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Chapter 15 Miscellaneous
Where is the best place to invest for my children's education?
Depending on the age of your children, this is usually a medium to long term investment and there are a variety of approaches you can take.
You can increase your monthly mortgage repayments. This will enable you to pay off your mortgage quicker, so that you will have lower outgoings when you need extra money for your children's education. If you have a small mortgage, you will be able to extend your mortgage when you need more money.
You can increase your contributions to your pension scheme. You won't be able to get this money unless you are retired when you need it for you children's education. But you will be able to reduce your normal pension contributions as your pension will be better funded.
Or simply build up a portfolio of shares and sell them as you need the money.
Don't contribute to any fixed term savings scheme. You might need the money earlier or later.
Where is the best place for a child to invest their savings?
I recommend that children should invest directly in the stockmarket for two reasons. Firstly, the investment is presumably long term and the stockmarket is the best place to invest for the long term. Secondly, a child who invests in the stockmarket learns a lot about it at an early age - crashes, dividends, and of course the extraordinary growth of the stockmarket.
OVERSEAS PROPERTY
First of all let me say that there is nothing wrong with buying a property in Spain or Portugal for your holidays. If you like a particular resort and you can afford to buy and keep a home there, then off you go.
But overseas property is not a good investment. It is a much hyped and oversold fad at the time of writing. People are being lured with promises of capital appreciation and rental income.
Some of the
problems:
It is extremely risky - all your investment eggs are in one basket. If
there is a downturn in the property market, then you face a substantial
loss in value of your property.
It is difficult to manage an asset overseas. If there are problems, you
are not familiar with the legal system in Spain and it will cost you a
lot of money to sort out these problems.
When you go to sell the property, agents' fees eat up a huge part of the
selling price.
There are so many properties being built that it is unlikely that they
will all be let.
In the 80's and early 90's lots of people ignored the warnings and got stung by timeshare salesmen. Now people are ignoring the warnings and will be stung again.
We repeat, buy an overseas property as a holiday home but not as an investment.
BES SCHEMES
BES schemes were once very popular but have become a lot less popular due to tax changes in recent years. You invest in a business. You get tax relief on your investment and you hold it for 5 years. Usually the company you invest in buys you out after 5 years.
The problem
with BES is that too many promoters used it as a source of fees and packaged
unsuitable businesses into the BES framework. There used to be guarantees
but these are not allowed anymore.
They were artificial constructions to take advantage of the tax breaks.
Some of the BES schemes investing in films seem to be fairly safe. AIB has a unit which specializes in film investment. There is risk but this is minimized by their having pre-sold the film to distributors.
It's probably not advisable to invest in a BES scheme, unless you know and trust the people involved. Even in that case, it should only form a part of your overall portfolio.
TRACKER BONDS
Do not confuse these with tracker funds. A tracker fund is a very sensible low cost investment which buys the shares in an index and which rises and falls in line with that index.
A tracker bond is a completely different animal. You invest for a fixed period - say 3 years. The bank links your return to the return on the index its tracking. But this is often capped at 10% a year or 50% of the return on the index. They also provide some form of guarantee e.g. that you will get at least 70% of your money back.
Avoid these products - they make a lot of money for the banks and brokers who sell them and very little for the unfortunate consumers who buy them.
FORESTRY
Forestry is an attractive investment to many people. There are generous grants available to plant trees commercially. The profits from forestry are tax free. The BIG disadvantage is that forestry is a very long term investment and the returns are just so uncertain. The best way to invest is through a forestry fund , such as the Seventh Irish Forestry Fund. This is like a unit linked fund in that you can invest as little as £500 in such a fund. In 30 years time, when the forest matures, you will get your money and profits back.
The problem is that most of us don't have a 30 year horizon for investing. If you want your money in 10 years time, there is very little you can do about it. The promoters will try to find a buyer for you, but you have no way of knowing whether or not there will be a demand for your shares.
Just in case you think forestry is a good thing to invest in from an environmental point of view, it is not very clear cut. Most of the commercially planted trees are evergreens and are not native to Ireland. They have often been planted in the wrong places and damaged rural communities and environmentally sensitive areas. They have been accused of acidifying rivers and contributing to the decline in salmon. On the positive side, trees are very important in processing carbon dioxide.
Unfortunately, planting environmentally valuable native trees such as oak or ash or rowan is not economically viable.
INVESTMENT CLUBS
Investment
clubs are based on the concept that a group of people sharing information
and education on the stockmarket could do better than individuals working
on their own. Unfortunately, this concept is flawed.
Investment clubs do worse than a randomly selected portfolio of shares
primarily because the monthly discussions tend to lead to very frequent
trading in the shares and high transaction costs.
As a hobby or as entertainment, investment clubs are great fun. But not as an investment.
COLLECTIBLES
Some people buy art, antiques or vintage wines as investments. They fall into the same category as overseas holiday property. Buy them because you enjoy them. If you make money that is a bonus. But don't buy them as an investment.
The big problem with all collectibles is the huge fees in buying and selling. Buying and selling a painting at an auction will typically cost you 25% of its value. This is a huge dent in any profits you might make and you would have to be a very astute buyer to make that in profits.
ETHICAL INVESTING
The world is a dangerous place to live in these days. We are expanding at such a rate that we are threatening our very survival as a species and we are extinguishing many other species along the way. We are fighting wars, drinking and smoking, and carrying out unspeakable acts of barbarity on animals in the name of scientific research.
If you invest in a broad portfolio of shares, you will own companies which cause lots of these problems. Ethical Funds try to avoid these damaging companies. The only ethical fund in Ireland is the Friends First Stewardship Fund, but as we have seen the charges on the Friends First products are very high indeed.
You might be better off looking for an investment in an overseas ethical fund. Look for an fund with low charges and offshore status, so that you will not pay tax in the overseas location and again in Ireland when you cash it.
SCAMS AND HOW TO AVOID THEM
If you have read this far, you will probably not be vulnerable to an investment scam. But every year, hundreds of people are ripped off by scams. They give their cash to someone who guarantees them a 30% return on their investment. They invest in wine or ostriches or some American biomedical company about to make a great scientific breakthrough.
If you are promised a return much higher than normal, ignore it.
If you get a cold call offering you a superb investment opportunity, ignore it.
Don't be tempted to get rich quick by exotic investments such as gems, wine or rare stamps unless you are already an expert in the area.
Make out the investment cheque to the institution you are investing with and not to the broker, no matter how well you know him. Every few years an Irish broker disappears with his clients' investments.