Business Personal Finance

Wednesday 25 April 2018

Three steps to avoiding risks and making investments pay

Rory Gillen

DID you know that if you committed to saving €500 a month, or €6,000 a year, for 10 years from the age of 25 to 34 and obtained the long-term returns that the stock markets have delivered this past century (circa 9 per cent annually before costs), you would not have to add another cent to your investment programme after age 34, and still end up with more than €1m by retirement age of 65?

Did you know that even if you had been unlucky enough to start a regular savings programme (and that could be a pension plan) at the start of any of the last three major bear markets -- which was at the start of 1973, the start of 2000 and mid-2007 -- but stuck to your plan and continued to invest monthly through these downturns, the longest it took you to get back to break-even was three years and six months?

Yes, even after completely mistiming your start date to be at the very start of one of the three worst bear markets in the past 70 years, so long as you stuck to your plan, you survived.

Do you know why Coca Cola's share price today remains 15 per cent below the high reached 14 years ago in 1998 despite having grown its earnings at an 8 per cent compound per annum rate in between?

Did you know that the US stock market reached its most overvalued level ever in late 1999, and that this single fact largely explains why the key US stock market has given poor returns since then?

To make a success of investing in risk assets over your lifetime, first you need to know how to invest.

In Ireland, we made all the errors. Yes, previous governments have to take their share of the blame for the excesses of the last cycle, and the banks stand rightly accused of acting as incompetents when given access to Europe's monies following the introduction of the euro in 2000.

However, despite this government and banking incompetence, as investors we are responsible for ourselves, and we still could have avoided the calamity that befell us had we each known how to invest.

A solid plan, some patience and an understanding that volatility in markets is normal, and is not risk, will help you to control risk, to obtain the returns on offer and to avoid turning temporary losses into permanent ones.

The book outlines exactly how everyone in society -- from the novice investor just getting started, the parents with the children's allowance, the person managing their own pension to the person with a lump sum to invest -- can make a success of investing.

The two biggest hurdles to successful investing that investors (in Ireland) face are, first, a lack of education about how to invest, and second, the workings of the financial services industry.

First, we have the banks. They can look into your deposit account. These days, the banks can't even earn a margin from your deposits which further encourages them to sell fee-earning products, and particularly guaranteed structured products. Is offering you, the bank's customer, a higher fee-earnings product investment advice or is it product selling with an inside edge?

How many people in Ireland were offered property deals and encouraged to take on the debt to finance them in the cycle leading up to the global credit crisis? How many Irish people now face ruin because of that practice?

Next, we have the private client stockbrokers whose very existence depends on you engaging in lots of trading, which boosts commissions. As far as I can see, the Regulator's requirement that brokers "Know Their Client" is simply not being enforced to a proper standard, and the consumer is the one who loses. In defence of the Irish private client stockbroking businesses, most have altered their business models somewhat following the lessons of 2008.

The dreaded spread-betting companies are another matter altogether. I can find no redeeming features in the offerings of spread-betting companies in terms of an investment service for ordinary private investors. In my view, these offerings are suitable only for professional traders who understand how to control risk while speculating. The evidence suggests that north of 90 per cent of non-professionals trading through spread-betting accounts lose their money. I would avoid them like the plague.

Last, we have the network of supposedly independent financial advisers (IFAs) across the country. Surely they can be relied on to provide customers with the advice they so badly need about how to invest? Unfortunately, the IFAs are also sellers of investment products as they get paid by the product providers and are totally compromised.

With an entire industry geared up to sell and not advise, is it any wonder that technology funds were selling best in 1999 at the top of the technology bubble and that property funds loaded with debt were selling best in 2006 just before the property excesses caused havoc in the developed world? Today, guaranteed products and absolute return funds are selling best. The book shows you clearly why these funds cannot hope to deliver the returns that an industry structured only to sell has led you to believe.

It still mystifies me that the Regulator cannot see that the consumer is not being educated about how to invest in anything other than fee-generating products that encourage herd-like investment behaviour among both product sellers and their customers.

One of the great advantages of investing through the markets is that you can start small, very small, and without the use of any debt. You can build an asset base brick by brick. All that most of us need is a globally diversified equity exchange-traded fund or, if you prefer, a globally diversified property exchange-traded fund. Both are passive index-tracking funds quoted on the stock exchanges and come with built-in geographic and industry diversification, no debt and low costs.

In the book, I outline that there are just three steps required to make a success of investing over your lifetime. The first is to have a plan and to ensure you buy value. Buying a global equity or property exchange-traded fund is a solid plan, but understanding value does need some assistance. The second is to understand that markets will always be volatile, but that volatility is not risk. Understanding this will assist you to avoid turning temporary declines in prices into permanent losses. The third, and final, step is that you need to have the patience to allow compounding to kick in and work its magic. The SSIA programme in Ireland from 2001 to 2006 was the right one, but it ended too early and no one benefited from the power of compounding which only kicks in after year seven or eight.

There is no silver bullet to investment success, but everyone has the ability to invest successfully over their lifetimes. Knowing how to avoid the risks will make it a rewarding journey.

Rory Gillen is the author of 'Three Steps to Investment Success'. The book costs €19.95 and can be bought online at and in good book stores

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