As we hurtle towards Christmas, it is an opportune time to have a look at how your financial assets have performed during 2018 and start thinking about what to do in 2019.
For many people this has the same appeal as sticking hot needles in to their eyes but in today’s world the subject’s importance has never been greater. The hurdle rate when considering any investment is the inflation rate as that determines the real value of money.
In 2018, inflation in Ireland has been 0.5%, so to generate what we call real returns every €100 must be worth at least €100.5 by year end.
Starting with cash, the deposit rate is about 0.25% but that has minimum sums attached. While cash is an
important store of value, it has not helped drive your overall portfolio this year and has acted as a drag on real returns.
The picture is brighter for anyone with a house as average prices have moved up about 6%.
As houses are often the largest asset owned by an individual this price movement is important; a three-bedroom house valued at €250,000 last January had added €15,000 to your wealth and if that is your primary residence it is a tax-free gain.
Moreover, if you have been diligently chipping away at an associated mortgage you have probably reduced that debt by at least 4%, so the combined effect on net wealth is not to be sniffed at.
Equities have lived up to their reputation as the highest risk asset class in 2018.
The Iseq, for example, has dropped 14% and certain company shares have declined by a much greater degree.
It is years like this, following a run of strong annual returns, that remind us how important diversification and stock selection can be.
Bonds have returned little during the year with the Irish long bond falling in value by about 1% and its yield compensating by a similar amount. Gold prices have been volatile in dollars but when measured in euro are broadly flat.
Of course, how all this converts for an individual depends on the blend of their asset mix and also how that is structured in a tax context. Furthermore, you must consider how much capital you added during the year and how much income was generated in hard cash via dividends and coupons.
Taking a helicopter view, it would appear as if most Irish income earners, being houseowners, have probably added to their net worth during 2018.
The standout under-performer this year is equities and that poses more of an opportunity than a challenge. Amid the broad selloff in equities are many companies that are well managed, generate strong returns and are trading at valuation multiples that have not been seen for a number of years.
Equities, as an asset class, have strong, long-term performance credentials, so the setbacks evident in 2018 create a window to invest for the future.
I particularly like to find companies with profit ratios that are at multi-year lows while delivering a well-covered dividend that is growing faster than inflation.
It is worth reminding everyone, too, that the surefire way to create positive returns is to use Father Tax as an efficient way to deploy savings and capital.
The exchequer allows you a large tax break, at the marginal rate, for monies invested in long-term saving and investment funds.
That allows the gross money work for you, often for decades, before drawing down income.
Any long-term study shows this as the easiest way to create wealth so please apply that lesson to younger friends and family over the coming holiday.
Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal