Wealth Management - How to Invest €6M - Where to Get Advice

[DublinHead54]

That doesn't matter. They are wrong.

Volatility is short term risk.

It is of very little meaning to a long-term investor.

The industry likes volatility because they can measure it.

It's a very poor substitute for risk.

A deposit which has reduced in real value consistently over the last 20 years would be regarded as zero risk. Whereas an asset with an average return of 5% but yo yoing about would have very high volatility.

Brendan

Brendan, volatility is not a short term measure, it can be measured against any length of historical data. What you are quoting likely is the VIX index / futures products and option models that generally use 3 month maturity for pricing. Volatility is not short term risk nor is it a substitute for risk, it is a component of risk.

Anyway we are off topic, happy to discuss risk management via Private message.

Again for the poster I suggest they talk to some financial planners and wealth managers. I would also disregard some comments here about Wealth Managers just trying to sell you products to make commission. The industry is highly regulated now (MIFID II) and you should be able to act in confidence that they aren't trying to rip you off.

 

[Purple]

That is not what Risk is.....

Risk is any uncertainty with respect to your investments that has the potential to negatively affect your financial welfare. In that context keeping your wealth in cash is high risk, based on the experience of the last 50 years. The uncertainty here being that returns on cash will devalue relative to inflation... actually it's more of a certainty than a risk so maybe you're right.

 

[RetirementPlan]

1. and a small salary for brothers / friend say maybe €15K x 3 to top up their other income.

You can give €3k each year to anyone as a gift with no tax impact. If you gave €3k each year to each of de brudder, de brudder's partner, maybe to a child or two, that family will end up with more than they get from your €15k employment, and you'll have none of the hassles and indeed liabilities of an employer.

That's my plan for sharing the loot after Saturday night anyway.

 

[flyingfolly]

...Wealth Managers just trying to sell you products to make commission. The industry is highly regulated now (MIFID II) and you should be able to act in confidence that they aren't trying to rip you off.

Have recently had an interaction with a wealth manager who was trying to sell me a product that is completely wrong for my risk tolerance level and age. I would advise that just because the industry is "highly regulated" doesn't mean there aren't plenty of bad apples out there trying to just flog whatever will make them money

 

[DublinHead54]

Yes Purple, I agree risk is uncertainty, but that differs to your first point. I was going to quote the same definition, holding cash right now it is known that your money will lose value, there is no uncertainty correct? I can say that my interest rate tomorrow is 0.1% and inflation is 5%, there is no uncertainty.

When I invest in Equities I can't say what the price will be tomorrow with certainty. That is the risk.

"Risk" is the erosion of the real value of your wealth. Given that it is true to say that in the last 50 years cash has been riskier than equities as a medium to longer term investment.

Risk is any uncertainty with respect to your investments that has the potential to negatively affect your financial welfare. In that context keeping your wealth in cash is high risk, based on the experience of the last 50 years. The uncertainty here being that returns on cash will devalue relative to inflation... actually it's more of a certainty than a risk so maybe you're right.

 

[DublinHead54]

Have recently had an interaction with a wealth manager who was trying to sell me a product that is completely wrong for my risk tolerance level and age. I would advise that just because the industry is "highly regulated" doesn't mean there aren't plenty of bad apples out there trying to just flog whatever will make them money

I suggest you report that to the CBI. There is a defined set of products that can be offered to Retail Investors, and there is a bar to hurdle to be treated as a professional investor, and if treated as a professional investor you should be able to understand the products sold to you.

Also generally you have to already be onboarded as a client before a wealth manager can try and sell you anything.

 

[Always Learning]

At the end of the day, with 6 million, if you want to keep your money "safe" while also growing it, the only way to do that will be to ensure you are diversified in your investments. With inflation ramping up now, your money will reduce at 5% a year by doing nothing (who knows when inflation will slow down)

There's so many different options, but if I was in your position, I would first of all get a very good understanding of how investing in equities / ETFs works. Read some books, get some training and invest 1,000 of real cash into a platform like Degiro to see what happens over the course of a few weeks.

Then I would split the money 50/50 - half in property and half in equities. The stock market and the property market are both at all time highs right now, but at least by diversifying you are reducing your risk by being allocated to one area. Being in equities helps further diversify you throughout different world markets and industries.

You could look at buying into an ETF like this one which is a dividend paying ETF that pays around 4% per annum: https://www.marketwatch.com/investing/fund/spyd

3 million would give around 120k per year return in dividends (ignoring the natural growth - that fund grew at 8% in the past 5 years, while paying a dividend). Then 3 million of property would get you say 12 properties at 250k each. Say they're all 3 beds and pay 1200 a month that's 172,800 per year - 10% management fee makes it 150k per year.

