Save wisely and sleep easy

We all want a decent rate of return on our savings but to do that usually means taking some risks. We look at the options open to savers seeking safe, secure growth. When clients ask for safe savings options, David Quinn, managing director of Investwise, says his first recommendation is to shop around for the best ‘regular saver’ accounts.

These options tend to be packaged as ‘Child Saver’ or ‘Family Saver’ accounts and all life assurance companies and smaller banks have some on offer.

“They offer higher-than-normal interest rates, typically for monthly savings up to €1,000 per month. They also cap the balance at between €5,000 and €50,000. The life assurance companies all offer monthly savings accounts, which can be invested in a wide range of funds. These will tend to be longer-term savings vehicles, where the investor is looking to take some short-term risk with their capital. Beware though, as some of these accounts can be very expensive, so ask your adviser to break down the charges and commissions,” he says.

Lower-risk options are less attractive now than they were 10 years ago, according to Quinn, with bank deposits yielding less than 0.50 per cent now, even for one-year fixed deposits.

“Prize bonds will give good access and security, but only a very slim chance of any return. The bond markets look very expensive now and, while they are secure in terms of Government backing, they are likely to produce negative real returns in the coming years,” he says.

For regular savers, the sleep-easy option is to invest your savings in a cash or deposit account that has very little investment risk, but in the current environment, offers very little potential for return, Diarmuid Corcoran of Wallstone Financial Planning says.

“Smart savers understand the power of investing regularly and capitalising on the returns that the stock market can offer over the longer term. Numerous studies have demonstrated the benefits of investing on a regular basis and the power of compounding interest. We encourage all savers to embrace this concept, the main point being to start sooner rather than later,” he says.

Short-term certainty

In fact, a preference for short-term certainty can end up costing you money in the long term. That’s according to Eoin Corcoran of Davy, who says: “While we don’t have to face up to the potential regret of experiencing a fall in the value of investments, it ignores the longer-term challenges we face. What do you perceive as the bigger risk to you? A fall in value of your investments in the short- to medium-term or not having sufficient funds later in life to meet your needs?

“There is risk involved in both scenarios, but the second is clearly much more consequential. So what can you do about this? Initially, it comes down to understanding what the experience of being a long-term investor is and aligning your expectations to this.

“A diversified portfolio containing a blend of investments is the bed-rock for anyone looking to grow their money over the long term. While it can’t avoid falling in value from time to time, it avoids concentration and leverage which are the major risks to investors,” Corcoran says.

Quinn says risk in investments is inextricably linked to the time horizon for the investment.

“I would argue that anything other than an equity portfolio is actually the high-risk option for a pension investor in their 20s. Only equities or high-growth assets can guarantee real growth and protection against inflation over a 30-year period. However, this can be too volatile over a short period of time (less than five years). A simple rule of thumb that I use for savings is to add more stock market exposure for every five years you expect to hold the investment. If it is less than five years, hold only a small level of equities and if it is more than 20 years – ie pension – there is scope to invest completely in equities,” he says.