7 Levels of Investing in New Zealand

Savings accounts, ETFs, CFDs. They all get filed under the same word, "investing," but they sit at completely different points on the risk scale. If you've ever opened a term deposit one year and found yourself staring at a leveraged trading platform the next, you've felt how wide that gap actually is.

The problem is that nobody sits new investors down and explains how these products relate to each other. So people jump straight into something complex and risky without realising there were five or six simpler steps they skipped on the way there.

This post walks through what we call the seven levels of investing, a ladder that runs from the safest, simplest products at the bottom to the most complex, highest-risk products at the top. The goal isn't to climb as high as possible, it's to work out which rung actually matches your knowledge, goals and tolerance for risk.

What are the seven levels of investing?

To make sense of how these products relate to each other, I built a simple framework I call the seven levels of investing. It isn't an official industry classification, just a way of visualising how risk and complexity generally increase as you climb the ladder, from parking your cash through to trading leveraged contracts.

The table below shows the typical risk and complexity at each level, and "typical" is doing some work there. A conservative KiwiSaver fund can carry less risk than a speculative corporate bond, and a government bond is a very different animal to a high-yield one. Treat this as a teaching device for how the levels generally stack up, not a strict or universal risk rating.

What is a term deposit and how much risk does it actually carry?

A term deposit is essentially a loan you make to a bank at a fixed interest rate for a fixed term. The bank then lends that money on to others, for a mortgage or to fund a business's growth.

Term deposits exist to preserve your money and lock in a set return. They suit people who value certainty over growth, short-term savers, investors dialling down risk elsewhere in a portfolio, and retirees who rely on fixed income. Put $1,000 into a term deposit paying 4% and you'll earn $40 in interest for every year of the term.

They're simple to understand, and backed by large banks and potentially the government through the Depositor Compensation Scheme, which gives them a strong perceived safety. The trade-off is that you generally can't touch the money until the term ends without facing a penalty, and inflation can quietly erode your purchasing power if the return doesn't keep pace with it.

How do bonds fit between cash and shares on the risk ladder?

Bonds have a reputation for being boring, but the bond market is still one of the largest in the world. A bond is a loan too, just like a term deposit, except instead of lending to a bank you're lending to a government or a company, who pay you interest and repay the debt when the term ends. If the New Zealand government needed $10 billion for a new Auckland harbour crossing, it could raise that from investors through bonds rather than going to a bank.

Bonds offer a middle ground: generally more stability than shares, with the potential for higher returns than cash or a term deposit. But they aren't risk-free. Companies can run into financial trouble, governments and companies can issue new bonds at higher rates, and bond prices move up and down before they mature. You'll often find bonds sitting inside KiwiSaver and managed funds, helping balance out riskier assets and reduce overall volatility.

What's the difference between KiwiSaver, managed funds, and investing yourself?

Outside of housing, KiwiSaver is the biggest investment most New Zealanders will ever own. A managed fund does exactly what it sounds like: you pool your money with thousands of other investors, and a professional fund manager invests it on your behalf. KiwiSaver is simply a wrapper that lets you invest in managed funds while saving for retirement.

The point of managed funds and KiwiSaver is to make investing easier. Instead of researching individual companies or deciding your own split between shares, bonds and cash, the fund manager does that for you, spreading your money across hundreds or even thousands of investments so a single poor performer doesn't sink the whole fund.

The catch is that you give up control. You pick the fund, sit back, and pay a management fee for someone else to do the work. Different funds invest differently, so two funds can produce very different outcomes depending on what they hold and how they're run. Because these funds mix growth assets like shares with income assets like bonds, the value can still move up and down, and it's worth reassessing your fund from time to time to make sure it still suits your goals.

How do ETFs differ from managed funds and individual shares?

An ETF, or exchange traded fund, is a single investment that can give you exposure to hundreds or even thousands of companies in one purchase. Instead of buying individual stocks, you're buying a small piece of many at once, like buying the whole fruit basket instead of trying to pick the sweetest apple. If one apple turns out rotten, it doesn't ruin the whole basket.

ETFs and managed funds get confused, but they're not the same thing. With a managed fund you're effectively hiring someone to decide what to buy. With an ETF you keep more control: you can go broad and follow an index like the S&P 500, or narrow in on a specific industry, country, commodity or theme. Rather than debating which single AI stock to buy, a thematic ETF gives you a slice of several at once.

ETFs let you buy across many companies and industries at once, and they tend to carry lower fees than actively managed funds since most simply track an index rather than picking stocks. What they don't remove is market risk. Diversification can wipe out company-specific risk, but if global markets fall, a broad ETF generally falls with them, and you're accepting market returns rather than trying to beat the market. That makes ETFs well suited to a relatively set-and-forget approach, where you've decided which industry, country or index you want exposure to and just want to execute it cheaply and easily.

