Investment Basics

Master the fundamental concepts of investing. Understanding these basics will give you the confidence to make informed investment decisions.

What You'll Learn

Key Points

  • Represents partial ownership in a company
  • Value goes up and down based on company performance and market sentiment
  • Can provide dividends (profit sharing) and capital gains (price increase)
  • Higher risk but historically higher returns than bonds

Real Example

You buy 10 shares of Spark at $4.50 each

10 shares × $4.50 = $45 investment

→ If Spark rises to $5.00, your shares are worth $50 (11% gain)

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Understanding Risk and Return

The fundamental rule of investing: higher potential returns come with higher risk. Understanding your risk tolerance helps you build the right portfolio.

Golden Rule: Never invest money you can't afford to lose. The stock market can be volatile in the short term, even if it trends upward long-term.

Sample Portfolio Allocations

Balanced Portfolio

Balance between growth and stability

Stocks50%
Bonds40%
Cash10%

Profile Details

Expected Return:5-7% per year
Time Horizon:3-7 years
Risk Level:Medium

Index Funds vs Actively Managed Funds

One of the most important decisions you'll make is choosing between passive index funds and actively managed funds. Here's what you need to know:

Index Funds

Passive investing - tracks a market index

How they work

Automatically buys all (or most) stocks in an index like the S&P 500 or NZX 50. No fund manager picking stocks.

Advantages

  • ✓Very low fees (0.03% - 0.20% typically)
  • ✓Instant diversification
  • ✓Consistently beats 80-90% of active funds
  • ✓No manager risk
  • ✓Tax efficient (less trading)

Disadvantages

  • ✗Can't beat the market
  • ✗Includes all stocks (good and bad)
  • ✗No downside protection

NZ Examples

  • • Smartshares NZ Top 50 ETF (FNZ)
  • • Vanguard International Shares (via InvestNow)
  • • Kernel S&P 500 Fund

Average Fee: 0.20% - 0.50% in NZ

On $10,000 = $20-50 per year

Actively Managed Funds

Active investing - fund manager picks stocks

How they work

Professional fund managers research and select investments they believe will outperform the market.

Advantages

  • ✓Potential to beat the market
  • ✓Professional management
  • ✓Can avoid bad companies
  • ✓May provide downside protection
  • ✓Access to expertise

Disadvantages

  • ✗High fees (1% - 2%+)
  • ✗Most don't beat index funds
  • ✗Manager risk (style drift, leaving)
  • ✗Higher taxes (more trading)

NZ Examples

  • • Milford Active Growth Fund
  • • Fisher Funds Growth Fund
  • • ANZ Growth Fund

Average Fee: 1.0% - 2.0% in NZ

On $10,000 = $100-200 per year

Which Should You Choose?

For Most Beginners: Index Funds

Warren Buffett recommends index funds for 99% of investors. The low fees, instant diversification, and consistent performance make them ideal for building long-term wealth. Start here unless you have a compelling reason not to.

Consider Active Funds If:

  • • You have specific ethical/ESG requirements not met by index funds
  • • You're investing in niche markets where active management adds value
  • • You have high conviction in a particular fund manager's track record
  • • You want exposure to smaller companies not in major indexes

The Numbers Don't Lie: Over 15 years, 92% of actively managed funds fail to beat their benchmark index after fees. The longer the time period, the worse the odds get for active management.

Common Investment Strategies

Dollar-Cost Averaging

Invest a fixed amount regularly regardless of market conditions. Reduces impact of volatility.

Example: Invest $500 every month into an index fund, whether markets are up or down.

Buy and Hold

Purchase quality investments and hold them long-term, ignoring short-term fluctuations.

Example: Buy index funds and hold for 10+ years, reinvesting all dividends.

Index Investing

Buy funds that track market indexes. Low cost, diversified, and historically solid returns.

Example: Invest in S&P 500 or NZX 50 index funds for broad market exposure.

Value Investing

Buy undervalued stocks and hold until the market recognizes their true value.

Example: Research and buy companies trading below their intrinsic value.

Common Beginner Mistakes to Avoid

❌ Trying to Time the Market

Nobody can consistently predict market highs and lows. Time in the market beats timing the market.

❌ Putting All Money in One Stock

No matter how good a company seems, never put all your eggs in one basket. Diversify!

❌ Panic Selling During Downturns

Market drops are normal. Selling during a crash locks in losses. Have a plan and stick to it.

❌ Investing Money You Need Soon

Only invest money you won't need for at least 5 years. Keep short-term funds in savings.

❌ Chasing Last Year's Winners

Past performance doesn't guarantee future results. Yesterday's winners often become tomorrow's losers.

Key Takeaways

Start Simple

Begin with index funds or ETFs for instant diversification and low fees

Think Long-Term

Investing is a marathon, not a sprint. Focus on decades, not days

Diversify Always

Never put all your money in one investment, sector, or country

Keep Costs Low

High fees compound negatively. Choose low-cost index funds when possible

Ready to Learn More?

Now that you understand the basics, explore specific topics or test your knowledge.

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