As a Financial Advisors this is the question I hear more than any other; Where can I get a decent return on my money? With deposit rates at historic lows investors cannot earn a good return without exposing themselves to some degree of risk/volatility and it is this uncertainty that scares many people away. However, as with most things that frighten us it is often our ignorance that is the real enemy and perhaps by acquiring more knowledge we could overcome that fear or at least learn more about what exactly it is we are fearful of. I often hear people saying things like ‘Could I lose all of my money?’ or ‘I know someone who lost everything’. It can be difficult for a Financial Advisor to overcome what very often are misinformed and somewhat hysterical ‘opinions’ formed by some half-listening to others along the way. Like a bad game of Chinese Whispers these others had probably formed their opinions in a similar fashion. It might be helpful therefore to stand back and look at some facts about investing.
(I) Any guarantee is only as reliable as the strength of the Provider. A good friend of mine came to me a few years ago and told me how a highly regarded professional acquaintance of his was offering 10% return per annum for 3 years for a €100,000 loan with the capital repaid at the end of year 3. The borrower who lived in a big house and had all the trappings of success was offering a Personal Guarantee as security against the loan. I advised my friend that if his acquaintance was so successful why would he pay 10% for money when theoretically banks were lending at half that rate. Clearly that indicated this was high risk. Against my advice my friend lent the money and of course never got a cent back. The personal guarantee backing up the loan was worthless as the borrower subsequently went bust and it turned out that while he did own a lot of assets they were heavily leveraged so he was in fact insolvent. To me it was obvious but to my friend his ‘greed’ overruled his logic.
(II) Nothing in life is without risk. Every day you get up you are risking life and limb. So, we shouldn't be afraid but, we should learn how to assess risk and make sure that when things go wrong as they inevitably do sometimes we have controlled our exposure so that we can cope with the outcome.
(III) The banking industry is based on them lending many multiples of the actual money they have at their disposal. It is not without risk. Banks go bust, fact. Not often but it can happen.
(IV) Inflation has to be a factor. Your €1 today will not have the same purchasing power in the future.
(V) Tax also is a factor. In Ireland DIRT tax on deposits is 41%. So you place €100k on Deposit to earn 2% p.a gross of which you lose almost half in tax. To me that investment only makes sense if you need access to the money OR are convinced asset values (stock markets etc) are about to fall.
(VI) Time is a factor. The more time you expect that you will be able to leave your money invested, the more risk you can potentially take (within reason). Asset values rise and they also fall but over time they tend to trend upwards. The longer the time frame the likelier this to be the case.
I have been in this industry almost 20 years and if there is one thing I have learnt in relation to investing it is that it is usually better to buck the trend. If everyone is buying property you should probably be selling. Equally if everything is falling heavily in value you should be buying. It takes great discipline to do this as you have to fight against your natural greed to join in when things are over-exuberant and you have to fight your fear to be brave to go in when others are exiting.
In Ireland in recent years the Investment Providers have adopted the European Securities and Marketing Authority (ESMA) system of ranking their investment funds from 1 to 7 based on volatility with ‘1’ being ultra low risk/volatility (cash etc) and 7 being high risk/volatility. By giving each of their funds the appropriate rating it makes life a lot easier for us as Investment Advisors and you as Investors to assess risk and to match your desire for growth balanced with your aversion to volatility/risk. In recent times, I have seen many of my larger clients favouring funds with a rating of 2 or 3 as they seek a better return that deposit in return for which they accept they may see a small drop in their capital but it should be no greater than 5% annualised over 5 years (worst case). They consider that low level of risk worth taking as they can benefit from significantly better returns by having some exposure to equities/property/bonds etc.
Advising somebody about their investments is always challenging as everyone is different. Whether it is a pension pot of €2m or somebody who has inherited €50k there are many considerations and it is always a good idea to seek independent financial advice and not just to expect balanced advice from a bank who will only be interested in selling you their wares.
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