As Albert Einstein 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.
The best demand account available currently is 0.01% up to €100,000. Deduct DIRT tax (Deposit Income Retention Tax - 33% of interest earned goes to the government) and you're left with 0.0067%, and definitely not worth getting out of bed for!
Current deposit interest rates are so low that the credit unions are one of the first to suffer negative interest rates on funds left with AIB Bank (they charge 0.65%) and Bank of Ireland (they charge 0.4%) on surplus funds their members lodge with them. That is why most of the credit unions around the country have reduced their thresholds to keep costs down.
So where are the best rates?
The best deposit return in the country is the National Treasury Management Agency’s (NTMA) State Savings – their National Solidarity Bond yields 10% TAX FREE after 10 years. Grossed up at 33% (the DIRT tax rate) it is equivalent to 1.43% each year.. maximum investment is €120,000 per person… but it is safe – guaranteed by the government.
So where to go now for that much needed growth on your hard earned savings?
Quite easily, the stock market is the best return of any asset class including property, commodities (gold etc) ... the S&P 500 index fund over a 30-year period (1991 to 2020) produced an average annual growth rate of 10.72%!
As billionaire nonagenarian Warren Buffet once remarked, the stock market is a mechanism for transferring wealth from the impatient to the patient. 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. If you want any kind of growth not only do you have to take a little risk but you won’t find growth in deposit accounts!
Interest rates are likely to stay low for some time, so what can investors looking for better returns do? If you want growth, as I said, you MUST take some risk…and to make the decision to invest outside of those deposits.
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 $400million today.
The easy route to the stock market is via managed funds, not individualising stock selection. Managed funds are easy to understand and simple to operate plus 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 by a numbered level of risk from 1 to 7 – the lower the number the lower the risk. The European Securities Marketing Authority (ESMA) are one body that categorises every stock share and company in the world on a scale of 1 to 7.
All the insurance companies offer managed funds but most only categorise five funds – 2 to 6, deeming the first (1) and last (7) category too extreme … so #2 category being the cautious fund (government bonds, cash funds) and the #6 category being the most aggressive fund (emerging markets, technology and energy stocks, BRIC countries etc).
Find your risk attitude
The trick of course is to find your risk attitude and invest accordingly. Normally investors would complete a risk questionnaire to determine their attitude.
Investors also have the ability to swap back, generally at no charge, at any time to more cautious funds if you can’t stand the heat of the more aggressive funds – at the touch of a button.
These funds stay in their lane or risk categories. There are also some special features with some of the managed funds 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 most cautious fund (government bonds, cash funds – and safety again).
Zurich have a similar competitive offering in their Prisma funds investment as do Standard Life’s MyFolio Active funds. All of them allow switching funds but remember these funds are medium term investments – 5 years or so as withdrawal penalties on a reducing basis (5% down to 1%) 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 in your investment at that point, you will pay a withdrawal tax on that profit then, currently 41%. No tax is payable before then – this is called gross roll up. Get professional advice or email me for further information.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ.