I do like the quotations of Albert Einstein. He once quipped:
“Compounding is mankind‘s greatest invention as it allows the reliable systematic accumulation of wealth”
He might be turning in his grave at the returns now available in the deposit market. Hardly worth getting out of bed for, as one famous Super Model might have put it back in the 90s.
The best demand account available currently is 0.76% up to €100,000. Deduct DIRT tax (Deposit Retention Income Tax - 41% of interest earned goes to the government) and you’re left with 0.4484%, less than half a per cent! In 2014 PRSI (Pay Related Social Insurance – 4%) was first deducted, and with inflation, you could actually be at a loss leaving money with a deposit taker!
Current deposit interest rates are now nearly matching the historical lows of the ECB interest rates – 0% at present. Here are some of the highlights of the current best deposit rates…
- Best gross demand deposit account interest rates are Nationwide UK at 0.76% and KBC Bank at 0.7%
- Best 5-year return is State Savings (NTMA) their Saving Certificate yielding 5% TAX-FREE (it was 21% not so long ago) Grossed up at 41% (the DIRT tax rate) it is equivalent to 1.66% each year ... maximum investment is €120,000 per person
- Best 18 month fixed is 1.5% (KBC Bank)
So where to now for that much-needed growth on your hard earned savings? For the last 7 years, the 2nd longest bull continues unabated – the stock market has grown over 200% since March 2009 despite the recent volatile 6/9 month stagnation…but which sectors, asset classes? Trying to individualise stock selection is a mug’s game. No one – stockbrokers, clairvoyants, financial advisers – can predict what is going to happen. All one can do is take educated risks and spread that risk…investment is not just about managing risk but taking it too.
Interest rates are likely to stay low for some time - Draghi hinted recently until 2018 at least - so what can investors looking for better returns do?
If you want growth, you MUST take some risk and to make the decision to invest outside of those deposits - the safety net - you would want to see a potential doubling of the best deposit interest rate available as a return to justify the decision to swap over to alternative investments.
One of those choices is the stock market – the best asset class return of any sector over any period of time. Investing $10,000 in Berkshire Hathaway (Warren Buffet’s vehicle) in the late 50s would see your investment at $400 million today.
The easy route to the stock market is via managed funds. Easy to understand and simple to operate, there is a plethora of managed fund investment choices from a variety of providers available for consideration but mainly through insurance companies.
These individual funds are categorised from 1 to 5 or even 2 to 6…with 1 or 2 being the cautious fund (government bonds, cash funds) and the 5 or 6 being the aggressive fund (emerging markets, technology and energy stocks, BRIC countries etc) the trick is to find your risk attitude and invest accordingly.
You have the ability to swap back at any time to more cautious funds if you can’t stand the heat of the more aggressive funds…and safety – at the touch of a button. The swaps are free. These funds stay in their lane or risk categories. There are also some features such as Irish Life’s Multi Asset Portfolio (MAPS)’s DSC, Dynamic Shares to Cash, a mechanism whereby on a global meltdown while you are sleeping, your money is transferred automatically via a clever algorithm to the #1 fund (government bonds, cash funds – and safety again).
Zurich has a similar offering in their Pathway Funds investment as do Standard Life’s MyFolio funds. All of them allow switching funds but remember these funds are medium term – 5 years or so as penalties do apply if you withdraw in the early years. Also remember that if you have not made any withdrawals, after 8 years if there is profit at that point, you will pay DIRT tax on that profit then. No DIRT is payable before then – called gross roll up. Get professional advice or email me for further information.
John Lowe is managing director of Providence Finance Services Ltd trading as Money Doctor, regulated by the Central Bank and based in Stillorgan Co Dublin. He is author of The Money Doctor 2017 – 100 Ways to Save Cash (Gill Books). For consultations and corporate seminars, call (01) 278 5555 or email email@example.com Follow John on Twitter (@themoneydoc) Linkedin Pinterest Google+ & Facebook