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Be wary of moving nest egg from frying pan into the fire

THE financial woes that plagued our country last year prompted savers and company treasurers to pull more than €70bn in deposits from Irish banks.

If you're among those that withdrew money from the Irish banks, you could be sitting on one hell of a nest egg. Be careful not to move your money from the frying pan into the fire, though. The Sunday Independent lined up some experts to get their investment no-no's for the New Year.


This year could mark the last of the heydays for gold, warns the wealth managers, Barclays Bank Ireland.

"We wouldn't suggest investing in gold in 2011," says Pat McCormack, head of wealth management with Barclays Bank Ireland. "The dollar isn't about to collapse, hyperinflation is not lurking around the corner, the gold price has already risen a long way and there is no yield -- nor any prospect of one. It wouldn't be a surprise to see gold at some stage fall by 20 to 30 per cent if investors were to regain confidence in other assets."


Fixed income funds, often considered low risk and dependable investments, will dive by as much 15 per cent this year, warns Vincent Digby, founder of the financial advisers Impartial and a former head of funding with Bank of Ireland Global Markets.

"Since last October, fixed income funds have dropped in value by between five and seven per cent," says Digby. "We can see fixed income funds dropping by a further 10 to 15 per cent over the next 12-18 months."

Fixed income funds are funds that put your money into investments which deliver a steady -- but low -- return each year. They include investments such as bonds or certificates of deposit.

Their low returns make fixed income funds particularly vulnerable when inflation rises. But inflation -- which is already on the up in the eurozone and is expected to increase further this year -- isn't the only upcoming threat to fixed income funds.

"In the last three years, as interest rates tumbled and central banks bought fixed income government bonds as part of their quantitative easing measures, fixed income funds gained between 15 and 25 per cent -- a very good return for a "lower" risk investment," says Digby.

"However, interest rates in the major economies are now at record lows. At some stage, the central banks will have to bring interest rates to levels they believe normal. Paul Fisher, the executive director of markets with Bank of England, recently recommended that people start preparing themselves for interest rates of about five per cent in Britain. That's 10 times higher than the current Bank of England rate of 0.5 per cent."

The recent explosion in government deficits is also likely to drive down the value of fixed income funds, says Digby. "The level of new debt that governments are going to have to issue will significantly increase," he explains. "This extra supply will drive fixed income prices down. So we have a perfect storm for fixed income funds -- which includes rising interest rates, concerns that inflation may be on the way back, and the chances of a significant increase in the supply of government bonds."

If you are a cautious or low-risk investor, you will probably have some of your money in fixed income investments. "If you are investing in consensus or balanced managed funds, you may have 25 to 30 per cent of your money in fixed income," says Digby.

Digby particularly advises against investing in fixed income funds for three years or more. "Alternatives to fixed income funds include corporate bond funds -- which will be less sensitive to increasing interest rates, inflation linked bonds -- which will do better if inflation returns, and cash deposits with investment terms of six months or less -- as these can be reinvested after rates have increased," says Digby. "At this stage, it may be worth considering a slightly higher exposure to equities, property and commodities."


Guaranteed investment products, such as guaranteed investment bonds, funds, plans or contracts, should be avoided like the plague, says Rory Gillen, founder of the investment website, www.investRcentre.com.

These products promise to give you the opportunity to make money on the stock market, investment funds or other investments -- with the "security" of getting back whatever you initially invested.

"Guaranteed investment products sell in huge quantities in Ireland but perhaps in four out of five occasions the investor will simply get what it says on the tin -- their money back," says Gillen.

"The attractions of a 'guarantee' are strong. After a painful decade for equity and property investors, the concept that you can invest in a risk-asset fund with the prospect of much higher than cash deposit returns -- but where the downside is removed via a guarantee -- has significant attractions for the investor.

"For the investor it appears to be equity like returns without the risk. It sounds too good to be true -- and it is."

Investors pay through the nose for the "guarantees" on these products. "The simple fact is that there is no free lunch in markets," explains Gillen. "Someone has to pay for the guarantee, the product manufacturing costs and the often considerable distribution costs, which amount to between three and four per cent (of the investment return) a year on average. The trouble is long-term returns from the stock markets have been about eight to nine per cent a year. Take out the three to four per cent product costs, and you're left with a possible investment return of between four and five per cent a year."

But there is a further hitch. "As the guarantee must have a timeline, these products normally have a defined lifespan of four to five years," adds Gillen. "If markets hit a poor patch during the lifetime of your product, you may miss those returns due to nothing more than bad luck. Guaranteed investment products reward the seller, not the investor!"

As an alternative to guaranteed investment products, Gillen suggests putting half of your money on cash deposit where it will earn interest, and the other half into a global equity exchange traded fund.


Subordinated bonds don't sound very exciting -- and if they're issued by any of the Irish banks who've got a digout from the taxpayer, steer well clear of them, warns Gary Hanrahan, principal of the financial advisers Capital Options.

Also known as subordinated debt or junior bonds, subordinated bonds are essentially debts that are paid back after other debts -- known as senior debt -- should the company (or bank) that issued that debt go bust.

"Given the necessary restructuring of the Irish banking system in 2011, holders of subordinated bonds in Irish banks are likely to see further losses in 2011," explains Hanrahan.

"The Government -- and by association, the EU -- have decided that holders of senior bonds in the banks will not suffer any losses. As a result, holders of subordinated bank bonds are likely to suffer further heavy losses as part of the cost of restructuring the banking system."

Losses on subordinated bank bonds have ranged from between 50 to 80 per cent over the last year, according to Hanrahan.

"Subordinated bonds carry a much higher investment risk in return for a higher interest rate being paid by the banks," adds Hanrahan.

"The value of any bond can rise or fall -- and not all bonds are the same."


If you play it safe with deposit accounts, your caution will cost you dearly this year, warns Stephanie Condra, senior investment consultant with the pension and investment consultants, Invesco.

Indeed, if you have left money sitting in low-interest deposit accounts for the last two years, you will have already missed out on the 40 per cent return earned on stock markets since the recovery in March 2009, according to Condra.

Condra believes it is a mistake to leave your money in cash this year -- unless you are doing so to protect the current value of your investments or you plan to use your money over the next two years.

"The return you earn on cash is next-to-nothing these days," says Condra. "These returns are expected to stay low for at least another year, if not longer.

"If you are choosing safety over returns, the next question you should be prepared to answer is can you afford to keep your money in cash? Do you plan on saving more or are you sacrificing your lifestyle in retirement?

"Investors often defend significant cash holdings by explaining that they are temporarily parking their money in cash while they reassess their investment strategy. A problem arises when that parking spot becomes a permanent home and two years later the money is still sitting there.

"Investors who take their money out of the stock market during a crisis are often caught out by market timing," adds Condra. "Such investors never seem to find the best time to move back in (to the stock market).

"The consensus view of investment managers is that the global stock market is expected to earn returns of between five and seven per cent this year. That said, there are a few negative views out there, but whispers of a double-dip in the markets have certainly disappeared over the past few months. If you have money in a one-year cash deposit that is earning less than one per cent interest, you are choosing to forego additional (stock market) returns of four to six per cent alongside potential double-digit returns that might be available through emerging market and commodity investments."

Condra doesn't recommend putting all of your money into high-risk equity investments. "However, if this money has been put aside for a mid-to-long term investment (for three years or more), then there is no harm dipping your toe back in the stock market this year," she says.

Sunday Indo Business