That would give you close to your 200k per year to live on, while potentially increasing the principal (growth of property value and shares) diversified across multiple sectors. But that's pre-tax.

If you wanted to throw some extra risk in there, put 10k into bitcoin and leave it for 20 years I guess!

Thanks for taking the time to respond. Yes what you have posted there is probably the direction I will end up going in. Although I intend to spend around €125K per property with a return of €12-14K per annum. At the moment, I'm a complete beginner in the field of EFT's (I had to Google what that meant).

I have a specific field of expertise and I'm quite good at making money in that particular field. Now that I'm out of that industry and I can't return for the foreseeable future, I have a new challenge. I have to learn how to make money with money, as opposed to making money with the service I used to offer. Don't get me wrong, it's a fortunate position to be in but it does represent a challenge and I have a lot of learning to do.

Of course in addition to getting opinion's here I'll be getting a lot of professional advice. It's good to get information from multiple sources and this forum has been quite interesting to hear the different opinions so far.

 

[Purple]

When I invest in Equities I can't say what the price will be tomorrow with certainty. That is the risk.

And in the medium to long tern you cannot say what the interest or inflation rates will be with certainty. This is a risk.

 

[Always Learning]

You can give €3k each year to anyone as a gift with no tax impact. If you gave €3k each year to each of de brudder, de brudder's partner, maybe to a child or two, that family will end up with more than they get from your €15k employment, and you'll have none of the hassles and indeed liabilities of an employer.

That's my plan for sharing the loot after Saturday night anyway.

Yes thanks for sharing that. Good luck on Saturday - although I'm planning on winning that myself, so perhaps not!

 

[RetirementPlan]

although I'm planning on winning that myself, so perhaps not!

Greedy guts.

 

[DublinHead54]

And in the medium to long tern you cannot say what the interest or inflation rates will be with certainty. This is a risk.

True, but you can say with more certainty what the interest rates will be in 12 months time than you can the level of the equity market As the European Central Bank has said they will be ready to raise rates in early 2023. That is why the Equity market is riskier, greater uncertainty.

 

[Always Learning]

@Always Learning one simply bit of advice is get some objective professional financial planning advice BEFORE you make any decisions.

I'm a financial planner but I don't believe any one of us has financial goals. We have lifestyle goals that have financial implications. We need objective professional guidance because when making decisions we all suffer from predicable psychological blockages

see https://www.amazon.com/Predictably-Irrational-Revised-Expanded-Decisions/dp/0061353248
or
https://www.amazon.com/s?k=thinking+fast+and+slow+by+daniel+kahneman&i=stripbooks-intl-ship&sprefix=thinking+fast+%2Cstripbooks-intl-ship%2C151&ref=nb_sb_ss_ts-doa-p_2_14
On property here is my 50 year study of residential and commercial property on both sides of the Irish Sea

Investing in Property Investing in Property in the UK and Ireland

Investing in Property is a topic that is frequently under consideration in Ireland and the UK and the intention with this guide is to conduct an objective, empirical comparative study to assess the relative risk, return and correlations across these investments with a view to informing Portfolio...

viewer.joomag.com

and some thoughts on how to choose an adviser

Choosing an adviser How to choose an adviser

One of the most important financial decisions an individual investor can undertake is in selecting the right adviser. The following checklist may help guide you in making the right choices

viewer.joomag.com

all the best

@Marc - Thanks for those links. I'm going to take a read through these the next time I get some time.

 

[Purple]

True, but you can say with more certainty what the interest rates will be in 12 months time than you can the level of the equity market As the European Central Bank has said they will be ready to raise rates in early 2023. That is why the Equity market is riskier, greater uncertainty.

Over the longer term Equities have consistently out performed savings so in the context of which offers the best chance of the greater return equities are a better bet. If the question is framed as "which offers the greater risk of a real devaluation in your wealth", then holding that wealth on deposit is riskier.

