GOT A LITTLE money aside that you’d like to benefit from? While the savings in your deposit accounts are very important for unexpected costs and emergencies, they pay (on average) less than €20 a year in interest, according to the lastest Central Bank report.
So, why do we tend to place all our life savings in low-interest deposit accounts? In short, we’re falling victim to The Money Illusion - the idea that if we save €100 in 2019 that it will still have the same ‘real’ value in say, 2021. Unfortunately, the ‘real’ value (purchasing ability) of that money is decreasing all the time.
As the Money Doctor John Lowe explained earlier in the series, this is why putting your savings deposits are for the very short term. He reminds that even at the highest interest rate on the market, you’ll get around 0.0975% after interest – a payout so small you could probably miss it.
So what should we know about our options outside of deposit accounts? Here Lowe gives a crash course in what you should know if you’re fortunate enough to be in position to invest.
“Less than 10% of us do a budget each year”, says Lowe, who stresses the importance of dividing your savings into short, medium and long term. In the short term, you’ll need to work out how much you need each year for birthdays, anniversaries, Easter, Christmas and holidays. Then divide this figure by 12 – that’s what you need to put away each month.
Lowe also advises people to save up 3-6 months’ salary for their ‘rainy day fund’, in case of unexpected costs or a sudden loss of income. Then medium term, if you’re a parent, you’ll also need to plan for possible third level. And it’s only when these three are in good shape, should you consider investment.
Lowe is an avid golf fan – he’s played on most of the best courses in the world and always follows the biggest tournaments closely. Even with all of this knowledge, he still finds it near impossible to win big when he bets on the Masters. Individualising your stocks is a more extreme version of this, says Lowe: “It’s a mug’s game – unless you know more than most stock brokers, it’s unlikely that you won’t lose out.”
So what’s the answer? “You need to diversify – the whole point is to spread your risk”, says Lowe. This you can only get with expert advice who can guide you to a portfolio that carries a lower risk than individualising (more on that below). And if you’re absolutely set on it, keep your investments small: “If you want to get into that area of trading, I would put a small amount of money in that you can afford to lose.”
Lowe urges new investors to get familiar with the European Security Markets Agency volatility scale. This is a scale from 1-7 that categorises every market you can invest in. As investing in those ranked 1 and 7 aren’t really worth your time (1 being not risky enough, 7 being too risky), generally you should choose funds ranked from 2, 3, 4, 5 and 6.
Lowe explains how it works: “Six for example would have hundreds of technology companies, so if one goes down it’s not the end of the world.” Investing in these markets can provide a little more stability, and it’s worth looking for more stabilising features.
“You need to diversify with your investments – the whole point is to spread your risk”, says Lowe. Some investment firms will offer what are known as ‘free swaps’. This means that you have the ability to “take your money out of a higher-risk fund like a six, and stick it into a two.” As Lowe reminds, “Stockbrokers are not clairvoyants”, so features like this can give you a bit of security with your investment.
Other investment firms may offer an in-built algorithm that does a lot of the work for you. For example, if values start to decrease dramatically, your money may be transferred into a lower risk fund, therefore minimising any loss. These are particularly useful for those who aren’t that interested in tracking their investments day-by-day.
Lowe urges readers to go to a few experts: “I’m a great believer in shopping around and getting choice”. He warns that relying on friends and relatives makes it “so easy to be hoodwinked by stories of ‘I made this amount on that’”. Ultimately, finding the right investment will be individual to the money you have available and the level of risk you’re willing to take and this should be assessed by an expert for you.
If you’re particularly concerned about risk, Lowe warns against investing in the wrong type of fund, Lowe has the following advice. Firstly, he reminds that the FTSE 100 “don’t have any cover by way of bonds or cash in the event of a global crash – they’re all equity funds”. And secondly, while tracker funds guarantee 90% of your money, with only 10% to gamble with it’s unlikely you’ll make money from them.
And above all, try to give them the time they need to grow, says Lowe:
Warren Buffet once said that ‘investment is the transfer of wealth between the patient and the impatient’. Investing in the stock market is the best return you’re ever going to get of any asset class.
Ready to start investing? See what kind of investor you are and check out the range of investment options available at KBC. There’s a dedicated investment advisor in every KBC Hub to take you through all the options – book your appointment now.
Terms and conditions apply. KBC Bank Ireland plc is regulated by the Central Bank of Ireland. Warning: The value of your investments may go down as well as up.
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