Investment through the ages

Knowing how to invest and maximise a return on that investment can leave a lot of people scratching their heads. From the young person just starting out in life, saving for a mortgage and trying to squirrel away a pension, to the mature person who has sold a business and has more diverse wealth management needs, the decisions can be challenging and far-reaching. We spoke to two experts about how both younger and older investees might proceed in current markets.

Wealthy entrepreneur

Head of portfolio construction with Davy, Eoin Corcoran, explains how a more mature person or someone with significant wealth might approach financial planning: “For someone who has sold a business, the key questions presenting to them are along the lines of: Do you want to go again with another venture? If this is a possibility at some point in the future, then you may want to keep some capital back for that. If it is your intention to do that straight away then you should ringfence some funds to act as income replacement for a number of years and then establish how much capital will be needed for this new project.”

If you do not intend to start another company and instead are looking to invest, then you should think about the following things, he says: “Are you comfortable in giving up control? Entrepreneurs tend to be very focused and driven and used to changing things if not going well. Investing can often run counter to this, where you need to stick with a long-term plan. This can often be challenging but should be considered before you start investing.”

What is the level of return that you require to meet your long term needs? “Business owners will often seek to maximise returns as much as possible and are willing to take a high degree of risk in doing so. At this point in your life do you need to take on much risk to meet your objectives?”

Saving for children

In terms of looking after children’s educational needs, specifically third-level education, Corcoran says: “If you want to avoid college costs coming from current spending, when your children reach this stage then it may make sense to set up a dedicated amount to grow capital to the required level. Education fees continue to rise, so a return well in excess of inflation is likely to be required to keep which would correspond to a strategy with higher-risk assets. Whether your children will live at home or out of home can add substantially to the cost and while you won’t know definitely, making an estimation of those costs can help you understand what initial amount is required to seed this account.”

Young professional

Investment Strategist with Investec, Daniel Moroney, says it can be tough for young people to set aside funds for a pension, given the cost of saving for a mortgage, high rents and the cost of childcare, but putting aside even a small amount at a young age will pay off.

“Someone under 40 should be saving for a pension to whatever extent they can. It’s a very expensive time in your life, when people have young kids and it can be impossible to set aside extra cash, but to whatever extent you can you should. It’s the closest thing to a free lunch in investing; the tax break on the way in alone is very significant. If you can afford €100 a month, then €200 goes into your pension and the power to be able to grow that in a tax-free environment is an incredibly powerful dynamic.

From the investment providers perspective, it’s very simple. “The pension should be invested in diversified equity, as the person has no fear of a short-term market correction.”

He says taking their pension in total isolation, they should hope for the stock market to fall quite significantly, by a double digit percentage, and stay down for several years.

“Because they’re clipping in regularly every month, they should hope it stays low all through their 40s and as they approach retirement, in the ideal scenario, you would then see the stock market rally. It’s hard for people to grasp and obviously there is a bigger picture, in a huge recession that person could lose their job, so I’m being very careful in saying this is purely from a pension perspective”.

Put simply: “People who are making regular contributions to the global equity market, if the market falls, they are making the same financial contribution but are getting more units of the global market at a cheaper price.”

Corcoran says the most important advice for an investor in relation to their pension is to start now. “While initial contribution amounts may be small, the advantage of starting when you’re 30 as opposed to 40 can have a material impact on the amount you need to save over your working life.”

If your employer offers matching for a portion of your contributions, you should avail of this to help your capital grow.

“Avoiding the current headlines about markets is also important as your time horizon for investment is going to cover multiple market cycles. That time horizon gives you the opportunity to take a higher level of investment risk, as you can wait out poor performance periods and in fact grow your contributions at times like these. It’s best to avoid the temptation of investing in single stock and instead focus on a diversified approach that will give you the returns you need,” he says.

Sidebar: Elaine has sold her business for €5million and is in her mid-50s. She now wants to live out her life on the proceeds of that sale and to ensure she has the same standard of living, if not better, than what she has had throughout her life.

Dan Moroney from Investec advises her of her options:

Firstly, I would advise her to clear any outstanding debt. A tracker mortgage that is very easy to service is fine but any debt at a high interest rate should be cleared.

It’s a particularly challenging scenario out there at the moment and will continue to be for some time. Under ordinary conditions she could put a significant portion into government bonds and live off the interest of that, with a smaller amount of cash invested in more volatile assets but with interest rates at 0 per cent or negative, she will get no return. That is no way to preserve capital in the long term.

The most important thing is to think long term and that means for her to really understand what risk is for her. Risk is generally used synonymously with volatility and for someone who is looking to live off a lump of cash for possibly decades, it’s a very dangerous assumption to make that volatility is a bad thing. A sensible approach to embracing volatility is what she should be looking at.

Investing in short-term or long-term government bonds will not give her any return, that’s what risk is for this investor. When you read that they are conservative/ low risk, that is very misleading, they’re actually risky in this scenario.

Cash of €5million in a bank won’t fall to €4.5million but over the long term it will not keep pace with inflation. She needs to think, in 20 years time, will I be able to continue funding the lifestyle that I think I deserve? She shouldn’t be frightened of short-term volatility as the assets that will have ups and downs are the ones that will give her the best returns.

So look at equities, listed properties, even physical property, although she can’t look on a computer screen to see what her apartment valuation is every day. Invest a sufficient amount in assets that will be volatile but to do it in a way that avoids the risk of any permanent loss.

The individual must focus on quality, and remember there will be dips. There might be a temptation to invest in private equity, for example a new restaurant or bar. That’s a very high-risk investment as it can go to zero and I wouldn’t advise that.

However, if for example, it is €50K of a €5 million lump, that may be okay for her as long as it’s done with eyes wide open.

The huge majority of the capital should be blended between high quality assets in a liquid diversified way, spread out geographically around the world. It won’t be immune from taking a dip but the risk of permanent loss is gone.