Plans to float state assets have turned the attention of many New Zealanders to the sharemarket for the first time. But should the average Kiwi be buying in? This week Tamsyn Parker looks at the risks and rewards.
Retirement Commissioner Diana Crossan says a key area to consider before making a new investment is how much debt you have and how much it costs to service.
The interest rates on credit cards, hire purchases, personal loans or car loans are generally much higher than the return from shares so it makes sense to get rid of this debt before investing.
According to financial adviser Liz Koh, one exception to this is KiwiSaver.
She recommends people join the retirement savings scheme even if they have high interest debt.
"KiwiSaver has a far better return than even paying off any credit card or store card debt."
Koh says that's because for every dollar savers put into KiwiSaver up to $1043 per year they get 50c matched by the Government.
There is also the $1000 kick-start contribution from the Government which boosts the rate of return.
"Joining KiwiSaver will give a far better return than buying shares in Mighty River Power," she says.
Koh has an eight-step plan for helping people gain financial freedom and says investing in individual shares is quite a way down the list.
If they have already joined KiwiSaver she suggests paying off all debt including the mortgage before starting to invest.
"If you have got a spare $1000, it's probably better to use it to pay off the mortgage."
Mortgage holders For those who have a mortgage Koh says any investment would have to be paying more than the 5 or 6 per cent mortgage interest rates to make it worthwhile.
Paying off the mortgage also has the advantage that capital gains made on houses are tax free.
Mighty River's dividend or investment yield has not been declared yet.
Estimates range from below 5 per cent to 8 per cent. Other listed power companies range between 6.7 per cent and 7.35 per cent per annum before tax.
On the highest tax rate their returns would be under 5 per cent.
But financial adviser Simon Hassan believes even people with a mortgage should consider buying Mighty River shares because of the bonus share issue.
The Government has yet to spell out what this will entail but has said there will be a bonus share scheme for all its partial SOE floats with investors in Mighty River rewarded if they keep hold of their shares for a period likely to be about three years.
Hassan says even if Mighty River had no dividend the bonus share issue would make it a good deal because investors would be getting something extra without having to do anything.
"If you have got cash in the bank and don't need to use it in the next few years it's almost going to be a no brainer."
But Crossan says making a decision to invest when you already have a mortgage can depend on your money personality and how well you know your spending habits. "Some people are disciplined enough to pay off the mortgage and then start saving."
She says most people aren't that strong-willed and have to save as they go even if it means taking longer to pay off the mortgage.
Learning curve Young people without a mortgage or any debt could consider buying shares and using it as a chance to learn about investing in the share market.
Koh says it could be a good option for a grandparent or parent to buy the shares as a gift.
But she warns that investing in shares is a long-term game. "If it's money you know you are going to need to use in the next five years you shouldn't be buying shares. If you are going to need access to it, it's better to leave it somewhere more secure."
Hassan says young people need to think about what their future plans might be. "How do you feel about home ownership? Or having a family."
Too many eggs Crossan believes people who have never invested in anything other than KiwiSaver need to think about whether buying the power companies individually will put too many eggs in one basket.
KiwiSaver scheme managers are widely expected to be buyers of the SOE floats but they will not be eligible for the bonus shares.
Hassan says if investors have only a small amount invested in KiwiSaver it could be too much to buy $2000 of Mighty River shares.
"It's definitely a concern for those people who have smaller accounts."
Choices Koh says potential investors also need to consider how Mighty River Power and the other floats will fit into their entire investment portfolio. "There are going to be a number of [share] issues so they might want to spread the money across them. You have to consider each one on its merits."
She says investors should also consider looking outside of the SOE floats to the rest of the market. "Just because the Government is behind it doesn't mean it's a guaranteed investment."
What everybody ought to know about investing in shares
Is investing right for you right now? Forget share prices, earnings or dividends...
1. Your own situation
A clear look at your finances lets you make informed decisions
2. Got any debt?
* Credit cards
* Personal loans
* Student loans
How much could you save if you paid it off faster?
3. How much is it costing you?
cost = fees and interest you're paying
4. That's a big ask
Paying off debt first is almost certainly going to be better for your finances, with a lot less risk.
5. Are you in KiwiSaver?
You're already investing - so you may already own shares in the company you're considering.
6. Borrowing to buy shares?
It's risky business. The high returnsmight seem fantastic, but could you handle the potential losses? (If you are borrowing against your house, you could lose it!)
7. Ready for the unexpected?
Set aside three months' expenses in an emergency fund, and make sure you've got the right insurance. Still got money that would be better invested for the long term?
8. What do you want to own? Time to look for an industry and a company you want to own, even if it's just a part (a share).
Before you invest, ask:
* What is my current situation?
* Why do I want to invest the money and when will I need it back?
* What sort of returns will the investment give?
* Will I be putting too many eggs in one basket by buying this?
* What would happen if I lost all of the money invested?
* How does the investment stack up compared with other investments?
By Tamsyn Parker Email Tamsyn