier you start investing, the better since investments can compound and grow. Even a small amount of money invested regularly can grow into a significant amount. For example, if you invested $1,000 and earned a 10% return, you would have $1,100. If you then earned another 10% return on that $1,100, you would have $1,210. Over time, this compounding effect can result in significant growth.

Investing is a long-term game

While there are certainly some investors who may make a pile of money in a short amount of time, they are the exception. The vast majority of us will need to be patient. We will need to stick with our investments for years or even decades to see significant returns.

Successful investment is all about risk and return

In general, investments that offer higher returns also come with higher risks. Therefore, before making any investments, it is important to determine your risk tolerance: the degree of risk you are willing to take with your investments.

You will all need to have a spending plan. These will depend on factors such as your age, financial goals, and personal circumstances. Younger investors with a long investment horizon may be willing to take on more risk, while older investors with a shorter investment horizon may prefer lower-risk investments.

Investing requires patience, discipline, and a solid plan

Whether you’re saving for a down payment on a house, funding your children’s education, or preparing for retirement, investing can help you get there. But you need clear goals and a strategy to help you achieve them.

For example, if you are investing for retirement, you might set a goal of having enough money saved to live comfortably once you have stopped working. According to a Massy University study, as an individual, you should budget $40,616 a year for a very basic, modest retirement. If you’re a single person, you’ll receive $24,073 from NZ Super annually, so you’ll need an additional $16,543 each year in retirement. To save that much money, you will therefore need a plan appropriate for your age, risk tolerance, and financial situation.

According to Mary Holm, a well-known personal finance journalist, if you expect to spend the money you have invested within ten years, then it may be best to be in a medium-risk managed fund. If you invest in the higher risk fund, there’s a chance the markets will fall and won’t recover in time. Once

you are within two or three years of spending your investments, she suggests you then move to a low-risk fund or bank term deposits as they will be less volatile.

Do your due diligence

Once you have a plan in place, it is important to do your research before making any investments. This means looking into the companies, funds, or other assets you are considering investing in and learning as much as you can about their financial performance, management, and industry trends.

Information helps you make prudent investment decisions. Read books and blog posts. You can also consult with financial advisors or other experts to get their guidance on specific investment opportunities. They can help you create a plan that works for you.

Do not borrow large sums to invest.

This is a grave error many people make. When the investment goes down, they are left heavily in bad debt. Invest your savings first.

There are several investment options available.

Generally speaking, managed investment portfolios are considered to be the most accessible forms of investing and can be purchased through banks, and managed fund providers. One of the most popular options is KiwiSaver which has a range of investment options, including conservative, balanced, and growth funds. These funds vary in risk and return.

Another investment option is the stock market. When you invest in stocks, you are buying a portion of the company’s earnings and assets. Stocks can be volatile and risky, but they also have the potential for high returns over the long term. It’s essential to do your research and invest wisely. Mary Holm advises that if you’re investing directly in shares, it’s wise to spread your money over at least ten companies in a broad range of industries. Shares in a single company, or industry, can become worthless, but that doesn’t generally happen to multiple companies all at once.

Bonds are loans made to companies or governments. Essentially, you lend money to the bond issuer and receive interest payments in return. Bonds are generally less risky than stocks, but they also offer lower returns.

Investing in real estate is another popular option in New Zealand. Real estate can provide a stable income through rental properties or appreciation in property values. However, real estate requires significant upfront capital, and there are ongoing costs associated with property maintenance and management.

Diversification is a key principle of investing

This means spreading your investments: investing in a range of assets rather than putting all your eggs in one basket. Diversification will help reduce your risk and protect your portfolio against market fluctuations. For example, you might invest in a mix of stocks, bonds, real estate, and other assets, to ensure that you have a balanced and diversified portfolio.

All forms of investing are risky.

The only thing we can do is minimise that risk, we cannot eliminate it. But it is important to realise that not investing is also very risky. You need to put your money to work for you and beat inflation. And remember, financial markets always have peaks and troughs. If you panic and sell at the bottom of the market, you miss the opportunity to recover during the next peak. If you can keep the bigger picture in mind, you can ride out the rough patches and your investment will grow again when things recover.

Investing is a long game

People with diversified investments, who don’t plan to spend that money within ten years and who stay put during market downturns, are the ones who come out on top.