It’s a fine art
Analysis: Where do you get a return on your money when interest rates are so low? Susan Edmunds looks at the options and the risks.
Sharemarkets have had a long run of great returns. But there are increasing signs that this is coming to an end.
On Wednesday, the US stock market tumbled more than 700 points, or nearly 3 per cent, in the afternoon and lost close to 7 per cent in the past three weeks.
Wednesday’s sharp selloff was caused by a development in the bond market, called an ‘‘inverted yield curve,’’ that often foreshadows a recession.
The yields – or returns – on short-term US bonds have eclipsed those of long-term bonds.
If global uncertainty has made you want to get out of shares, where could you put your money instead?
Property
Property investment has traditionally been New Zealanders’ favoured option, particularly for those who remember the impact of the 1980s share market crash.
Rent yields are not high at the moment, at anything from about 4 per cent in Auckland to 7 per cent in Invercargill, but capital gains have been undeniably good in almost all parts of New Zealand over the past decade.
Things are getting a bit tougher – rental properties now have to meet higher standards and there are moves to give tenants more rights. Capital gains have slowed, at least for the meantime.
If you didn’t want to buy your own property outright, there are also opportunities to buy into a property syndicate investing in commercial properties, or through one of the ‘‘house share’’ platforms that have sprung up in recent years.
Pros
Most people understand how property investment works. If you’re in it for the long-term, you can expect capital gains to improve again over time, as well as your yield as rents rise. Once the mortgage to buy the property is paid off, you have a relatively passive income stream.
Cons
It’s hard to get bank lending to buy a new investment property unless you have good levels of equity. There’s increasing regulation and compliance to deal with. The costs of ownership are high when you factor in maintenance, management and servicing a loan.
Term deposits
Another old favourite of New Zealanders is a term deposit in the bank.
You give the bank your money for a set period. In return for locking it in, you get a higher interest rate than you would in most savings accounts.
The problem is that interest rates are low and do not look like they will move up for the time being.
If you have $10,000 in a term deposit for six months, you’ll typically earn less than $100 once tax is deducted.
Pros
Easy. Anyone can set up a term deposit with the bank. It’s low risk.
Cons
Very low returns at present. There can be penalties for breaking a term deposit before the time period is up.
Cars
Cars are usually thought of as an expense rather than an investment.
Typically, they depreciate the moment you drive out of the car dealership.
But Cade Wilson, a motoring adviser at the AA, said any cars that were made in the 1970s or before would now be considered a classic and could increase in value if they were kept well.
‘‘Most vehicles will depreciate heavily to a point [but then] if they are based on something collectible, then will slowly increase as the historic status kicks in,’’ he said.
‘‘So with that timeframe in mind, limited production, performance or special editions of cars in a range will be a starting point to consider, Nissan GTR, Subaru and Honda Type R, or luxury cars like Porsche, Bentley, Mercedes AMG...
‘‘You have to think the long game, and it’s hard to know what tastes will be like in 40 or 50 years. These cars are usually stumbled upon because the previous owner hid it away and looked after it, and the next generation find it and then bring it out, and that’s when the value starts.’’
Pros
If you’re a fan, investing in cars is probably good fun.
Cons
You need to be very careful about what you buy if you want it to retain value, let alone increase.
Gold
If you really want to channel your inner Scrooge McDuck, you can invest in gold.
Platforms such as MyGold and NZ Mint make it easy to start with relatively small investments in bullion.
Lately, this has been a reasonable option – since August last year, the price of an ounce of gold has risen 27.94 per cent, in New Zealand dollar terms.
Pros
Investing is easy. There’s something a bit satisfying about owning slabs of gold. Some investors see gold as a hedge against inflation. Gold prices are still predicted to rise.
Cons
There are fees associated with buying and selling. You have to think about where you’ll store your gold.
Art
Everyone’s heard a story about someone who bought a painting by an unknown artist who then went on to be super-famous.
But investing in art is not a straightforward proposition.
If you want a reliable bet, you’d need to buy art from established artists who have an established following.
Knowing the provenance of the artwork is also important.
If you really don’t know what you’re doing, you could enlist the services of an art consultant to help. Generally buying one more expensive work is a better investment than many, cheaper ones.
Don’t buy anything that doesn’t appeal to you just because you think it’s a good investment. If the bottom falls out of the market, it’s best to be left with something you actually want on the wall.
Pros
You’re buying art. Worst case, you can put it on your wall.
Cons
For every op shop purchase that turns out to be a Monet, there’s a $20,000 work that falls out of favour. If you don’t love it, it can be a waste of money.
Rural businesses
Andrew Watters, chief executive of My Farm, which syndicates investments in dairy, sheep and beef, horticulture, manuka honey and rural commercial property, said he had noticed investors looking for other ways to get income from investments.
He said an offer to invest in two SunGold kiwifruit orchards via MyFarm was taken up by 60 investors within three days.
‘‘It seems investors love the touch and feel of a specific investment be that a kiwifruit orchard, cherry orchard or hop garden.’’
Pros
Diversification – it allows exposure to a different type of industry, which helps to spread risk. Yield should be better than you get in the bank.
Cons
Outcomes are tied to business and industry performance. Real assets tend to be less liquid, although MyFarm has a system to help people who want to exit. You need at least $100,000 to invest.
Actually . . . shares
When share markets are tanking, it’s actually a good time to buy.
If something you regularly need is on special at the supermarket, you probably buy more to stock up.
The same should apply to shares. If you buy more when prices are weaker, you’ll get the benefit when prices recover again.
If you pull your money out of shares when the market wobbles, you just realise your loss.
Leave it there and wait for the recovery that will inevitably happen eventually.
For every op shop purchase that turns out to be a Monet, there’s a $20,000 work that falls out of favour.