How do you confuse investors? Place three shovels against the wall and ask them to take their pick. Choosing the right vehicle for your money can not only be as confusing but it can cost you dearly. John Lowe of MoneyDoctors.ie has the answers.
With 14 different asset classes from property to cash, and equities to commodities together with geographic options, currency and security issues, investment can be tricky to navigate.
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 rate currently is 0.01% - net 0.0067% after DIRT tax deduction.
The current best deposit product in Ireland is National Management Treasury Agency (NTMA – a government body that looks after all the cash for the government, including An Post and Prize Bonds etc) and their National Solidarity Bond... a 10 year investment yielding 10% tax free on maturity and on a gross basis equivalent to an annual 1.43%.
Perhaps for your children's education – 3rd level alone can cost up to €42,000 per child and that is without fees (source: Irish League of Credit Unions) for medium term capital requirements – a holiday home or extension? Saving for that special holiday or even your children’s weddings.
Retirement / Pension
If you are not happy to live on the current State Pension of €253.30 per week - which may not be there at all in 30 years’ time - then you will need to invest in a solid pension that may supplement the State Pension when you retire). In 2021 for every person who retired there were five workers, but by 2051 for every retiree there will be only two workers. Problem is we will have three times the retirees that we have today – 1.8million!
Approved Retirement Funds investment
On retirement where you have opted for an ARF as opposed to an annuity, you have to invest the balance of your pension fund after extracting the tax free lump sum to maximise the return on same as the annual withdrawal (called imputed distribution) of 4% per annum over 60 years of age, 5% when you hit 71 years of age plus annual management charges of c. 1.5% annually may drain the fund quicker than you think.
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 generally choose investments with little risk, e.g. cash, government bonds, while those in their mid 30s may have a different mindset and choose riskier options e.g. emerging markets, renewables, technology stocks, etc.
However, if you want growth in these times, you will not find it in cash or bonds… therefore you have to take a little risk but this risk can be measured with expert advice.
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, reviewed 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 therefore, uncluttered and easy to understand is key for the average investor. What is also key is that changing nature of investment. Currently equities still outperform the market despite wars, viruses and recessions.
From 1991 to 2020 – 30 years – the average annual stock market return was 10.72%. However, the stock market is cyclical but as Warren Buffet stated the stock market is a mechanism for transferring wealth from the impatient to the patient. But having the flexibility to be able to swap into different investment vehicles without cost and without fuss is essential.
First things first – work out what is your attitude to risk. On a scale of 1 to 7, where one is lower risk and seven is higher risk, where are you? The European Securities Marketing Authority (ESMA) are the body who categorise every single stock share and company in the world from 1 to 7, the lower the number the lower the risk.
Once you have established your 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 their five funds that match their five risk levels (most of the insurance companies who do managed funds exclude categories one and seven as they regard them as too extreme).
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 four 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 & 5 (medium to higher risk).
Annual management charges range from 1.15% to 1.35% and for those wanting to see precisely the make up of every investment in all of these models, email me for the fact sheets (email@example.com). 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 minimising the losses if they occur. Peace of mind.
If you need clarification on any of the above or wish to complete a risk questionnaire to determine where your attitude to risk is please email firstname.lastname@example.org.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ.