In an ideal world we would be able to invest our money securely and expect a fairly decent return. But life isn’t like that. Security comes at a price and these days that’s a very low or even a negative return. Indeed, as Emmet Leahy, head of financial planning with Davy, points out, banks have taken to charging people for putting their money on deposit.
Even low interest rates will not protect the value of your money, as Bank of Ireland head of pensions and investments Bernard Walsh explains. “If you have savings of €500,000 on deposit at a rate generating a zero return after DIRT has been deducted, the effect of a 3 per cent inflation rate over five years would be to reduce the value of those savings by €70,000.”
But that doesn’t mean you should just go chasing the highest returns for the sake of it. Investments should be matched to your personal needs and life goals.
“Start with what’s important to you,” Leahy advises. “That is, what do you want your money to achieve today, over the lifetimes of you and your family, and possibly for future generations. Without starting with this crucial piece, it’s like jumping into your car and realising you have no idea where you want to drive to.”
Low returns
Investment choices will mainly boil down to the traditional asset classes of cash, bonds, property and equities. Cash still has its place despite its poor returns as a deposit account offers a secure home for money required for short-term needs.
Next on the list is bonds. A bond is a debt instrument issued by a government, public body or company. Returns are pretty low at the moment as their yields tend to be quite closely linked to market interest rates. But they still have their place, according to Leahy.
“Returns are expected to be low across different types of bonds in the near term but for money needed in the short term, there are definitely options that can meet that need which will beat the negative rates being experienced on cash and a well-diversified portfolio between different types of bonds and geographies can make sense in this regard.”
Regular savings plans which offer better returns than standard deposit accounts are another option, according to Killian Nolan, head of product with Cantor Fitzgerald. “This is a medium- to long-term investment where you drip-feed the money in over time. There are other capital protected bond products, but they are not for everyone as they tend to be five- or six-year investments.”
Despite the turbulence experienced during the great financial crisis, property remains an attractive investment option. The downside is its relative lack of liquidity – it’s hard to get your hands on the cash invested if you need it in a hurry.
Extreme volatility
Equities offer by far the best returns over the longer term, but they can be subject to extreme volatility so are not for the fainthearted. “There really is no alternative if you are looking for substantial growth,” says Walsh. “Investing in a well-diversified portfolio of shares is likely to deliver a decent return.”
But there is always the risk of a market crash. This can be mitigated by diversifying the investment across the other asset classes through a managed fund. “Managed funds are invested in thousands of companies and bonds issued by hundreds of governments. For the property element, you could be looking at owning a piece of 60 or 70 different commercial properties.”
Leahy agrees: “A portfolio diversified across long-term asset classes such as equities, real estate and alternatives can help here to ensure that there isn’t over-concentration to any one investment or asset class. For long-term investors with a higher risk appetite who want to make money work harder, a lower allocation to defensive assets can work to offer a higher expected return over the long term.”