 

[fonduster]

I would agree with most people here that given the amount of money you are dealing with, i would diversify and not invest all your money in property in one region. I think i would split the money as follows if i was in your situation:

Property: 2.5m
-I know you said you didnt want to use leverage however debt is one of the greatest tools to grow your wealth. If used correctly and in your case, you could easily have a low LTV, it shouldnt become a worry yet still grow your net worth over time.
-I would take out debt of 20pc of your overall net worth of 1.2m @5pc interest rate(even though you can currently get 4pc rates) > At current costs, this would equate to a mortgage payment of 74kpa (interest only portion @50pc for simplicity is 37k). 20pc leverage across your entire portfolio puts you in a very low risk profile to me at least and you would also be growing your net worth by 37k pa through capital payments in your mortgage.
-I would allocate 2.5m of your existing money along with the 1.2 to property giving you property exposure of 3.7m.
-At a 10pc gross yield rate this would give you cashflow of 370k pa.
-I think you didnt account for costs when doing your calculations. I would estimate 12pc for maintenance(45k), 12pc for vacancy(45k), 10pc for management (37k). Some years costs might be lower, some years higher so better to include these.
-So total gross - costs is: 370k - (45+45+37+37)=206k or around 100k net.

Pension: 500k
-Ok so given you are no longer working and a pension is one of the greatest tools to grow your wealth, would you consider setting up your own pension and buy property worth circa 500k with it. All extra income generated in the pension would then be sent to an etf within the pension and in 35 years time, it should have grown to a nice amount.
-Private pension schemes have changed in recent years where costs and legislation may not make it feasible any longer so more research in this would be needed.

EIIS Scheme: 250k
-The EIIS scheme invests in small SME in ireland and is inherently risky however it acts as another form of diversification to spread your assets into various areas.
-you get 40pc back as a tax relief in the year after you invest and you need to hold the money in these funds for a min of 4-5years.If your lucky you might get an extra 5-10pc in gains but i would just be hoping to get my original amount back along with the tax relief. You may not get all your money back and you cant offset it as a loss.
-I would put 50k in every year for 5 years and let the cycle continue after the 5 year mark ends when you start to receive your original investments back and reinvest it in EIIS schemes.
-To limit your risk, i would spread the 50k equally between BDO,BEP and Goodbody.
-This scheme would equate to you getting an extra 20k in tax relief off your rental and dividend income.

Stocks: 2.5m
-So about 3/4 years ago, i was in a similar situation to you where i didnt understand stocks and was nervous of getting into them. I had a thread at the time where i had 2m in property and i was nervous of allocating 10k to stocks. The best way to overcome this at least for me was to google how to read balance sheets and how best to invest in them. Im by no means a stocks guru but to me it was about confidence in understanding it so i can invest in it. Im of a similar age to you and i personally used youtube to understand stocks. You will get all types on youtube so take some of them with a pinch of salt but it can be useful to get several different opinions on how to rate stocks and then build your own opinion on what strategy will work best for you.
-Unlike property where you have direct control of the asset and you can do your own value add etc,you have less control over what a company does however if you invest in good companies, they should flourish over the long term and i would target a mix of stocks with good capital appreciation to limit your tax exposure and some dividend stocks.
-I would not buy ETF or stock funds. With ETF's even if you dont sell them, ireland have an awful tax called deemed disposal where you need to pay tax on the etf @41pc every 8 years. Its awful for net worth growth if your intending to hold these long term. Funds are even worse again.
-If you do your own research and you put between 50-100k in 25-50 companies, you will have your own mini etf and most importantly you will only pay tax or offset a loss when you decide to sell.
-In terms of dividend stocks, dont focus on getting the largest yield as the payout ratio might be unsustainable and the yield might decrease over time. Just focus on solid healthy companies that are boring and well known. Google dividend kings and dividend aristocrats
-I know it might be nerve racking picking companies but just go for big well known companies that you know of such as facebook, mcdonalds, coca cola, johnson and johnson etc. Some might be a little expensive relative to others but large cap stocks are well known and strong companies over the long run although might not produce the returns of some small cap companies but will be safer and will keep your mind sane.
-Do not lump sum invest in stocks. The last thing you want to do is to put 2.5m into stocks in one go. You might invest at the worst possible time so please dollar cost average in. Likewise one of the hardest things to adjust to in stocks is looking at the value of them change daily. Unlike property where its usually slow gains/decreases where you can estimate but never truly know the exact amount until you sell, you can see the exact amount all your stock portfolio is worth if you sold it right now. For a portfolio size of 2.5m. You could see portfolio fluctuations of between 1-3pc on a daily basis and if you see your stocks going up by 75k in one day, thats great but if it drops 75k, its hard to stomach. At least if you start small and continue to dollar cost average in until you get to 2.5m, its easier on the emotions.
-if you have a diversified stock portfolio you might have dividends of circa 1.5pc pa which would equate to another 37k stream or circa 18k net > this is highly dependant on what stocks you invest in and i would recommend not going too heavy on dividend stocks as you are still young but its healthy to have a broad mix of a few of them.

