- November 14, 2019
- Bob Quinn
- Financial Planning
This, along with a few other questions appeared in last Sunday’s, Sunday Independent.
Q. I have a large lump sum sitting in a deposit account with a rubbish interest rate and with no sign of rates rising anytime soon, so my mates have been on at me to invest in this, that or the other.
All of them seem to be in something, but I’m a sceptical person by nature and I think I just love the security of cash in the bank. The last time I invested in anything was the old Telecom Eireann shares and needless to say that didn’t work out well.
How can I get over this hump? Paul, Dublin 22
A. Paul, you were burned by a bad experience and you weren’t the only one. Telecom Eireann shares were recommended by the very people who shouldn’t be giving investment advice, including sitting government ministers. I don’t blame you for being slow to take your mates’ advice on ‘this, that and the other’. You seem to have learned from your mistakes, but your experience is also paralysing you.
Losing by doing nothing
Let’s consider first what would happen were you to yield to the warm fuzzy feeling of having cash in the bank. Say you have €100,000 saved. Over ten years, at 2% inflation per annum, you’ll be losing close to €20,000 in real terms over the term. So you see, the rubbish interest rate is not your only niggle when it comes to money on deposit. Even a bad investment strategy is better than leaving cash in the bank.
To decode what you seem to be saying: “If I gave this lump sum away tomorrow, it wouldn’t actually have a material impact on my life, but I am frustrated that I am earning so little on my savings. What can I do?”
That puts you into the investor category.
The hard work is accumulating the lump sum, and you have already done that. Now comes the easy part – investing it long term. This is the bit that you’re finding difficult, partly because of your bad experience with Telecom Eireann, but also because I suspect you do not truly understand risk.
How to avoid risk
Risk increases where you are unduly exposed to the fortunes of one company (Telecom Eireann or AIB), one country (Ireland), one sector (construction), one asset class (property). In addition, the more complex a proposition is the riskier it is.
To mitigate risk, I recommend a globally diversified fund which has a broad spread of securities.in many sectors, in many asset classes and in many countries.
Look for passive (or hands-off) funds which means fees will be lower, and more importantly, transparent. This is not shares in AIB. This is not a structured product with the potential for capital loss over a term. This is not a kick-out bond. You need something that is open-ended and invested across global markets.
Such funds are now available to Irish investors at very reasonable prices. Consult with a fee-only financial planner on the options available to you.