Your money can be invested in many things. Popular investments include shares, bonds, and fixed interest. We call these ‘asset types’.
Every asset type is designed to reward you with ‘growth’ or ‘income’.
Some investments give you both. For example, some shares pay dividends and might also grow in value. In investment properties, your tenant pays rent weekly – and the house might grow in value too.
The excitement of growth
So, ‘growth’ is when the asset type grows in value and, when you sell it, you get more money than you invested. This is also what happens when you sell a house at a profit. It can be exciting to watch your money grow.
Shares and some types of fixed income are growth assets.
Over time, growth assets usually earn higher returns because, in theory, there’s no limit to how much they can go up in value.
But they can also drop to zero – and do it quickly. So, there’s higher risk with these assets.
The steadiness of income
‘Income’ is when the asset type pays you a return while you own it.
When you buy it, you know what your return will be, and how long you’ll receive it for. It might be the rent you get on an investment property. Or the interest on a term deposit.
With income, you don’t have to sell your asset to get the return. Cash and most types of fixed income are ‘income’ assets.
Income assets keep paying you a fixed return for a fixed period. This reduces the risk of owning them, and makes them attractive when the value of growth assets plummet.
When growth assets are doing well, however, a fixed return could look low and unattractive in comparison.
How to pick your mix
The mix you need depends on your goal. How far away is it? How much money do you need?
It also depends on how comfortable you are seeing the market wobble, or losing some of your money.
The more growth assets in your portfolio, the more rocket fuel it has. This increases the chances of it going far and fast, but also its chances of blowing up.
The more income assets in your portfolio, the less rocket fuel it has. Now, this increases the chances of your money staying in one piece, but it slows down the pace it’s moving towards your goals. In fact, it might grow so slowly, it won’t reach your goal at all.
That’s why most KiwiSaver providers have three basic types of fund.
Three main types of funds in KiwiSaver
Conservative: This makes preserving your capital a priority, with a little growth on the side.
Balanced: You’re trying to achieve a mix of growth and preserving your capital.
Growth: You’re making growth a priority. Typically, investors in growth funds have to accept bumps and losses along the way.
How else can asset types work for me?
You can also mix your investments within asset types. For example, with shares, choose a product that combines the shares of companies from different countries, industries and of different sizes. If you’re comfortable doing it, you can also select shares yourself.
With fixed income, choose a product that combines the bonds of many companies and governments in different countries, all maturing at different times. Or, again, you can pick bonds yourself.
As a final touch, you might be able to find investments which behave differently to cash, shares, and fixed income.
These asset types can be more exotic, have different risks, need more research, and can also need a higher initial investment. So, they’re not for everyone.
What you’re looking for here is an asset type that performs regardless of what happens in the financial markets.
These could be timber plantations, which grow as demand for building, furniture and paper go up. Or gold, which typically performs well when financial markets do poorly.
Even if you can find them, and are comfortable investing in them, you shouldn’t have too many of these in your portfolio.
Published September 2018
Story by Paul Gregory, Pie Funds
We aim to make investment with KiwiSaver easy to understand. To help us make this article reader friendly, we used The Write Plain Language Standard.
Paul Gregory is the Chief Operating Officer at Pie Funds Management Limited. Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read our Product Disclosure Statement. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. We recommend you speak with a financial adviser. All content is correct at time of publication date.