Investing made easy: Finding alternatives

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Sonia Speedy looks into why spreading your risk by investing in other types of investments isn't such a bad idea

Monday, December 14th 2009, 12:00AM 1 Comment

by Sonia Speedy

The old cliché of not keeping all your eggs in one basket holds for property investment too - and it doesn't just mean spreading your property purchases around geographically. Investing in a range of other asset types altogether can offer advantages too.

The experts agree that residential property can be a great stepping stone to building wealth, but at some point it may come time to sell - be it as an investor nears retirement; tires of dealing with tenant or property issues; or just wants to make sure they have a good spread of risk in their finances.

Jeff Matthews, a senior adviser at Spicers Portfolio Management, says at some point people want to take their profits and do other things. He adds that while residential property might have been a good way to build up that nest egg, at the end of the day people also want to protect it.

"And the best way is to spread your risk," he says.

Craig Moffat, ANZ general manager of specialist distribution, points out that the recent global financial turmoil is likely to have driven home the importance of diversification for many of us.

Moving from residential property into other investment classes often comes down to a lifestyle choice, says Ben Duflou, director of Wellington-based business advisory and chartered accountancy firm All Accounted For.

"Does this still fit with what I'm doing from a lifestyle perspective? If not, then maybe I should be looking at something else where I don't have to put as much time and effort into dealing with tenant issues," he says.

The rules of engagement
Risk is a key word when it comes to investment of any sort - in particular, determining how much of it an investor is willing to tolerate. The general rule of thumb is the higher the potential returns being touted, the more risk there is of losing the lot.

Duflou says the level of risk an investor is willing to take on often depends on where they are in life. Those who are younger are likely to look for higher yielding investments, but those closer to retirement are more likely to be putting in the chocks.

While property investors might know a lot about property, they may not be so knowledgeable on other asset classes. But Moffat says the same principles that should be applied to residential property investment hold true for other investment areas too.

This includes doing good-quality research, being clear about goals and having a firm idea of the level of acceptable risk.

"Also, get good-quality advice from people who you trust and that have experience in the various different markets," Moffat says.

A financial adviser and accountant can be invaluable here, while the likes of share brokers and banks can also prove to be useful sources of information.

Duflou also stresses the importance of putting in stop-losses, to help limit any downside risk.

The asset alternatives
The array of potential investments available is huge - everything from cash in the bank to investing in fine wines or classic cars. A good place to start exploring the options is on the Retirement Commission's Sorted.co.nz website.

However, there are a few staples that Matthews suggests generally constitute a well-balanced portfolio. This includes cash, bonds, or other fixed interest products, property and managed funds that invest in domestic or overseas shares. The mix of these depends upon the individual.

At the less risky end of the spectrum are the likes of term deposits, which fall into the fixed interest category. However, the returns can be lacklustre.

Portfolio Investment Entities (PIEs), managed funds offered by banks and some finance companies, can be taxed at a lower rate than bank term deposits for some investors.

When investing with banks or finance companies it is important to check out how secure they are. Look for their Standard & Poor's (S&P) credit rating, which can give you an independent view on how strong that particular institution is.

Bear in mind that putting money into KiwiSaver schemes also offers significant tax advantages, but that the money cannot be accessed until age 65. Investing in shares (equities) directly or managed funds comes with a higher risk level than cash in the bank and there is also commercial property and foreign exchange to consider as investment options too.

On the flipside, Financial Focus principal Murray Weatherston does not necessarily see a problem with investors having all their money tied up in property.

"All the theories suggest that you should diversify widely across the total asset base, but my experience would tell me that there are large numbers of investors who cannot handle the highly visible volatility of the equity market," he says.

However, those that are keen to consider other assets need to ensure the value of their wealth is not eroded, he says.

"Effectively, if you're investing for the long term your biggest enemy is actually inflation," Weatherston says.

"So you have to invest in something that will compensate you for inflation. What will do that? Equities will do it, property will do it, not much else will do it," he says.

Those comfortable with risk can get involved with more volatile investments such as commodities, which includes tangibles like oil, metals or even corn. At the really exotic end of the spectrum are the likes of buying and selling art, coins and stamps, wine, antiques and even sporting memorabilia.

"You need some serious knowledge around those areas," Moffat says.

He suggests the potential to lose all of your money is much greater.

Matthews says there are people who do well out of collectibles, but agrees it's not for everyone.

"For the vast majority, the people who don't have an interest, who don't have knowledge, then keep well away, unless you want to start and that's going to be your new hobby," he says. 

Your investment framework
Making sure investments are structured effectively can be just as important with other asset classes as it is with property.

"You can do this sort of stuff in a trust as well. If you've built up wealth it's probably not a bad place to stick all your money. Gift it away and then let the trust generate more wealth. It just provides some protection for assets for the individual," Duflou says.

He also warns that the taxation for various investments can differ to that for property. So make sure you understand the tax treatments for the assets being considered and get in touch with the experts.

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