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CHAPTER 1 THE TOP TIPS ABOUT YOUR SAVINGS AND INVESTMENTS
Don't
let your savings rot away in a deposit account
If you had put £10,000 in a deposit account in 1971 and left the
interest accumulating, it would now be worth £50,000, But due to
inflation, £50,000 could only buy what £5,000 would have bought
in 1971, so your money has lost half its real value
A diversified
stockmarket investment provides the best return and the lowest risk in
the long term
Buy about 10 of the top Irish shares and forget about them. You don't
need to be an expert, just let the magic of the stockmarket do its work.
£10,000 invested in 1971 would be worth £650,000 today or
£75,000 in real terms. Expect crashes and slumps along the way,
but these are only blips on the path to long term growth.
The CounterView
This blind faith in the stockmarket led to a major debate on Askaboutmoney.
In summary, it is argued that the stockmarket has performed so well, that
it is now way overvalued. The American stockmarket in particular is still
irrationally overvalued and may decline by up to 50% over the coming years.
Residential
Property is not as good an investment as the stockmarket. However, if
you borrow to invest, residential property is a better investment than
the stockmarket.
The stockmarket has outperformed residential property. However, you get
tax relief on mortgage interest but you don't get tax relief on interest
paid on borrowings to invest in the stockmarket. This makes residential
property a better investment for those who are prepared to borrow to invest.
If you borrow to invest in any asset, you are increasing the risk.
You must
also be prepared for the extra work involved in maintaining the property
and dealing with tenants.
A foreign
holiday home is not a good investment
If you can afford to buy a holiday home abroad go right ahead and enjoy
it. But don't justify it on the grounds that it is an investment. It is
a high risk, low return gamble.
You don't
need to know anything about the stockmarket to invest in it
Don't be put off by the arcane jargon of stockbrokers. Stockbrokers and
Investment managers have a false expertise. They perform no better than
a random selection of shares. Everything you need to know is written in
Chapters 4, 5 and 6.
Don't
invest more than 20% of your money in any one share or business, no matter
how good it is
Buy about 10 shares in the top companies and forget about them. Ignore
stockbrokers reports, newspaper tips and your nephew's recommendations.
Good companies often turn bad. And even good companies can decline in
price for no apparent reason. Spread your money around.
A pension
is the best long term savings vehicle
If you are a top-rate tax payer with money to put away for the long term,
go for a pension scheme. Some people say they prefer property to pensions.
But you can use your pension fund to invest in property and maximize the
return.
But you
can be too young to start a pension!
Pensions are great, but don't start one until you have bought a house
and got your mortgage under control.
Unit Linked
Funds are very expensive ways to invest
Most people invest in the stockmarket by buying a Pep or some other form
of unit linked investment. These are only suitable for small amounts of
money as the investment management charges, which appear small in percentage
terms, are a real drag on performance. Unit Linked Funds are suitable
for smaller investors because they allow you to spread your risk over
a large number of shares and because the administration is minimal.
Ignore
the ads for the past performance of investment managers
All the research shows that past performance says nothing about the future
performance. Last year's best manager is often next year's mediocre manager
or might well be poached by another investment manager.
Look for
low charges in any form of investment
£10,000 invested 30 years ago at 8% would be worth £100,000
today. If you had to pay a 1% fund management charge each year, it would
be worth only £76,000. If you paid a 2% annual charge, it would
be worth only £57,000. Small charges have a huge effect in the long
term.
Be careful
about committing to any form of long term investment.
Ask how much your investment will be worth if you cash it in after one
year. If it declines in value this is a bad product. Your circumstance
will change and you might want to get your cash earlier. If you are tied
in for 20 years, you will get back very little on your investment. This
does not apply to pensions.
WHAT TO LOOK FOR IN AN INVESTMENT
Make sure
that it is an investment and not an excuse for spending
An investment is an asset which we do not consume. Putting part of our
salary into a deposit account is an investment. Going to the pub is spending.
Buying a work of art is more spending than investment. It just might rise in value. Likewise buying an overseas holiday home is much more spending than investment. Again, it might rise in value, but it's very risky compared to traditional investments.
Acceptable
level of Risk
Most of us don't like to gamble with our savings. We might flutter a few
pounds on the horses or on the Lotto, but that's for fun. With our savings,
we want more security. Don't try to get rich quick.
High Return
You are looking for a high return after tax with the minimum level of
risk. The best return with the lowest level of risk is the stockmarket.
Property is the next best investment.
Tax Efficiency
Some vehicles such as Special Savings Investment Accounts and Pension
Schemes are very tax efficient and saving through them can dramatically
increase the net returns. However, don't let the tax advantages of a bad
investment seduce you.
Easily
Managed
Properties in bad condition with multiple tenants can be a full time job.
It's more like a business than an investment. A direct investment in shares
requires very little effort other than calculating the gains, losses and
dividends for the Revenue each year.
Low Level
of expertise required
Buying a local property or buying a portfolio of Irish shares requires
little or no expertise. Investing in Futures and Options is the very opposite.
Don't invest in something which requires expertise, if you don't have
that expertise.
Low charges
and transaction costs
A lot of life insurance companies sell products based on high stockmarket
returns. But what they don't highlight is the huge charges they make.
If you pay 5% up front on every contribution and 1.5% a year annual charge
in a managed fund, it will be very difficult to make money.
If you buy and sell shares frequently, the stamp duty and stockbrokers fees may wipe out a large proportion of any profit you make.
Investing in property can cost you 10% up front in stamp duty and legal fees. You have to stay invested for the long term to recover this.
Flexibility - you can cash in your investment or add to it quickly and easily without high costs
Many people in their early 20's contribute to a monthly with profits savings scheme fixed for 20 years. This is complete madness. Most of the premiums in the first few years go to the guy who sold you the policy. If you cash before the 20 years is up, you get a lousy return on your investment.
A good product allows you to cash it whenever your circumstances change without penalty. It also allows you to add to the investment if you have more money.