Best way to invest $100k in New Zealand

One question investors often ask is: “Ok Nefe, be honest with me. What’s the best way to invest $100k?”

You could argue this for hours. The truth is, there is no one “best” way.

There are lots of ways you could put your money to work. Each has its pros and cons. And it can depend on what you want to achieve.

Even though I help investors buy New-Build properties, I won’t just tell you to invest in property.

Instead, I will lay out the options as simply as possible. Then I'll step back so you can decide how to invest yourself.

Since I can’t predict the future, let’s look to the past. In this article, we’ll go back to 2014 and see how you could have invested $100k. Then we’ll see how each investment worked out over the next 10 years.

#1 – Term deposit

A term deposit is where you take a lump of money and lock it away with the bank for 30 days to 5 years.

You then get a fixed interest return on that money.

Let’s say you invest $100k at 5.5% for a year.

After 12 months you get your $100k back. Plus, you also get $5,500 (which you then pay tax on).

The benefit is that you get a fixed return and you know what that return is in advance. You also earn an income from the term deposit. You get paid in cash.

Compare that to a managed fund, where your return is your investment going up in value.

The downside is that your return tends to be lower. On top of that, you pay taxes on all of your returns. That's because you are earning an income.

Term deposit example

So, let’s say Jo has $100k. She decides to invest in term deposits. Every year she locks in the average 1-year term deposit rate around January 1st.

In 10 years (2014 – 2024) Jo would have turned $100,000 turned into $124,287.

She would have made $24,287 from her investment.

That is a compounding after-tax return of 2.2%.

This assumes that:

• Jo reinvests her money
• , and her returns are paid at the end of each
• her tax rate is 33%

More from Opes:

• What are the top 8 best investments in New Zealand? (Article)
• Property vs shares vs funds vs term deposits (Article)
• 5 strategies if you don't have the money to invest just yet (Article)

#2 – Balanced fund

A managed fund is a type of investment where your money is pooled together with other investors.

You then invest in shares, bonds, term deposits and a range of other investment types.

When you put your money in a fund, you purchase “units”. Those units might then go up in value.

The return you get (and the risk you take) varies. It depends on the fund you choose. Balanced funds are medium-risk and medium-return.

The trouble with funds is that it's hard to track their performance. You need to factor in the tax and fees you pay to your fund provider.

Balanced fund example

So, let’s say Jo has $100k. She decides to invest with Milford, choosing their Balanced Fund.

She puts her money in. By the end of the 10 years (2014 – 2024), she’d have $162,754 in her account. That’s based on my estimates of Milford’s actual returns.

So after 10 years, she's made $62,754 from her investing.

That is a compounding return of 4.99% per year. That’s the after-fees, after-tax return.

This assumes that:

• her Prescribed Investor Rate (PIR tax rate) is 28%

#3 – Growth fund

Growth funds are a bit higher-return, higher-risk. That means that their value jumps up and down a bit more.

That's because growth funds invest in more shares (equities).

But over the long term, they tend to have higher returns.

Growth fund example

Let’s say that Jo now decides to invest in Milford’s Active Growth fund.

She invested her $100,000 back in 2014. By 2024 she’d have $182,817 in her account.

So she made $82,817 from investing.

That’s a 6.2% after-fees, after-tax return, based on our modelling.

#4 – Shares

Shares are known as stocks or equities. When you buy shares you buy a percentage of ownership in a company.

You make money by collecting dividends, which is a share of the company's profits. These are generally paid every quarter.

You also make money by the shares going up in value.

Some companies (growth stocks) often don't pay dividends. However, they will reinvest funds to increase the value of the company and the shares.

It’s often tricky to give hard numbers for shares. This is because your returns depend on which companies you invest in.

And most people with $100,000 to invest wouldn’t pick individual shares. They’d invest in a fund.

But, since Kiwis are increasingly interested in shares, it’s worth talking about.

Remember, you’ll also pay fees when you buy or sell shares and your dividends are taxed.

On top of this, if you decide to invest in overseas shares (like in the US), you may have to pay a special type of tax (the Foreign Investment Fund regime).

Shares example

This example is a little different to the others mentioned above. With term deposits and funds, we can figure out exactly how much money Jo would make.

But with shares, it depends on what companies Jo invests in.

So, to keep things simple let’s say Jo invests in a range of shares in the NZX50. That’s New Zealand’s stock exchange.

And for simplicity, let’s say that her investments directly track the index.

She invested her $100,000 in January 2014. By the time she gets to 2024, her investment would now be worth $243,548.

So she made 143,548 from her investing. That's a 9.3% average compounding return.

This is an overly simplistic view. I’m not factoring in any dividends. And it's unlikely that Jo's shares would directly track the index.

That does make this example less comparable to the term deposits and funds mentioned before. But I’ve done it this way to keep things simple.

#5 – Property

Property is very different to the other investments on this list.

You own the property directly instead of investing through a fund or bank. You buy it and rent it out.

This means that there are often no fees to pay to an investment company, and the tax you pay is different.

With property, you're going into business. You need to rent the property, manage the cash flow and keep your tenant (the customer) happy.

You get two types of returns. Capital growth through the property going up in value. Then the rental return.

The other big difference with property is that you often take out a mortgage to buy it. This is known as leverage. This can increase both your return and your risk

Property example

Ten years ago, Jo bought a property in Auckland for $500k, using her $100k as a 20% deposit.

If her property increased in value with the rest of the Auckland housing market, her $500,000 property would now be worth $914,000.

So she made $414,000.

This is a 17.8% return.

This return is high. But, it’s important to say that the return isn’t high just because she bought property. It’s because of the leverage.

With property, you can take out a home loan to buy the house. But, as it increases in value you get to keep that capital growth.

But if you took out a lower mortgage (or no mortgage), that return would be much smaller.