The 2020 pandemic did not affect interest rates but it has certainly affected the investment market. I like the quotations of Albert Einstein, who 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 model put it.
The best demand account available currently is 0.15% up to €100,000. Deduct DIRT tax (Deposit Retention Income Tax - 33% of interest earned goes to the government) and you're left with 0.1005%.
As one of my favourite celluloid characters, James Bond, stated: "Not exactly Christmas, is it?"
In 2014 PRSI (Pay Related Social Insurance – 4%) was first deducted on interest earnings and with inflation, you could actually be at a loss leaving money with a deposit taker. The Credit Unions certainly are as they are now being charged for their customers’ deposits with AIB Bank and Bank of Ireland 0.65% and 0.4% respectively.
Deposit interest rates
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 in Ireland…
- 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 33% (the DIRT tax rate) it is equivalent to 1.4925% each year... maximum investment is € 120,000 per person
- Best 10-year return is the NTMA’s National Solidarity Bond yielding 16% net tax-free on maturity. This is equivalent to a gross annual rate of 2.31% - the best deposit rate in Ireland. The maximum investment again is €120,000 per person.
So where to now for that much-needed growth on your hard-earned savings? For the last 11 years until last March, the second longest and 26th BULL (rising) market raged – the stock market had grown over 200% since March 2009 despite the many global, fiscal and economic issues we had to deal with during this period….but where to now with the arrival of the 26th BEAR (falling) market?
Is the next market a BULL?
Trying to individualise stock selection is a mug’s game. No one – stockbrokers, clairvoyants, financial advisers – can predict what is going to happen or when. All one can do is take educated risks and spread that risk… investment is not just about managing risk but it is about taking it too.
Interest rates are likely to stay low for some time to come so what can investors looking for better returns do?
If you want any kind of 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 substantial prospect of a return far in excess of the current deposit rates to justify the decision to swap over to alternative better-yielding investments.
One of those choices to move out of deposits is to invest in the stock market – the best asset class return of any sector over any period of time. As Warren Buffett stated the stock market is a mechanism for transferring wealth from the impatient to the patient.
Investing $10,000 in Berkshire Hathaway (Warren Buffett’s vehicle) in the late 50s would see your investment at $400million today. The easy route to the stock market is via managed funds as most offer a cash/government bonds option - safety in volatile markets - within those managed funds.
Index funds do not have that cash safety option while managed funds are 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 generally from one to seven – the European Securities Marketing Authority (ESMA) categorise every stock share and company in the world between these numbers… the lower the number the lower the risk and vice versa. From cautious funds (government bonds, cash funds) up to aggressive funds (emerging markets, technology and energy stocks, BRIC countries, etc)
The trick is to determine 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 managed fund features such as Irish Life’s Multi-Asset Portfolio (MAPS)’s DSC – Dynamic Shares to Cash – a mechanism whereby there is automatic switching from aggressive funds to passive on economy affecting events – such as Coronavirus… money is transferred automatically via a clever algorithm from the higher/ aggressive funds to the lowest or most cautious fund (government bonds, cash funds – and safety again).
Alternative investments such as art, precious metals (gold – the barometer of volatility – surged over 45% in the last 6 months) wine investment, philately, numismatics, rock ‘n roll memorabilia, scripopoly and classic cars and bikes can all play a part in a balanced portfolio – as they say don’t put all your eggs in one basket.
Whatever you do, take professional advice or email me.