Choosing the right investment vehicle for your money can not only be as confusing but it can cost you dearly.
With fourteen different asset classes from property to cash, and equities to commodities together with geographic options, currency and security issues, your money has never been more at risk.
Most people have different investment needs and goals ranging from short to long term. Whether the need covers:
Rainy Day Fund – an accessible account to meet emergencies, sudden loss of income or that investment opportunity. Ideally, you should have 3 to 6 months net annual income in this type of deposit account. You should also ensure you are receiving top interest rates – best demand deposit rates currently are KBC Bank’s 0.6% and Rabodirect also at 0.6%
Perhaps for your children’s education – Irish League of Credit Unions says that 3rd level alone can cost up to € 42,000 per child and that is without fees. For medium term capital requirements – a holiday home or extension?
Retirement / pension planning
If you are not happy to live on the current State Pension of €238.30 per week then you will need to invest in a solid pension that will supplement the State Pension when you retire. In 2010 for every person who retired there were 6 workers, but by 2051 for every retiree, there will be only 2 workers.
Approved Retirement Funds investment
You may wish to invest your retirement fund after extracting the tax-free lump sum and maximise the return on same as the annual withdrawal (called imputed distribution) of 5% may be insufficient to meet your annual living needs then.
The Approved Minimum Retirement Fund
Maintaining €63,500 until you are aged 75 – also requires management and a decent return.
Some of these investment decisions will be based on a cautious approach while others may be aggressive in their investment strategy. This will mainly depend on age, family status, health and lifestyle and of course ability to fund. Those, for example, nearing retirement age will choose investments with little risk, e.g. cash, government bonds, while those in their mid-thirties may have a different mindset and choose riskier options e.g. emerging markets, renewables, technology stocks etc.
Unfortunately choosing an investment is not like buying a car where you look at all the pros and cons of the car at the start, select every aspect of preference but once bought, that’s that – you have made your bed...now you have to lie in it.
Not so with investment choices. They need to be constantly watched and switched if performing poorly. Stark warnings abound...if you invest in these funds you may lose some or all of the money you invest.
Keeping it simple and easy to understand is key for the average investor.
What is also key is the changing nature of investment. Currently, government bonds have been the star performers over the last few volatile years. However, they cannot continue to perform as they have and therefore having the flexibility to be able to swap into a different investment vehicle without cost and without fuss is essential.
First things first – work out what is your attitude to risk. On a scale of 1 to 5, where 1 is lower risk and 5 is higher risk, where are you?
Once you have established this risk attitude, then the choices become a little clearer. Remember if you do want more than the paltry deposit interest returns currently available, you must take a little risk. One popular option is managed funds.
Examples of them are best rated Irish Life’s Multi Asset Portfolio funds (MAPS) Zurich’s Prisma funds and Standard Life’s MyFolio funds where you simply choose between one of the five funds that match 5 risk levels. Each fund is designed to maximise potential returns within the investor’s chosen risk level and is then monitored, reviewed and actively managed by the respective investment teams.
Based on the same scale of 1 to 5, each MyFolio of multi-asset funds, for example, are risk-based. Originally launched in the UK over 4 years ago, the fund has so far attracted over €1b in Ireland alone with 40% invested in the MyFolio 3 (the balanced choice) and c. 20% each in the MyFolio 2 (lower to medium risk) and MyFolio 4 (medium to higher risk).
Annual management charges range from 1.15% for model 1 to 1.35% for model 5 and for those wanting to see precisely the make up of every investment in these models, email me for the fact sheets (firstname.lastname@example.org). This type of investment is not suitable for those investors who do not wish to take any risk on their money.
Irish Life’s MAPS do have one additional safety feature with their Dynamic Shares to Cash (DSC) option. This is triggered by the algorithm detecting global uncertainty and at a certain point automatically transfers funds without your permission from the more aggressive funds to the cautious ones restricting the losses if they occur.
With the Bear market around the corner – we are currently in the 8th year of the 2nd longest Bull market .. the longest was thirteen years from 1987 to 2000 stopped in its tracks by the dot-com bubble crash – no one can predict when that 20% drop will happen, the percentage needed to go from Bull to Bear.
John Lowe is a Personal Insolvency Practitioner & managing director of Providence Finance Services Ltd trading as Money Doctor, regulated by the Central Bank and based in Stillorgan Co Dublin. He is the author of Money Doctor 2017 (Gill Books).