I asked how soon they were planning to buy a house and they said within a year. I said leave it in a bank and keep it there till you are ready to buy.
Well I don’t claim to be always right, but in this case gold was $1700 an ounce then, and dropped to $1200 an ounce a year later.
Their $90,000 would have turned into $63,500.
· A sinking fund put aside to repair or replace equipment - business
· Money put aside to buy a car, boat, camper van or caravan
· Saving for a first home
· Emergency money that you foresee you will need soon e.g. probable redundancy
· Money saved for a big trip
· An inheritance that you are not sure what to do with
· Money put aside to buy livestock or new fences or fertiliser – farming
· Money when you are between houses but not yet ready to buy
· Mum’s money that you are looking after because she is in a rest home*
*The life expectancy of someone in a rest home in NZ is about 18 months.
But banks pay so little
That is true and their rates will go lower, but what is the alternative?
I am aware of some mortgage funds that are paying 5% or even 6%. Over a year on $100,000 you might make a miserable $1,500 more, but there must be more risk (no free ride remember). They are paying more because they are charging the borrower more (than a bank). But if a borrower has to go to them, it will be because a bank won’t lend to them. Why? Because they are higher risk.
If something goes wrong, you might only get $90,000 back. Hardly worth it for a hoped for extra $1500.
What about a hot share? I heard Xero is flying high
Yes, they shot up from nowhere to $44 a shares, but last I heard they were down to $18.
Investing in a “hot pick” share short term is gambling, not investing.
What about A rated bonds? They are low risk, paying a tad more than a bank, and you can sell them anytime.
That’s true, but bond prices can sag if interest rates rise unexpectedly, so you could lose 2% or 3% if you need your money out and cannot wait.
What a boring adviser you are!
Yes, that’s true, but the people who nearly bought gold at the beginning of this article think I’m great.
When you will want the money?
The first question I ask people with money to invest is “how long are you investing for?”
And many say they don’t know.
Morningstar research says a balanced portfolio of bonds and shares needs 5 to 7 years for best results.
Why? Because we never quite know where markets will go, even if we think we might think we are pretty clued up., For example you invest $100,000 today in balanced portfolio.
We are never sure where we are, which is why we often invest 50% now and 50% in 6 months’ time – known as averaging in.
So I ask them “what is the likelihood you will need the money within say 3 years?” This question usually get things in perspective.
If it is 50% or more likely that they will need it with 3 years, I will recommend they leave it in the bank.
If it is less than 50% likely they will need it within 3 years (but still might) I will recommend that they invest 50% of it, and leave the balance in the bank.*
*After asking a lot of other questions too.
Over to you
Seeking that extra little bit more interest from a diversified portfolio when you have time usually works out.
Seeking that little bit more when you will need your money out sooner rather than later is a bad idea.
If you want to gamble, take $100 to the races or the casino – only gamble with money you can afford to lose (that’s kind of silly, isn’t it?).
Treat your serious money seriously and make haste slowly.
Supplied by Alan Clarke, financial & retirement adviser, & author.
His 2nd book “The Great NZ Work, Money & Retirement Puzzle” is now available. Alan is an independent authorised financial adviser (AFA) FSP26532.
His disclosure statement is available on request and free of charge.