1. Consumers
  2. Prepare to invest
  3. Understand the basics of investing

Understand the basics of investing

There are some basics that you need to understand before you invest: 

Be clear and realistic about what you want to achieve

The type of investment that’s right for you will depend on your goal and when you expect to achieve it.

Research, compare and review your choices

There are many different types of investments to choose from. The right investments for you will depend on your goals, your knowledge of investing and whether you want to take a hands-on or hands-off approach to managing your investments.

Our ways to invest section explains some of the different types of investments available. If you need help working out which investment will best suit you, you may want to speak to a financial adviser. See our getting financial advice pages for details.

TIP: If you need help choosing a KiwiSaver fund that works best for you, have a look at Sorted’s KiwiSaver fund finder tool. It’s an easy way to research, compare and review KiwiSaver funds offered by different New Zealand providers. 

Find the right balance between risk and return 

Over the short term, riskier investments increase your chance of losing money because you don’t have time to wait for them to increase in value again after a loss. However over the long term, they typically produce better results.

A great place to start is to find out what type of investor you are (your ‘investor profile’). This will determine how well you might handle ups and downs or possible losses. Sorted’s investor kickstarter tool will help you work this out.

We provide more information on our risk and return pages.

Find the right mix of investments for you

Once you’ve worked out your goals and the level of risk you’re comfortable taking, your next step is to choose a mix of investments (what experts call ‘asset allocation’) that matches.

You can use Sorted’s investor kickstarter tool to see what the suggested mix of investments (such as shares, bonds, property and cash) are for each type of investor. The Sorted tool will also give you an idea of what results to expect from different mixes of investments.

You can read about shares, property, bonds and cash, and other more complex investing options, in our ways to invest section. You can also speak to a financial adviser – see our getting financial advice pages for details.

Don’t put all your eggs in one basket

A good way to reduce your risk is to spread your money within each type of investment. This is known as ‘diversifying’. For example, if you’re investing in shares, you could buy shares in different companies, across a variety of industries and even in different countries. While some investments may do badly, others may do well.

Spreading your investments in this way helps to smooth out the ups and downs and reduces the risk of losing money.

TIP: Having a number of different investment properties may not spread your risk enough, as multiple properties can be affected when there are changes in the property market or mortgage rates. It’s a good idea to consider spreading your risk across different types of investments, such as cash, bonds and shares. Investing in KiwiSaver or other types of managed funds is an easy way to spread your risk.

Understand how investments grow and compound over time

When you invest, your investments will likely start to earn interest. If you leave that interest invested, you will start earning interest on that additional amount, as well as on the original capital you contributed. This is called ‘compounding’ interest and it is a powerful force for wealth creation.

Regularly adding to your investments can greatly improve your results. If you reinvest your return or make regular contributions to your investment, you’ll see the highest growth.

You can find out more about compounding on Sorted.