Interest rates are low; very low, and staying low for a considerable time. This has a dramatic impact on savers, annuity holders, and investors: No compounding of interest, inflation eating into your capital, and maybe negative interest rates to come.
There are €95bn of retail deposits in the banks and building societies in Ireland; another huge sum of money in Approved Retirement Funds (ARFs), and then investors with lump sums. But what are they all going to do?
Well, firstly, the good news is that there are returns available, but they are not down the traditional route of deposits or tracker bonds.
Certain asset classes look toppish, like equities, and certain asset classes are now too risky, such as bonds.
There may be something left in the property cycle, but that, too, will carry risk, when investing at these levels.
Any products on the market that are offering low returns, like 2% or 3%, for some capital guarantee, are a waste of time when deposit interest retention tax (DIRT) of 41% is taken into account. To achieve a return, we definitely need to take on a little more risk, but in a controlled, diversified fashion.
There has never been a better time to access the market, from an investor’s point of view.
Modern technology gives access to diverse asset classes at very competitive rates. It also allows a degree of flexibility, which can provide early access to cash, if necessary.
The economic outlook is mixed, at best. Low growth and low inflation dominate the major world economies.
After trillions of dollars of quantitative easing in the US, their economy may be slowing down again.
The banks have huge credit exposure to commodity-producing countries and companies, and while commodity prices remain subdued, that risk is a time bomb.
In 2008, it was loans to the property sector that imploded. This time, the same risk exists, but just to a different sector.
The market is certainly not a safe bet, and even all that money on deposit is not 100% safe. If there was another banking crisis, depositors would be bailing out the banks.
However, we can still navigate the market for a return, but we cannot justify naked equity or bond exposure, at this time. So, at Baggot, we like the following principles and products:
Be diversified. Don’t have all your eggs in one basket. That may sound like common sense, but you would be surprised how many people ignore it.
Understand the product you buy. That means credit risk, market risk, commissions, and potential returns. If you cannot understand the product, get some education; it is your money, after all. Would you buy a car without knowing something about it?
Understand timing. ‘Dumb money’ buys at the wrong time in the economic cycle. Top of the property market, top of the equity market, etc. Smart money buys when everyone else is bailing out. Can you recognise those times?
Product-wise, right now we like ‘Absolute Return Funds’. Basically, this is the ability to go long or short of a range of diversified assets. There are many of these products on the market, so get advice as to which is best.
‘Absolute Return Funds’ allow your investments to switch quickly in a market with little defined trend.
We also like some alternative investment classes, such as invoice trading.
They offer a secure, high-yielding, short-duration replacement to low-yielding safe havens, and are also an uncorrelated asset class.
Currency exposure can also be deemed an asset class, and, at times, it makes sense to have some of your portfolio in other currencies, besides the euro.
Property still has a way to run, especially in Dublin. We do not recommend physically buying it, but, as a more effective route, we can buy an REIT (real estate investment trust), and they are quoted as a stock.
That allows a quick exit, if the market turned.
Basically, investing is still seriously worthwhile. You just need to understand what you are buying and not leave decisions solely to your advisor.
Look on your relationship with your advisor as golfer and caddie, and you are the golfer!
Get some education, if you need it. Take on some risk to get your return. Be diversified; that’s really important.
Understand that markets go up and down and that you have to spend some time in the market to get a return.
Be willing to wait until the cycle is opportune to enter certain asset classes.
Peter Brown is owner of Baggot Asset Management Ltd; Baggot.ie
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