- September 25, 2019
- Bob Quinn
This article appeared in last week’s Sunday Times.
Deposit accounts provide certainty, yes, but perhaps not the desired kind of certainty. The certainty is that your money will not grow. In fact, it will struggle to maintain its value when you factor inflation into the equation.
Inflation is like the worst type of tax: it has neither exemptions nor credits. It erodes the value of your entire capital year by year. Imagine your reaction if a financial adviser to propose you park €200,000 in a place where, 10 years later, it’s essentially worth just over €160,000, assuming inflation is 2% per annum. You would not be rushing to sign the dotted line. And yet billions remain on deposit in Irish banks.
Asking the wrong questions
Why don’t more of us invest? It’s about the framing of risk. Saving feels less risky than investing -but, with saving, your money is guaranteed to lose value because of inflation and also DIRT and potentially exit tax, whereas by investing over the long-term, you have the potential to make a return.
Let me ask you this question: Imagine you have an opportunity to buy an exclusive apartment on the seafront and there are just two units left. One of them is the penthouse, which has a breath-taking view, and the other is on the ground floor where you can get out quickly in the case of a fire. Which one would you buy?
While I’m sure you’d be very happy in the ground-floor apartment, just imagine the views the couple living upstairs in the penthouse would enjoy every morning when they roll out of bed. By holding your cash reserves in a deposit account, you are denying yourself the panoramic views the other apartment has to offer. If it were me, I’d weigh up the risk of a fire breaking out and, concluding that it is low, I’d opt for the inspiring view every day.
I must stress that when I talk about investing, I mean in a globally diversified portfolio of stocks, I am not talking about trading shares in order to beat the markets – that’s not investing, it’s speculation. There are other forms of investment I am excluding – more on them below. If saving is such a bad idea, what do you do with your excess cash?
Spend when you need to
Too many of my clients are living quite frugally and yet they have large sums sitting on deposit. I’m talking about the money you have left over after your day-to-day expenses are covered and you’ve paid off your debts and have your rainy day fund squirrelled away.
Think back on the apartment analogy. What things are you needlessly depriving yourself of because you are terrified the stock markets are going to wipe out your wealth? I met a couple recently who wanted to move from a semi-detached house to a detached house – they wanted more space and they hated being able to hear the neighbours snoring – but they didn’t want to borrow money to move house at their stage in life.
I pointed out that they had more than enough cash reserves across various current and zero interest accounts to soundproof the adjoining wall and create a nice extension, and even bring somebody in to the overhaul the garden that neither of them liked. What would make your life better or your kids’ lives better? Remember, inflation will get its dirty mitts on your money if you do nothing.
Invest wisely when you’re not spending
Had that financial adviser suggested you invest your €200,000 over 10 years, with a 5% return, the gross return would be €325,000.
The key to investing is to ensure that money lands in our bank account as it’s required. It doesn’t matter how much you have set aside per se, so long as the money is available to you when you need it. This entails looking ahead and predicting those times such as when your children are going to college, when they’re getting on the property ladder, getting married and so on. Your retirement is an obvious one. It’s not a difficult exercise but most of us never get around to it.
A good financial adviser will take your attitude to risk, capacity for loss and required return into consideration. He or she will propose an investment solution that ensures money is available at those crunch times; yet it will not put your standard of living at risk even if everything were to go pear-shaped.
One of the wealthiest men on the planet has instructed his family to invest in a low-cost investment fund with broad market exposure after his death. If Warren Buffett is happy with that level of risk for his kids, then it’s good enough for me.
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