Cash: 250k
-i prefer to live off future money earned vs this lump sum that you just got but its always nice to have some cash on standby just in case.

Total cashflow:
Property:206k
EIS: 20k tax relief
Dividends: 37k
Net:140k

I hope the above helps and wish you good fortune on the next chapter of your life.

 

[_OkGo_]

Firstly, its a massive accomplishment to be in your position so well done.

What you need to do is take a step back and ask yourself what you want to do in life and bend your money to that rather than focus in investing for the sake of making money.

I think Marc has summed it up well here. What do you actually want to do now that you have sold your company. You are probably not one to go from running a business to doing nothing. You'll probably take time out but then want to return to some type of work. Why not invest in yourself and take a chunk of the money to study something new and apply your skillset somewhere else? Those non compete agreements are usually no longer than 18-24 months so at some point you might be able to consult in that industry

1. To provide a generous annual salary for myself / dependents of circa €200K. and a small salary for brothers / friend say maybe €15K x 3 to top up their other income.
2. To grow the value of the assets over the years to provide for future generations.

Why €200k? Most high earners on that kind of income are funding a pension, paying down a mortgage and probably paying for other expensive things like childcare or education at different points through their career. You don't need to do any of this so the amount of money you need to live a very comfortable life is probably much lower. Holidays and cars are likely to be your only big spends. And you haven't mentioned one yet but if you have a spouse, 2 x €100k salaries are better than 1 x €200k

As for your brothers/friend, I don't think you can pay anyone a salary if they don't actually work for you. You might be able to do it but I don't think it is a legitimate thing to do. As others have said, using the annual gift exemption is the easiest way of helping them out if you are feeling generous. And if you (or they) have spouses, it is easy to transfer quiet a bit of money tax free each year

And also, as Marc suggested, I think you have familiarity bias with the idea of running a rental business. If you want your wealth to be intergenerational as suggested, you need to look at this with several decades in mind. The type of property that you are suggesting to buy will not last. They are generally old, cold and on the edge of needing major renovations. I don't think much will change in the short term but it is a realistic assumption that housing needs, supply and standards will improve over the next 10-20 years. Do you really want to be left holding 50 units of the worst possible stock? This type of property could suffer the most in terms of rental yield and asset value.

Even the assumption that a management company will do this for a set percentage needs to be questioned. There is a lot of work in 50 low value units for 60k (10%). They would naturally prefer to manage higher value properties. So it is very possible that they will have a set minimum fee per unit and not a percentage. This would be your burden if gross rental dropped in the future.

With all that said, you should probably take a few months to relax, enjoy it and then research all your possibilities. You may end up going down the property route to some level but don't just jump into it straight away because you have been lucky with 3 properties already

 

[DublinHead54]

Over the longer term Equities have consistently out performed savings so in the context of which offers the best chance of the greater return equities are a better bet. If the question is framed as "which offers the greater risk of a real devaluation in your wealth", then holding that wealth on deposit is riskier.

Sorry, but the question is not framed that way, this is a question of Risk and Equities are a riskier asset class than cash. You included the definition of risk that stated it was the uncertainty, and Equities carry more uncertainty than the value of cash. The time horizon is a variable that generally holds true that if you hold equities longer you have a better chance of generating a return and negating the volatility. However this is timing the market to an extent. If I bought a market index ETF on 31st December 2019 to sell on 20th March 2020, I would have lost money.

Which Asset Classes Are the Most Risky?

Understand why equities and real estate are the two riskiest asset classes – even though they also provide the greatest potential for investment returns.

www.investopedia.com

That is all I have to say on the matter.

 

[Brendan Burgess]

Hi Dublin Bay

Risk is not uncertainty, although uncertainty is a part of risk.

If I toss a coin and heads will give me +€100 and tails will give me +€200 , there is no risk, although it is uncertain.

Risk is the chances of a loss in real terms over the term of your investment.

If I am buying a house next month, then putting my money on deposit is almost zero risk. Putting it in shares is extremely risky.

If I am investing for the next 20 years, then it is very risky. There is a real chance, probably an expectation, that inflation will exceed the after-tax deposit interest. If I invest in a balanced portfolio of shares over 20 years, there is a chance that inflation will exceed the after-tax return on those shares. So there is some risk, but it's a smaller risk than having money on deposit for 20 years.

The problem for most people is that they don't notice the value of their deposit falling as it's so gradual. However, they will see the value of their shares going up and down which is why they and the industry describe it as risky.

