Guide to understanding index investing

Investing is a powerful tool for growing wealth over time and achieving financial goals. However, with the multitude of investment options available, it can be overwhelming for newcomers to navigate the world of investing.

One popular approach used by many worldwide is index investing. Here, we will demystify index investing and explain why it can be a smart strategy for New Zealanders looking to enter the investment game.

Index investing, also known as passive investing, is a strategy that aims to replicate the performance of a specific market index, such as the NZ or US stock market, the international stock market, and the bond markets. Instead of trying to outperform the market, index investors seek to match its returns by investing in a diversified portfolio of investment assets that mirror the index's composition.

Simplicity

Index investing is straightforward and easy to understand, making it accessible for beginners. You don't need to spend hours researching individual stocks or trying to time the market. By investing in an index fund or exchange-traded fund (ETF), you gain exposure to a broad market segment in a single investment.

Lower costs

Traditional actively managed funds often charge high fees for their investment expertise. In contrast, index funds typically have lower fees because they aim to track an index rather than employing costly research and analysis. By minimising fees, index investors can retain a larger portion of their investment returns.

Diversification

Index funds offer instant diversification by including a broad range of stocks or other assets. This diversification helps reduce the risk associated with investing in individual companies or industries. For example, investing in a New Zealand index fund gives you exposure to multiple companies across different sectors, mitigating the impact of poor performance from a single stock.

Consistent returns

While index investing doesn't guarantee market-beating returns, historical evidence globally suggests that many actively managed funds struggle to outperform their benchmark indexes over the long term. By tracking the performance of the index, index investors aim to achieve consistent, market-like returns over time.

For New Zealanders, index investing offers several advantages:

• Access to domestic and global markets: New Zealand investors can choose from a variety of index funds or ETFs that track both domestic and international markets. This provides an opportunity to diversify beyond the local market and gain exposure to global companies, industries, and economies.
• Aligns with KiwiSaver goals: KiwiSaver is a voluntary long-term savings scheme in New Zealand. Many KiwiSaver providers offer index funds as an investment option, aligning with the low-cost, diversified nature of index investing. By selecting an index fund within KiwiSaver, you can capitalise on its benefits while saving for retirement.
• Exposure to sustainable investing: Index investing has also embraced the growing trend of sustainable investing. Several index funds in New Zealand focus on companies with strong environmental, social, and governance (ESG) practices. By investing in these funds, New Zealanders can support companies that align with their values while potentially earning a competitive return.

Index investing provides a simple, cost-effective (compared to active investing), and diversified approach to investing. By tracking a specific market index, investors can achieve market-like returns while minimising fees and reducing the risk associated with individual stock picking.

Whether you're a beginner or an experienced investor, index investing offers a solid foundation for long-term wealth creation and financial goals. As always, it's important to do your own research and consult with a financial adviser to determine the investment strategy that suits your individual needs and risk tolerance. Remember, investing involves risks, and past performance is not indicative of future results.

Looking to invest?

Knowing where to start with investing can be challenging. Because everyone's needs are different – there's no one size fits all. At AMP, we offer a range of investment options that may suit you. It’s a good idea to seek financial advice or other professional advice relevant to your personal financial situation. We recommend you contact your Adviser, or, if you don’t have an Adviser, contact us on 0800 267 5494.

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