If yours is one of the households that have accumulated extra savings in the last year, John O’Driscoll of Blueprint Financial Planning warns against leaving it all sitting in a bank account.
“Recent figures show there is over €124 billion on deposit in Ireland at present, which is a truly remarkable figure and the Covid-19 pandemic has added a significant amount,” he said.
“Leaving all your money on deposit is folly, however - it will have no chance to grow, and will not beat inflation in the long term.”
Last week we looked at the deposit and state-guaranteed options, so this week Mr O’Driscoll is offering tips for those considering investments for the first time.
“Whilst it is important to have sufficient money on deposit for your rainy-day fund, investing provides the opportunity to both beat inflation and deposit accounts whilst also providing an additional source of income,” he said. “It’s not without some pitfalls though.”
For that reason, he strongly recommends getting professional advice before investing.
“I would recommend engaging with an impartial financial adviser to create an overall financial plan: investing is just one part of what should be a comprehensive overall plan,” he says.
“It is important to discuss both your attitude and aptitude for risk with your adviser. Whilst the prospect of high returns is appealing, it all depends on your individual circumstance.
"Remember, investing is a long-term activity that benefits from compound interest, so monies earmarked for short-term purposes e.g. house deposit or wedding, etc., are unsuitable for investing, which traditionally requires a time frame of at least five years.
“There are so many online platforms for investing now it’s never been easier to invest, or in my view easier to lose money. A little knowledge can be a dangerous thing, so while cryptocurrencies and trading online seem like an easy way to make money, be careful.”
Mr O’Driscoll says there are investment options for people who are risk-averse.
“All the main life assurance companies in Ireland have low-risk investment funds which will have a large exposure to defensive asset classes like Cash and Government Bonds,” he says.
“There are also bespoke providers who have investments with varying levels of Capital Guarantee. Again, the important thing here is to get advice, there is a myriad of options available and regardless of your risk tolerance there will be something suitable for you.”
He says people who have a high tolerance to risk will traditionally favour investments with high exposure to equities - i.e. shares in companies, traditionally multinational household names.
“The more equities you have the more returns you should make theoretically as it is the best performing asset class over time,” he says.
“Be patient though, investing is all about time, as an example look at the share price of Netflix, a household favourite for box set binges over the lockdown. When Netflix launched in 2002 it was $15 per share, at the time of writing this article the share price is $550 per share, and in the last 19 years the share price has dropped by 80%... twice!
So regardless of what you invest in remember the old saying, ‘it’s time spent in the markets, not timing the market that is important.”
People’s individual circumstances, including their age, will be important factors in choosing the right investments.
“It stands to reason that someone at 25 will have a different outlook on risk than someone at 65, however, I would say that everyone is unique and in my role as a financial adviser I have met people in their late 20’s who are risk-averse and people in their 50’s who have a very high tolerance to risk,” Mr O’Driscoll says. “A lot depends on people’s circumstances.
“Their salary, outgoings, number of dependents, level of debt will all have an impact on their risk tolerance.”
- Be patient, you have to invest for the long term
- Invest only what you can afford, do not overstretch yourself
- Diversification is key, don’t put all your eggs in one basket.