Investment basics and the terms you must know

Effective investing, where risk is managed and returns are tied to your goals, often involves a long term approach that can actually be quite mundane. To break down the barriers to investing we’ve compiled a list of basic investment terms below that we think are key to understanding, wherever you are in your financial journey.

Investment timeline

This is how long you intend to hold the investment for. This timeline, and your risk tolerance, will dictate how you invest. It’s our job, as your adviser, to help establish this timeline and risk tolerance and use this as the basis of how we invest your funds.

Dollar-cost averaging

Dollar cost averaging is a simple investment strategy that involves investing equal amounts of money at regular intervals. By investing consistently, you can stay invested regardless of market fluctuations. Repeated studies have shown this to be a more effective means of investment growth than simply trying to time the market- an approach we look dimly upon. One of the best investment truths we know is “time in the market will always beat timing the market.”

Diversification

Diversification is crucial in investing. Rather than attempting to pick a single winning stock, investing in a diversified portfolio reduces your overall level of risk and increases your likelihood of long-term success. An easy way to achieve this is through the use of managed funds- such as your KiwiSaver, or cost effective structures such as Exchange Traded Funds; both of which are made up of a number of investments in different stocks and assets.

Volatility

The most misunderstood concept in investing and the reason we are engaged by people worried about their KiwiSaver balance going up and down. Volatility is a normal part of investing for the long term. Longer term investments allow an element of risk. With more risk comes the potential for more reward. As the larger returns take a longer time frame to be realised some up and down movement in your investment, aka volatility, can be expected in the short term.

If we use KiwiSaver as an example many people can’t access their funds for 20+ years and are worried by their balance moving up and down. Our clients understand that this is a normal part of long-term investing and that across their investment timeline this will correct and realise them greater returns than a less volatile investment, such as term deposits at the bank.

At the same time if your investment timeline is very short-such as looking to use KiwiSaver to purchase a home within two years, then we need to remove as much volatility as possible as some large-scale market drops can take longer than two years to properly recover from.

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Next steps

Our approach is based on educating our client and understanding what their goals are. If you want to start this conversation and get your KiwiSaver investment moving, then we recommend seeking professional advice from our qualified financial advisers. Get in touch by clicking the Contact Us icon above.

This information is not intended to provide specific advice or recommendations for any particular insurance, home loan, or investment product. You should not use this article to make any financial decisions, as we cannot assess your situation without thorough consultation.

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