My parents were great savers and they taught me how to save, from my first skateboard right through to my first home. The best thing about saving is that it is usually for a specific purpose, something you can see, touch or feel, and you often don’t have to wait too long to enjoy the rewards.
When it came to investing, for my parents that meant putting their money into term deposits at the bank. To make sure they didn’t put all their eggs in the same basket they would have their money in different banks. When we talked about putting money into the share market they said it was only for rich people and were worried you could lose some, or all, of your money - almost like gambling.
That kind of made sense back then, especially given how they were brought up. Their knowledge of the share market came from their parents, who had grown up during the great (I never understood why it was called great) depression, which was largely caused by the share market crash of 1929. The 1987 share market crash only reinforced their unconscious bias against shares, a view held by many others of their generation, who thought it was just too plain risky.
But there are very good reasons why that attitude has changed and why shares and other listed investments might be a good option for you.
You don’t have to be rich to get started
An important change, since my mum and dad started saving, is the accessibility of the markets and the types of products and choices that are available now compared to their day. No wonder they always thought investing was for the rich because, in many cases, the only way you could access shares and other investments like that was through your local share broker and you needed quite a bit of money to go and see one of those fellows. For many during that era it was seen to be this mystical place that only the chosen few could venture into and you had to have a lot of money you weren’t afraid to lose.
The great thing today is you don’t need a lot of money to start your investment journey. The relatively recent arrival of digital platforms and virtual investment supermarkets allows you to pick and choose a range of shares or managed funds that you think best suits your personal long-term goals. You can even invest a little time and money and get a financial adviser to do all the hard work for you and find the best solutions that work for your personal circumstances. And you don’t need thousands of dollars to get started. Even accessing fund managers like ourselves, you can start investing as little as $250 a month - a far cry from what dad would say were the good old days.
Beating the inflation blues
There are many ways to look at the differences between saving and investing, but most of it comes down to risk. Mum and dad were very risk adverse, hence why they only saved their earnings in term deposits. It meant it was there if they really needed it and it had a very low risk of losing value. The funny thing is, over a long period of time, while the capital value of their savings was going up, the actual buying power was going down because of that deadly invisible savings robber called inflation. Something we all know and have been experiencing over the past year or so.
A good analogy I often use is of when I was a kid and found 50 cents under the couch, which just may have fallen out of dad’s pocket when he was asleep, I could rush down to my local diary and get a massive bag of lollies that would last me a week. If I went into the same dairy today in Ashburton and asked for a 50 cent mixture, I suspect I would get an awkward laugh at best.
On the other end of the scale, the short-term risk of investments (outside of cash and term deposits) is that the value will fall from time-to-time, but you have to look at the long-term trend. Most people reading this, who are in KiwiSaver, will have seen exactly what that looks like over the past 14 months or so and, even though I work in this industry and know what to expect, seeing the balance of my KiwSaver going down has not been much fun.
Spreading the risk
Another key part of investing is taking the very important old saying “spreading your eggs in different baskets” or put another way diversifying your investment risk. If you look at most managed funds, that is done for you. Say you decide to invest in a balanced fund, your hard-earned money will be invested in cash, bonds, property and shares. They will typically be invested not only in New Zealand but a number of other countries around the world and in a number of different companies in those countries. This, of course, doesn’t mean you are protected from those horrible market jitters, but it does give you plenty of diversification and the chance to mitigate massive one-off country or sector results.
Saving and investing can sometimes be confused, however they are both essential parts to help with your overall financial wellbeing. Some great words of wisdom by one of my favourite bands Depeche Mode is “get the balance right” . The key is making sure you understand the difference and enjoy the benefits of both along the way.
As published on Stuff 10/02/23
Disclaimer: David Boyle is Head of Sales and Marketing at Mint Asset Management Limited. The above article is intended to provide information and does not purport to give investment advice.
Mint Asset Management is the issuer of the Mint Asset Management Funds. Download a copy of the product disclosure statement.
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