You might know what a tracker mortgage or the price of milk is but do you know the difference between a BULL and BEAR? I am not talking animals here but terms used in financial circles to describe the ebb and flow of the stock market, the best asset class bar none.
From 1991 to 2020 the average annual growth in the stock market was 10.72%. There have had 26 BULL (rising) markets to date and 26 BEAR (falling) markets – March 2020 saw the BEAR arrive.
For the BULL to become BEAR, the market has to drop 20% and generally, it leaves a sour taste for most stock market investors.
Coupled with deposit interest rates still on the floor (current best demand deposit interest rate is 0.15% and that's before Deposit Interest Retention Tax – DIRT – of 33% to 0.1005% ) investors are not flocking to deposit takers either with their cash for the paltry returns available.
Alternative investments where the returns might be considerably more attractive take the form of speculative and risk-laden options such as:
- Wine investment
- Classic cars
- Numismatics ( coin collections ) and philately ( stamp collection )
- Rock 'n roll memorabilia
- Precious metals
- Employment & Investment Incentive Schemes (EIIS) & other tax based schemes
One definition of the word safe in the Oxford English dictionary is free from risk. In light of asset performances in recent years, there is not a single investor who could state their investment is risk-free.
Between pandemics, the rising cost of living, inflation, oil crises, earthquakes, floods, famines, the world is constantly changing with regular economic challenges every day. Is anything safe today?
Staying positive is crucial. Remember, first of all, downturns do not stay down forever, and neither do Bull markets stay up. Everything is cyclical – here in Ireland, we had a boom for over 11 years til March 2020 when we saw the stock market drop at least 20% (BEAR). We are still waiting for the next BULL (rising market).
Cash is currently king, or queen as the case may be. Staying "liquid" or having a Rainy Day Fund is imperative for three very good reasons:
- Emergencies – your boiler goes.
- Sudden income loss – no bonus this year.
- Investment opportunity – a house deposit...or buying that bottle of Romany Conti (1995) for €40,000.
Therefore, savings are key to the next boom. The question is where to invest in the meantime if you have savings and what to do if you don’t.
The property market is becoming stagnant again and could soon be a buyer’s market…you just might find that bargain. It is also not just the bargain prices that make some properties attractive to buy, but properties - commercial or residential investment - with long-term guaranteed rental income will always sell.
Aside from property, the other asset classes of cash, stocks, bonds, and alternative investments should be examined and scrutinised for wealth preservation and growth. The buzzword is diversification and while, as I said, cash is king currently, consumers still want their cash guaranteed as per the Deposit Protection Scheme ( still € 100,000 per person per institution including credit unions).
Cash – remember the three deposit categories:
- Demand accounts ( make withdrawals at any time )
- Notice accounts ( you have to give notice – from 7 day, 30 day etc )
- Fixed interest rate accounts ( you MUST invest for the period agreed – no withdrawals are allowed. Periods from 1 month, 3 months, 6 months to 1,2,3, 5 and 10 year fixed0
Amounts vary from a minimum €1 to €100,000 and in some cases a maximum of €1,000,000 to no maximum. Rates are still low with recent interest rate rises not reflected in deposit rates. But you do still need to shop around. If you have the time and patience, you could open a myriad of accounts in different institutions availing in many cases of the €100K threshold policies of these deposit-takers.
The best long-term deposit is NTMA’s 10-year National Solidarity Bond (available in post offices or online) offering 16% tax-free on maturity – equivalent to 2.24% gross each year…minimum is €500 and a maximum €120,000 per person. Capital and interest are guaranteed by the government.
The Regular Save Accounts pay slightly better rates if you can commit to a minimum of €100 per month up to in some cases a maximum of €1000 per month – the best rate in this category is Bank of Ireland at 0.75% (12-month savings) If you do not have a savings plan, I beg you to start one now. A great discipline irrespective of the interest rate offered.
The stock market is cyclical but can change from year to year. The trick is timing – buying in at the lowest price and cashing out at the highest, or when you want to retire. Ahh, but you would need a crystal ball I hear you say. Some of the stockbroking houses have incredible research facilities and can give you a bell, book and candle on your preferred stock and the way it might move. However caveat emptor – they are not psychics and your decision when to buy or sell can make or break your investment.
The decision, albeit an informed one perhaps, is yours and while you may delegate that decision to your stockbroker (called discretionary) you are in essence giving your stockbroker authority to gamble with your money and if you suffer losses, excuses as to how it happened.
James Goldsmith is famed for his comment: "If you see a bandwagon, it’s too late", while the world’s richest man Warren Buffett stated the truth: "The stock market is a mechanism for transferring wealth from the impatient to the patient."
Still, I like the new breed of managed fund – easy to understand and simple to operate – offered by most of the Irish insurance companies. Email me for details.
Taking the blunderbuss approach where you spread risk as much as possible across a whole range of stocks, bonds, managed funds and such like depending on how risk-averse you are, will minimise that risk. The prudent investor will not have all those eggs in one basket.
Advice is so important and cannot be stressed enough.
For more information click on John Lowe's profile above or on his website.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ.