Don't gamble away your golden ticket
If you're ever lucky enough to scoop a Lotto jackpot, make sure you don't buy any magic beans, writes Louise McBride
Sunday May 04 2008
THE days of getting excited over a €1m Lotto jackpot are long gone. Now it takes a rollover Lotto of several million euro or more to interest punters.
As one lucky Dubliner snapped up last weekend's jackpot of €15,658,143 -- the second highest prize in the National Lottery's 20-year history -- we're back to the drawing board again. But could a windfall of €15m or more trigger more headaches than highs in the current investment climate?
The credit crunch, where lenders worldwide have tightened their belts to protect themselves from a mortgage crisis in the US, is now in its 10th consecutive month and shows no signs of abating. It's no longer unusual to see billions of euro wiped off the value of European or US stock markets in one day. And as investors have been caught in the crossfire of such market turmoil, many have become decidedly cautious. Add to this the slowdown in the Irish property market -- which for a long time was a bumper investment for someone with spare cash -- and any Lotto winner might be understandably bemused as to what to do with their new-found fortune.
"Forecasts from almost all major economies agree that the US will be in recession in 2008 and global economic activity will be subdued well into 2009," says Gareth Fahey, managing director of Dublin investment consultants, Mercury Wealth Management. Things will eventually improve, he feels. "But determining precisely when this will happen is crystal ball gazing," he says. "If you asked me is now the time to invest heavily after recent market falls, I'd really have to say no over a short-term basis, especially considering the current economic backdrop."
Kevin Quinn, the director of private banking with BoI, agrees that these are "challenging times" for investors.
"That said, the conditions we see right now do provide improved opportunities for the longer term investor that's prepared for a rockier road," he says. "The stock market looks like it is bottoming and is a lot cheaper than in recent years. There are bargain opportunities in parts of the global property market."
However, even if you can pick up rock bottom prices for particular investments, do your research before jumping in.
"Just because something is cheap doesn't mean it's time to buy it -- it can always get cheaper," says Fahey. "Hold your fire for the moment and negotiate a good deposit rate with your bank. Sit down with an independent investment broker and work on a strategy to feed your investment into the market over the coming 12 to 18 months."
The best deposit interest rates are for regular, rather than lump sum savings accounts. Irish Nationwide pays 7.35 per cent interest on its regular savings account -- the best rate on the market -- followed by AIB, at 7.3 per cent, and First Active at 7.15 per cent. Until the end of last month, EBS had paid 7 per cent interest on its regular savings account but this has since dropped to 4 per cent. First Active pays the best interest rate for lump sum deposits -- but its top rate of 5.22 per cent is only paid on savings of up to €15,001. If you save €15,001 or more, the interest rate on the balance is 4.33 per cent.
Others that pay interest rates of five per cent or more on lump sum deposits include Halifax, Northern Rock, Irish Nationwide, EBS, National Irish Bank and Anglo Irish Bank.
Some of these banks require you to tie up your savings for a certain amount of time to secure the best rate, so be sure to understand the conditions of the account before putting your money in.
Deposit accounts may suit conservative investors but the peace of mind they offer could come at a price -- particularly if market conditions are favourable. Riskier investments can generate better returns than deposit accounts but there's an important caveat -- if things go wrong, the losses can be substantial.
"Many investors want to generate returns well ahead of deposits and are prepared to go through the ups and downs that the market throws at them," says Quinn. "Typically, such an investor will have between 15 and 20 per cent of their money invested in the property market, about 40 to 50 per cent in the stock market, and the balance in a combination of alternative assets, as well as bonds or cash."
For those investors who like to live life on the edge, perhaps it is time to sit tight until the credit crunch has run its course. "If you are prepared to take risks with your money in pursuit of 'super-normal' returns, there are no sure fire ways to achieve this, especially in current market conditions," says Quinn. "Many investors who took on risks in the past 18 months, in areas such as contracts for difference -- where investors borrowed to invest in equities -- have seen significant losses. So the risks, particularly now, are very real."
In the current climate, you should be particularly careful about borrowing to invest in the stock market. Quinn urges caution if you are considering private equity funds, which allow individuals to invest in firms with a view to getting a controlling interest, and hedge funds, which are usually used by wealthy individuals and institutions to trade aggressively on the stock market. Do your research too if dipping your toes into the commodity market, which allows you invest in gold, oil, coffee and other unusual things.
"The commodity market may be tempting, given the extent of gains made in recent times," says Quinn. "However, a limited exposure is preferable as we may see many commodities hitting a peak and there may yet be better entry points."
- Louise McBride