When does it make sense to buy individual shares instead of an ETF?

Buying an individual share means buying a small ownership stake in a single company. You're a part-owner, betting that the company's value will grow or that it will pay out profits as dividends. Instead of owning hundreds or thousands of businesses through an ETF, you're backing one and hoping it performs.

Individual shares exist to give investors complete control over where their money goes. Rather than owning the whole market, you choose companies you believe have stronger products, management or growth prospects than average. If you're right, you may outperform the broader market.

The trade-off is concentration risk, the opposite of diversification. If that one company performs badly, it can hit your whole portfolio hard, and you're on the hook for the research yourself, which takes time. Warren Buffett's approach worked because he spent months, sometimes years, researching every company before he bought in. There's no automatic diversification protecting you if you get it wrong. Individual shares suit people who genuinely enjoy the research and have a knack for spotting opportunities others miss, and the potential upside is higher, but so is the downside.

What are leveraged ETFs and why do they carry extra risk?

Leveraged ETFs are designed to amplify the daily movements of an underlying index or asset, typically at two or three times. SPXL, for example, targets three times the daily return of the S&P 500. A normal 1% rise in the index would move your investment about 1%. With SPXL, a 1% rise in the S&P 500 aims to produce roughly a 3% gain, and the reverse is just as true on the way down.

The real risk to watch is volatility decay, sometimes called compounding erosion. These ETFs reset their leverage daily, so over time the returns can drift from the advertised multiple, which is why many investors use them for short-term trades rather than holding long term. They still trade on the stock market just like an ordinary ETF, and they have their place for people who understand what they're doing. I used them back in 2020 when markets were unusually volatile, but they're not a set-and-forget product.

How do options and CFDs work, and why are they the riskiest level?

Everything up to this point has involved owning an asset. Options and CFDs are different: they're contracts built around price movement, and if you don't know what you're doing, you can lose everything you put in.

An options contract gives you the right, but not the obligation, to buy (a call) or sell (a put) an asset at a set price by a set date. Investors use them to speculate on future price moves, to generate income, or to hedge an existing portfolio. CFDs work differently again. Rather than an agreement to buy or sell an asset, a CFD lets you exchange value based purely on its price movement. Go long and the price moves your way, you profit; it moves against you, you lose.

CFDs are generally simpler to understand than options, which come loaded with strike prices, expiry dates, greeks and time decay. With a CFD you get straightforward leverage, often 10, 25 or 50 times, purely on price movement, so a small amount of capital controls a much larger position. That magnifies gains when the market moves your way, and magnifies losses just as fast when it doesn't.

The recent SpaceX IPO is a good example of the kind of volatility traders look for: it listed at $135, quickly ran to $225, then slid back to around $110. That kind of swing pushes up implied volatility, and with it the price of options premiums, so even a correct call on direction can be dampened by how much you paid upfront for that premium. A CFD skips the premium altogether, it's a direct, leveraged position on price, which means your downside moves exactly as fast as your upside.

One of New Zealand's biggest names in the CFD space is BlackBull Markets, founded in Auckland in 2014 and now serving clients in more than 180 countries. Through a single account, traders can reach more than 26,000 markets across shares, indices, commodities, forex and cryptocurrencies, on platforms like MetaTrader 5, cTrader and TradingView, alongside educational resources and demo accounts for people who want to learn before risking real money. BlackBull is the principal sponsor of Auckland FC, a major partner of the Starship Foundation, and counts Milford Asset Management among its investors. As with any broker, the platform is just a tool, the outcome comes down to the decisions the trader makes, and CFDs are a high-risk product that won't suit everyone.

So, which level of investing actually suits you?

Term deposits protect your money. Bonds lend it out for a bit more return. KiwiSaver and managed funds pay someone else to make the calls. ETFs and shares hand control back to you, in broad or narrow slices. Leveraged ETFs and CFDs add gearing on top, for better or worse.

The highest level on this ladder isn't the best level. The best level is whichever one matches your knowledge, your goals and how much risk you can actually stomach when things move against you. Most people don't need to climb anywhere near the top, and knowing that is half the battle.

Frequently Asked Questions

Are term deposits completely risk-free?

Not entirely. The rate and term are locked in, and deposits are covered by the Depositor Compensation Scheme, but you generally can't access the money early without a penalty, and inflation can erode your purchasing power if the return doesn't keep pace.

What's the real difference between an ETF and a managed fund?

With a managed fund you hand the investment decisions to a professional manager. With an ETF you keep more control, choosing a broad index or a specific industry, country or theme yourself, and buying it through a broker just like a share.

Are CFDs suitable for beginner investors?

CFDs typically use leverage of 10 to 50 times your capital, so gains and losses are magnified in both directions. They're generally considered a high-risk, advanced product best suited to traders who understand leverage and price risk, not a starting point for new investors.