Do you know the difference between 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.
We have had 26 BULL (rising) markets to date and 26 BEAR (falling) markets – for the BULL to become BEAR, the market has to drop 20% and leaves a sour taste for most stock market investors. Coupled with deposit interest rates still relatively low and getting lower after the 4th straight ECB cut in recent weeks, investors are moving away from deposit takers and the paltry returns available and looking for other alternatives to grow their money.
Alternative investments where the returns might be considerably more attractive take the form of speculative and risk-laden options such as:
- Wine investment (a case of Pomerol Le Pin 1982 bought for $400 is now worth €125,000)
- Classic cars ( the light blue 1967 Triumph Herald estate over Paul McCartney's head on the iconic Abbey Road album cover sold by Dublin classic car dealer David Golding and bought by comedian millionaire Jeff Dunham is now worth over $100,000)
- Numismatics (coin collections) and philately (stamp collection)
- Rock 'n roll memorabilia (I have the first Beatle record My Bonnie recorded and charted in Germany in 1962 and worth a pretty penny)
- Diamonds
- Precious metals
- Art
- 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 oil crises, earthquakes, floods, famines, credit crunches, the world is a different place than it was 17 years ago. Is anything safe today? John Lowe of MoneyDoctors.ie tells us more…
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 had a boom for over 11 years when the stock market dropped at least 20% (BEAR).
Cash is currently King - or Queen as the case may be. Staying "liquid" or having a Rainy Day Fund imperative for three very good reasons.
1. Emergencies – your clutch goes (for the uninitiated, that’s part of your car!)
2. Sudden income loss – no bonus this year
3. Investment opportunity – a house deposit...
Therefore, savings are key to any 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 overpriced by at least 10% currently and could be a seller’s market…you just might buy at too high a price. It is also not just the location and price that makes some properties attractive to buy, but properties - commercial or residential investment - with long-term guaranteed rental income will generally 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 buzz word is diversification and while, as I said, cash is King, consumers still want their cash guaranteed as per the Deposit Protection Scheme (€100,000 per person per institution includes credit unions – windfalls and inheritances over this amount up to €1,000,000 are allowed up to six months for this guarantee).
Cash – remember the three deposit categories
- Demand accounts (make withdrawals at any time). Best demand account currently is An Post Money’s demand account at 0.75% ( 0.5025% net after DIRT tax )
- 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 fixed).
Amounts vary from a minimum €1 to €100,000 and in some cases a maximum of €1,000,000 to no maximum. Rates can vary but you do 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.
Best long term deposit is NTMA’s 10 year National Solidarity Bond (available in post offices or online) offering 22% tax free on maturity – equivalent to 3% gross each year…minimum is €500 and maximum €120,000 per person. Capital and interest are guaranteed by the government. Safe.
The Regual Savers Account can pay slightly lower rates if you can commit to a minimum of €100 per month up to in some cases a maximum of €1,000 per month for 12 months – the best rate in this category is AIB Bank and Bank of Ireland at 2% (12 month savings).
If you do not have a savings plan, I beg you to start one now.
The stockmarket is cyclical and can change from day to day, 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 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.
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 stockmarket 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 – Irish Life’s Multi Asset Portfolio funds, Standard Life’s My Folio funds and Zurich’s Prisma funds to name but three. 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, commodities such as gold (up over 50% this year alone) and such like depending on how risk – averse you are, will minimise that risk.
The prudent investor will not have all those eggs in the one basket. Advice, again, is so important and cannot be stressed enough.
While all investment is risk, Walt Disney summed it up in one sentence: "All our dreams can come true if we have the courage to pursue them" – he never sat on his assets.
For more information click on John Lowe's profile above or on his website.
