The Money Doctor
One definition of the word safe in the Oxford English dictionary is free from risk. In light of recent asset performances, there is not a single investor who could state their investment is risk-free. Between the oil crisis, earthquakes, floods, famines, credit crunches, the world is a different place than it was even twelve months ago. Is anything safe? Even the Investor Compensation Scheme only covers the first € 20,000 of ANY financial institution should there be a collapse.
Staying positive, however, in these times is crucial. Remember first of all, downturns do not stay down forever. Everything is cyclical here in Ireland, we have had a boom for over fifteen years, that we have nearly forgotten what a recession is!
Cash is currently king or queen as the case may be. Staying 'liquid' or having a Rainy Day Fund imperative for three very good reasons
1. Emergencies your washing machine needs replacement
2. Sudden income loss no bonus this year
3. Investment opportunity next door becomes available at half price.
Therefore, savings are key to our next boom. The question is where to invest in the meantime if you have savings and what to do if you don't.
The property market is currently undergoing a correction and while it is bad news for four categories that may still have to sell, it is good news for those house and property hunters seeking a bargain. It is a buyers' market.
Those four categories are
1. Property owners being re-located to a new region
2. Those who have bought and are paying expensive bridging interest as they cannot sell their existing property
3. Separating couples who can no longer stay in the same home together
4. Those unfortunates who having taken out mortgages when the ECB rate was 2%, are finding the going tough at double that ECB rate ( 4% ) PLUS ever increasing lending margins. The cost of funds is now over 5% and that's BEFORE the bank's margin.
It is also not just the bargain prices that make some properties attractive to buy, but properties with long term guaranteed rental income will always sell e.g. French leasebacks in early June 2008, a 92 apartment block in La Defence Paris with 4% net guaranteed income for 9 years with also a full 13% refund of the VAT from the French government, sold out within a week of release. Email me for details of this and others.
Aside from property, the other asset classes of cash, stocks, bonds and alternative investments should be examined and scrutinised for wealth preservation and growth. The buzz word is diversification and while, as I said, cash is king currently, the holders of Northern Rock accounts will confirm they had a few jittery weeks last year that they would not like to go through again with any other deposit taker. The next one may not have the backing of the Bank of England or equivalent.
Cash there are some really incredible deposit deals currently available. Remember the three deposit categories
1. Demand accounts (make withdrawals at any time)
2. Notice accounts (you have to give notice from seven days to thirty days)
3. Fixed interest rate accounts (you MUST invest for the period agreed no withdrawals are allowed. Periods from 1 month, 3 months, 6 months to 1,2,3 year fixed)
Amounts vary from a minimum €1 to €100,000 and in some cases a maximum of € 1,000,000 to no maximum. Rates can vary and you really do need to shop around. As I said, under the Investor Compensation Scheme, only the first € 20,000 is safe from a deposit taker collapse. If you have the time and patience, you could open a myriad of accounts in different institutions availing in many cases of the threshold policies of these deposit takers. For example, First Active offer 5.22% on the first €10,000 this is internet only so if you are not on line, you cannot avail of this account. Over this threshold, it drops to 4%. For all the latest deposit rates, please check my web site
To encourage the good saving habit of the SSIA which ended last April 2007, several deposit-takers introduced a 24 month saving plan called the REGULAR SAVER ACCOUNT which pay whopping rates if you can commit to a minimum of € 100 per month up to in some cases a maximum of € 1000 per month the best rate in this category is Anglo Irish Bank at 8% now there's a loss leader! If you do not have a savings plan, I beg you to start one now.
The stockmarket has had a roller coaster run over the last few years for instance, it was recently announced that Bank of Ireland's staff pension deficit doubled to €758m inside a 6 months period. Pension funds generally have been depressed of late but, as everyone knows, this market is cyclical and would appear always to bounce back with time. The trick is timing buying in at the lowest price and cashing out at the highest, or when you want to retire. A friend of mine told me recently the definition of stockbroker. He proffered a person to whom you give all your money until it is gone while humourous, it is also untrue. Some of the stockbroking houses have incredible research facilities and can give you bell, book and candle on your preferred stock and the way it might move. However caveat emptor they are not psychics and your decision when to buy or sell can make or break your investment. The decision, albeit an informed one perhaps, is yours and while you may delegate that decision to your stockbroker (called discretionary) you are in essence giving your stockbroker authority to gamble with your money and if you suffer losses, excuses as to how it happened!
Taking the blunderbus approach where you spread risk as much as possible across a whole range of stocks, bonds, managed funds and such like depending on how risk averse you are, will minimise that risk. The prudent investor will not have all those eggs in the one basket. Advice again is so important and cannot be stressed enough.
Government and certain corporate bonds are regarded as a safer investment than the equity market. Effectively these instruments should be the last to collapse and the coupon (i.e. dividend) guaranteed at least by the government.
Alternative investments would include Prize Bonds still a good deal with a greater chance of winning than the national lottery while still keeping your placing bet monies. You cannot lose. It is also state backed.
Gold took 27 years to climb back to $850 a troy ounce and that was only last year. Now hovering at the $890 mark, luminaries such as gold expert Robert McEwan have predicted that the price should reach $2,000 by the year 2010. You can buy the real thing (Kruggerrands, gold sovereigns, bullion ) or certificates (like the Perth Mint, guaranteed by the Western Australian government)
Art, diamonds, stamp (philately) and coin (numismatics) collecting, forestry, rock memorabilia, wine investment, first editions all make sense if you want to diversify and your security is good. For any of these alternatives, please email for details.
While all investment is risk, Walt Disney summed it up in one sentence "All our dreams CAN come true if we have the courage to pursue them" he never sat on his assets.John Lowe The Money Doctor, is a Fellow of the Institute of Bankers and managing director of Providence Finance Services Ltd Stillorgan Co Dublin and author of the best-selling The Money Doctor Finance Annual 2008 & 50 Ways to Wealth ( both Gill & Macmillan) Log on to the web sites or iTunes for podcasts "How to get rich this week" For newsletter tel +353 1 278 5555, email jlowe@providence or firstname.lastname@example.org