Sunday Business Post Article by Emma Kennedy – Contribution from Frances O’Hanlon
Novice investors need to take account of their age and their attitude in making investment choices.
Interest rates for savers are improving because of the current credit crunch, but rising inflation means your savings could be dropping in value. If you are a regular saver, now might be the time to consider becoming an investor in a bid to stay ahead of inflation. However, be aware that with increased reward comes increased risk.
Typical novice Irish investors are in their mid-50s and earn between €50,000 and €55,000 a year, according to Bernard Walsh, head of investments with Bank of Ireland Life. He said a lot of first-time investors of this age would have between €45,000 and €50,000 to invest, often accumulated through diligent saving, salary bonuses and inheritance.
‘‘We have also seen a new variety of novice investors in the last two years,” Walsh said. Many people who opened special savings incentive accounts (SSIAs) decided to invest some or all of the proceeds.
What prompts people to make the leap from saver to investor tends to be a desire to earn a better return on their money and to avoid spiralling inflation. ‘‘Inflation is at the forefront of people’s minds now. You see it at the petrol pumps, you see it in your electricity bill, you see it at the cash register,” he said.
If you decide that now is the right time to become an investor, Frances O’Hanlon, director of Munster-based independent financial advisor Frances O’Hanlon Mortgages and Investments, said the bottom line was to be true to yourself, your long-term financial goal and your comfort with risk. ‘‘Your age and your attitude to risk have a lot to do with the investment choices you make,” she said.
O’Hanlon said that cash was king at the moment, given the current economic circumstances. ‘‘But don’t be afraid to invest in other asset classes if your investment sight is medium to long term,” she said.
The choice of asset class – whether equities, bonds, property, commodities or alternative investments – depends on your personal circumstances and appetite for risk. However, beware of jumping in at the wrong time by backing a ‘talking point investment’.
‘‘An area where there have been phenomenal returns over the last three to four years may seem attractive, but usually you are looking at it from behind,” Walsh said.
Until a year ago, Irish investors were consumed by investment in bricks and mortar, according to Walsh. ‘‘Property syndicates were very popular then, but you couldn’t give it away today,” he said. Now attention among investors, novices and otherwise, has shifted towards equities, either through direct investment or via investment funds.
‘‘Value is screaming off the page at the moment,” said Walsh. ‘‘Some equities are at 20-year lows.” While equities may have further to fall and an immediate rebound is not evident, Walsh predicted that people would look back at current levels as good value.
Investing in equities can be a confusing business. Sean Kenzie, head of equities at Dublin wealth management company Custom House Capital, said: ‘‘There are so many ways and styles of buying stocks.”
He said a novice investor could buy shares directly, invest in an indexed fund to gain exposure to the market or pick an investment fund that followed a specific strategy.
‘‘The first thing investors should do is educate themselves about the methods of investing and then choose an investment strategy that suits them,’’ Kenzie said.
For novice investors looking to cash in on value in the equity markets, opting for direct investment can be a difficult route, as it can be quite costly and a large pool of capital is required to create a sufficiently diversified portfolio.
However, a fund can offer access to a mix of asset classes, such as equities, bonds, commodities and cash, and entry level investments tend to start from about €5,000.
Kenzie said buying shares directly could be challenging for novice investors. Someone else looks after the investment for you if you access equities via a fund, but Kenzie said it was still important for the investor to understand the underlying strategy behind the fund in which they invest.
For example, he said a fund that was following a growth-based strategy would opt for shares with very different characteristics to a fund with a long-term value objective.
‘‘A fund with a growth strategy would be looking at shares with earnings growing much faster than the market,” he said.
For those who do not wish to take on too much risk, a guaranteed investment fund – meaning that your initial investment is wholly or partly protected, depending on the product you choose – can seem attractive.
However, if you opt for this type of investment product for a first foray into equities or other asset classes, you will pay for the element of protection through a lower potential return.
O’Hanlon said management fees on guaranteed funds could be up to half a per cent more than fees charged on standard investment funds. Also, she said, investors who put money into a guaranteed fund might see their returns capped at a certain level.
When you make the leap from saver to investor, don’t forget to consider the tax implications of your investment decisions. For example, an exit tax applies to investment funds, which means that 23 per cent of any profit you make is deducted from your investment when you withdraw money.
If you plan to take the plunge and start investing, rather than just saving all you can, keep some of your nest egg aside in case of emergency. Walsh said it was important to have access to some money quickly in order to cover unexpected medical bills or other urgent expenses.
As a new investor, carefully consider your investment horizon. ‘‘You need to be very much in tune with this money being locked away for a set period of time,” O’Hanlon said. She advised that a certain percentage of your cash be held on demand for immediate access.
Should you need to lay your hands on your money, you may be able to access cash from your investment funds. But you will pay a hefty penalty for the privilege.
O’Hanlon said exit penalties – or an early encashment charge – of up to 6 per cent could apply in some cases if you tried to withdraw money from an investment fund before the maturity date.
For online article visit http://www.thepost.ie/story/text/mheyojkfid/