You’re likely to need a bigger return if:
3 ways you can make money
There are three main ways you can make money on your investment:
What you need to look for is an investment that offers the return you’re looking for, for the least risk and cost.
The best way to assess a return is to compare it to a relevant benchmark. The benchmark you use will depend on how your money’s invested.
Managed funds (including KiwiSaver) – Managed funds have to provide you with information about how their return compares against the ‘market index return’. The market index used depends on the fund you choose. This is shown in the fund update published at least once a year. You can also see how the fund has performed against the market index return for the past five years.
If you invest in an active fund, you’re hoping that by paying higher fees your manager will be able to achieve a return that’s better than the market index return. This isn’t always the case.
Here’s an example of the current (2016) return you might receive from managed funds generally used in the financial services industry in New Zealand (before fees and taxes have been deducted). Aggressive and growth funds invest in a higher proportion of shares. This means they are more volatile, as shares go up and down in value more – but over time they typically provide a higher return.
|Type of fund||Range of annual returns you might have||Expected average annual return (before fees and taxes have been deducted)|
|Aggressive||-9.0% to 27.0%||7.5%|
|Growth||-6.3% to 21.4%||6.7%|
|Balanced||-3.6% to 16.4%||5.9%|
|Conservative||-1.4% to 11.9%||5.0%|
|Defensive||-0.7% to 10.2%||4.6%|
For more details about the return you can expect from these funds, go to Sorted’s investor kickstarter tool.
Shares – If you’re invested in New Zealand listed shares, you can view their value on www.nzx.com and see how they’re performing. It’s important to remember that shares are volatile. This means they go up and down in value a lot.
Bonds – You can measure the performance of a bond by working out the amount of return you’ll get compared to what you paid. This measure is known as the yield and is calculated by dividing the interest received by the face value of the bond (note: bonds aren’t always traded at face value). Websites like www.interest.co.nz list current New Zealand bond yields. Your provider should have information about how to review the performance of bonds from other countries.
Cash deposits – www.interest.co.nz publishes interest rates daily. You can use this information to see how the interest rate you’re being paid compares with rates paid by other financial providers.
Property – The return you make on a direct property investment is known as a yield. In its simplest form, this is your annual rental income/property value x 100. For example, a property that was purchased for $500,000 and returns an annual rent of $26,000 would have a current rental yield of 5.2%. You can compare the average yields you might receive on properties in different regions around New Zealand on the quotable value (QV) website www.qv.co.nz/resources/property-investment-rental-analysis.
If you have shares in a listed property fund, you can view their value on www.nzx.com and see how they’re performing. There isn’t a specific benchmark for property syndicates but you could compare these to the return offered through property listed funds.
|TIP: If an investment is promising an unusually high return, it may be a more complex version of a product (for example capital notes, a complex bond). It could also be a scam. If it seems too good to be true, be wary and get advice before you invest.|