Brendan

 

[Purple]

Sorry, but the question is not framed that way, this is a question of Risk and Equities are a riskier asset class than cash. You included the definition of risk that stated it was the uncertainty, and Equities carry more uncertainty than the value of cash. The time horizon is a variable that generally holds true that if you hold equities longer you have a better chance of generating a return and negating the volatility. However this is timing the market to an extent.

Over a long period, as I have made clear in my posts, the risk of losing wealth is lower in equities than it is in cash. Therefore, in the longer term, holding wealth in equities is lower risk than holding wealth in cash.

If I bought a market index ETF on 31st December 2019 to sell on 20th March 2020, I would have lost money.

Nobody is suggesting otherwise.

That is all I have to say on the matter.

Good, that'll save me the hassle of having to keep correcting you.

 

[DublinHead54]

Hi Dublin Bay

Risk is not uncertainty, although uncertainty is a part of risk.

If I toss a coin and heads will give me +€100 and tails will give me +€200 , there is no risk, although it is uncertain.

Risk is the chances of a loss in real terms over the term of your investment.

If I am buying a house next month, then putting my money on deposit is almost zero risk. Putting it in shares is extremely risky.

If I am investing for the next 20 years, then it is very risky. There is a real chance, probably an expectation, that inflation will exceed the after-tax deposit interest. If I invest in a balanced portfolio of shares over 20 years, there is a chance that inflation will exceed the after-tax return on those shares. So there is some risk, but it's a smaller risk than having money on deposit for 20 years.

The problem for most people is that they don't notice the value of their deposit falling as it's so gradual. However, they will see the value of their shares going up and down which is why they and the industry describe it as risky.

Brendan

Hi Brendan,

I think you meant to address @Purple as it was they who defined risk as uncertainty (see below). Although I do agree and so does consensus.

Risk is defined in financial terms as the chance that an outcome or investment's actual gains will differ from an expected outcome or return. Risk includes the possibility of losing some or all of an original investment.

Risk: What It Means in Investing, How to Measure and Manage It

Risk takes on many forms but is broadly categorized as the chance an outcome or investment's actual return will differ from the expected outcome or return.

www.investopedia.com

I disagree with how you view risk, and how I view risk is aligned to how academia and financial markets assess and discuss risk. Not to be patronizing but I hold professional qualifications in Risk Management and have worked in the area in Financial Institutions for over 2020 years. I do understand the angle that you and others are approaching it from, the perspective of the change in value of your funds over a long period without considering the risk However, your definitions are dependent on the factor of time and you evidence the riskiness of equities over a short period in your example.

A good comparison example is that on another thread you were against investing in Equities if you carry a mortgage because you can pay off a mortgage saving the interest rate for risk free. This is the same concept as what I discuss here with the exception instead of a positive risk free return (of the mortgage rate) you are receiving a negative rate. If your cash held on deposit was earning a positive return above inflation, would your stance remain the same to invest in equities instead of holding cash? The levels of reward vary overtime, in the current low rate environment positive yields are in riskier assets, at other points in times yields have been different.

This is the very concept of the risk premium, as defined before. So yes I agree that over a longer period of time Equities should return more than cash held on deposit at current rates, but I am taking on the risk that it won't at the time of market exit.

"A risk premium is the investment return an asset is expected to yield in excess of the risk-free rate of return. An asset's risk premium is a form of compensation for investors. It represents payment to investors for tolerating the extra risk in a given investment over that of a risk-free asset."

Risk Premiums: Like Hazard Pay for Your Investments

A risk premium is the return in excess of the risk-free rate of return that an investment is expected to yield.

www.investopedia.com

Risk is any uncertainty with respect to your investments that has the potential to negatively affect your financial welfare.

It is extremely misleading the terminology being used to describe Risk. Nobody reading this forum should think that Equities are a less risky asset class than cash. If you do, then you really need to use the services of a qualified Financial Advisor.

 

[Brendan Burgess]

I am speaking about the risk of loss.

You are speaking about something else entirely. And if that is the academic definition, it's still nonsense.

Risk is defined in financial terms as the chance that an outcome or investment's actual gains will differ from an expected outcome or return.

If I play poker with you, and if I am a far better poker player I will expect to win €500 per session.
Well if I win only €300 you are telling me that I took a risk because it's less than I expected to win.

If I play poker with Purple and we are equally skilled, I am taking a real risk of loss.

What most investors should care about is the risk of real loss. That is their money losing real purchasing power.

Brendan