Thursday 12 December 2019

Ever wanted to jump from savings to stock markets?

You must take some risk with your money to make a return - but tread carefully, writes Louise McBride

A profit buffer can absorb much (if any) of the losses that you might incur when you move into a riskier investment (Cartoon by Tom Halliday)
A profit buffer can absorb much (if any) of the losses that you might incur when you move into a riskier investment (Cartoon by Tom Halliday)
Louise McBride

Louise McBride

Savers were dealt yet another blow earlier this month when the interest paid on State Savings was cut for the fifth time in four years. State Savings once gave cautious savers the chance to earn a reasonable return on their nest eggs. This is no longer the case.

The interest rate paid on one of the more popular State Savings products - the 10-year National Solidarity Bond, for example - is now almost a third of what it was when the bonds were first launched six years ago.

Had you invested €1,000 in a 10-year National Solidarity Bond in summer 2010, you could expect to earn about €400 in interest when it matures in summer 2020. Invest €1,000 in a 10-year National Bond today and you'll only earn €160 in interest by the time it matures - despite tying up your money for 10 years.

Of course, the National Treasury Management Agency - which runs the State Savings schemes - is not the only one chopping interest rates for savers. Banks have been busy cutting their deposit interest rates too.

The woeful interest rates being paid on deposit accounts today has tempted many once-cautious savers to eye up alternative homes for their nest eggs - in the hope of bagging a better return. Should you be thinking of making the move from a traditional deposit account into an investment product, it's important to do it right. Otherwise, you risk losing some - perhaps all - of your hard-earned savings.

So how might you move a €50,000 or €100,000 nest egg from a paltry-interest-paying deposit account to a more worthy investment?

"Have a long-term investment plan where you start off with a conservative approach to your investments - and build up a profit buffer of around 10pc of your original investment," advises Vincent Digby, managing director of the financial advisers Impartial. "Starting conservatively is a good way to avoid losing your nerve [if your investment performs badly] and locking in a loss. It could take years to get your profit buffer, but once you get there, you can consider higher-risk investment options."

A profit buffer can absorb much (if any) of the losses that you might incur when you move into a riskier investment. Even with such a cushion in place, however, choose your riskier products carefully. You could lose a lot more than your buffer should you put your money into an unsuitable or high-risk investment.

Some products that could help you to build up your profit buffer, according to Digby, are Zurich Life's Easy Access Investment Bond and Standard Life's Synergy Portfolio Investment Bond. Digby also believes you could use absolute return funds such as Standard Life's Global Absolute Return Strategies (GARS) fund and Zurich's Global Targeted Returns Fund to achieve your profit buffer.

Once you have your buffer, some of the riskier funds that you could consider investing in at that stage include Standard Life's European Smaller Companies Fund and Zurich's Small Cap Europe Fund, according to Digby. The European Smaller Companies Fund has made an average annual return of almost 10pc since it was launched in 2007. Although the Small Cap Europe Fund made an average return of about 10pc a year between October 2013 (when it was launched) and the end of March 2016, its performance over the last year has been weak.

Absolute return funds

Absolute return funds have become popular among those who have traditionally stuck to deposit accounts - but who have decided to move their nest egg elsewhere.

These funds seek to make a positive investment return regardless of stock market conditions. So if stock markets are falling in a particular year, absolute return funds still aim to make money. It is for this reason that many absolute return funds are appealing to investors who don't like to take much risk. However, like all investment funds, choose your absolute return fund well. Absolute return funds don't always make money - and many have failed on their promise to consistently deliver positive returns. Before choosing an absolute return fund, find out exactly how it has performed in each of the years since it was launched - that is, has it consistently delivered a positive return or has it made a loss most years? If it has made a loss more often than a return, or if the returns aren't beating what you would make on deposit, it's unlikely to be worth putting your money into it.

Standard Life's GARS fund is one of the absolute return funds that is regularly tipped by investment experts. It has made an average annual return of almost 6pc since its launch in 2008. "The GARS fund has a good long-term track record," says Digby. "However, Zurich's Global Targeted Returns Fund has had a better performance over the last 12 months."

Another absolute return fund worth considering is the Aviva Investors Multi Strategy (AIMS) fund, according to Richard Morton, director of Moneywise.

"A good absolute return fund should comfortably beat low deposit rates and inflation over time - but investors need to be aware that these funds do not come with capital guarantees and values can fall in the short term," says Morton. "It is for this reason that an investor with a timeframe of less than five years should not consider an absolute return fund."

Investment funds

There are, of course, other options outside of absolute return funds. Should you be willing to take a bit of risk with your nest egg - but not too much - Davy's GPS Cautious Growth fund and New Ireland's iFunds 3 are worth considering, according to Rory Nelson, founder of the Galway investment advisers Nelson Life.

"Davy's GPS Cautious Growth fund targets long-term return of between 4pc and 5pc per year - though there is no guarantee that this will be achieved," says Nelson. The GPS Cautious Growth fund made a return of 8.8pc in 2014 and 3.5pc in 2015.

At 2.4pc, the return made by the iFunds 3 fund in 2015 was quite low.

Property funds have become popular recently, but they should be avoided by those who don't have much of an appetite for risk.

"Many investment funds and property funds are showing stellar growth - but potential investors should not expect these returns to be replicated in the coming months and years," says Nelson. "Some property funds will have liquidity issues [which may make it difficult for investors to cash in their investment] in the next 12 to 18 months. This should be considered if you feel you may need access to cash or are near retirement."

Tracker bonds

Tracker bonds have also become popular among those looking for an alternative to traditional deposits, because these bonds are marketed as low-risk investments. However, tracker bonds are usually not a wise move and chances are you will make more money by leaving your nest egg on deposit.

Despite having to tie up your money for a few years, tracker bonds often deliver poor returns - so when you come to cash in your bond, you might only get back what you originally invested.

And as inflation eats into the value of your original investment, chances are your money will be worth less when you cash in the bond than it was when you first bought it. You may even get back less than what you originally invested. "The value of tracker bonds isn't that great at the moment because interest rates are so low," says Heber O'Farrell, director of financial services with Finance One. "The capital 'guarantees' on tracker bonds are typically down to 90pc or 95pc."

With a capital guaranteed product, you should, at the very least, get back what you invested. However many tracker bonds don't offer a full capital guarantee anymore - so you could lose 5pc or 10pc of your money.

"We're seeing capital 'guaranteed' products and credit linked notes [another type of bond] becoming very popular - and I'm not comfortable with this," says Digby. "The underlying cost which is built into these products eats into the investment return which you would otherwise get."

As always, tread carefully when it comes to your money.

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