Investments

Having all our eggs in one basket is unlikely to prove a successful long term investment strategy. For the most part, a balanced portfolio, responding to individual risk tolerance, is a better bet in laying solid foundations that will protect our wealth over time.

The risk-averse investor has limited options these days, with deposit rates down around 3% before tax. Tracker bonds and with-profits bonds offer a half-way house between low yielding deposits and pure equity funds, where the risk takers will absorb the shocks and tremors of this volatile environment. Many are comfortable with a mix and match approach.

Market Commentary

And so somehow the global financial system survived the 2008 meltdown caused by its own structural deficiencies and greed. The intervening period has witnessed massive diversion of private sector debt to public sector debt.

Sovereign states are coming under ever increasing pressure and will continue to do so. The discovery of false accounting in Greece brought them centre stage, but the other PIGS are not far behind – Portugal, Ireland/ Italy (depending on who’s reporting), and Spain. Indeed other major Western economies are at similar levels of debt relative to GDP, with the UK and US leading the way.

The future viability of the Euro has been questioned by many commentators, including (remarkably) the German Chancellor. Experience should teach us that every and all efforts will be made to protect the currency but we remain in unchartered territory. While the re-introduction of the Irish punt would lead to a significant devaluation, thereby helping exports, I’m not sure I’d relish the prospect of facing up to our debt (NAMA and otherwise) without the support of our European colleagues. I think I’d be packing my bags for greener pastures.

Moneywise Financial Planning Ltd. is Regulated By The Central Bank of Ireland

The rise and rise of Asia continues, albeit with considerable volatility in equity markets. There can be little doubt that this century will see the US and EU overtaken by the Chinese, Indian and other emerging economies. In Ireland, it seems barely a week goes by without further thousands of millions of euros being pumped into the banks, all the more difficult to swallow with sweeping public service cuts on the way – we ain’t seen nothing yet! The international view we hear about, that we’re the ones taking the lead in cutting public expenditure is hard to reconcile with even a cursory analysis of the exchequer figures. The property cash cow has imploded and we have yet to see what will take its place. A couple of hundred on a holiday home and a couple of hundred in water charges are a drop in the ocean.The age of austerity is not far away.

Central here will be the pace of the global recovery and the reaction of the European Central Bank. Many households are already struggling with redundancy, pay cuts, and higher taxes; and that with a base ECB rate of 1% and vast numbers holding a benign tracker mortgages. What happens when the ECB reverts back to its more usually 3% to 4%?

There is a second wave of this crisis on the way in Ireland for mortgage holders and finances should be structured, as far as is possible, to help weather the coming storm. The best way to do this is to save any monthly surpluses into an ordinary demand deposit account. The poor rate of return should not be of concern. The plan should be to build up a nest-egg to help with monthly mortgage repayments when things get tight.

The other item on the more immediate agenda is the proposed removal on the blanket guarantee on bank deposits at the end of December 2010. Will the winter see a flight of capital abroad? Will this result in even more State intervention to meet the new capital requirements set out by Matthew Elderfield, the new Financial Regulator?

Prudent personal financial management would see all individuals limit their deposit holdings to €100,000 (or €200,000 for joint accounts) per Irish bank. The guarantee is set to revert back to this level in January 2011. Do we honestly see depositors losing out? No we do not. But again we are in unprecedented times and no-one can tell what’s coming down the track. An IMF intervention could change everything.

Need an Income?

The advantage of unit-linked funds over privately held shares portfolio is that the distinction between capital and income is blurred – allowing for an enhanced income yield. Gross roll-up” investment instruments are tax–efficient to the extent that all taxes are deferred until such time as monies are drawn down. This exit-tax currently stands at 28%. on the growth element. This tax is deducted on each 8th year anniversary or on exit. Among the attractions of this style is that regular transactions like switching within a “gross roll-up” wrapper in itself doesn’t trigger a tax-hit. And where a regular income stream is selected there is a modest tax retention (reflecting only the growth element within draw-down.) The upshot is that with dividend income automatically reinvested in the core funds, there is no distinguishing income and capital. And if growth in the fund (comprising capital appreciation and reinvested dividend income) should stack-up at say 6% p.a. , a draw-down of 5% p.a. is plausible – with capital values remaining intact.