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Category : Investment

Talk like an investments ninja!

With markets having powered ahead in recent years, in general people are happier talking about the performance of their investment portfolio. After all, it’s easier to talk about gains than losses! But we’ve noticed some conversations shifting towards consolidation of gains as the prospect of a turn in markets probably moves closer all the time. We’re not in the business of trying to time markets, but help investors to take a long-term perspective with their investments and to build a portfolio that matches your own attitude to risk.

But back to those conversations… We know there is a huge amount of terminology and jargon surrounding investments, so we thought we’ll help you sound like an expert the next time those conversations start up again.


Here are some terms that you might hear (or use!) and what they mean.


Active/passive investment: These are different approaches to portfolio management. Active management is where an individual manager will attempt to outperform through wise asset / stock selection. A passive investment approach is where a manager simply mirrors an index, such as a stock exchange index.


Annual dividend/yield: The dividend is the amount paid out to shareholders during a year, usually based on a share of the profits. The dividend yield is calculated by dividing the dividend amount paid on each share by the share price itself.


Asset class: This is a group of similar types of assets that make up an investment portfolio. The most common asset classes are equities (shares), bonds, property, cash and commodities.


Bear market: This usually refers to a fall of at least 20% from a market peak over a period of time.


Bonds: These are loans made by investors to companies or governments, in return for a fixed rate of interest and a return of the original capital at the maturity date of the bond.


Buyback: When a company believes its shares are under-priced and also has excess cash available, they will often look to buy back their shares and then enjoy the profits themselves when the shares rise in value. This is a way of returning value to other shareholders, as after the buyback, there are now less shares in circulation, increasing existing shareholders’ share of the business.


Correlation: The degree to which two securities tend to move in the same direction. A well-diversified portfolio will have lots of non-correlated assets.


Correction: Smaller than a bear market, this term is usually used in relation to a 10% drop in share prices.


Cyclical stock: The stock of a company whose performance rises and falls depending on the economic environment. For example, luxury car manufacturers saw big profits during the boom of the early 2000s… with much leaner times after 2008.


Defensive stock: Different to the above, defensive stocks aren’t impacted to the same extent by the economic environment as their demand doesn’t fall away. Companies that produce basic foods, energy suppliers and healthcare stocks are often considered to be defensive as there is a demand for these products in all economic conditions.


Equities: Shares, stocks – different names but the same thing. They represent a partial ownership of a business.


Economic moat: This is a relatively recent term, introduced by the investment guru Warren Buffett. He used it to describe a sustainable competitive advantage enjoyed by a company over its competitors.


Hedge:  This is a strategy used to offset some of the risks in an investment. Companies use hedging to protect themselves against risks such as currency movements or possible future price rises of a key raw material.


Leverage: The use of borrowings to increase an investment impact. Great when a market rises, a disaster when a market falls. Remember property debts in Ireland in the early 2000s…


Market capitalisation: Market cap for short, this is the total value of the shares of a company. This is calculated by multiplying the number of shares outstanding by the share price.


Premium/discount: These terms are used to describe an exchange traded fund (ETF) that is trading above (premium) or below (discount) its net asset value, or bonds trading above or below their face value.


Real return: The actual return when the impact of inflation is included. An investment that grows by 3% in a period of inflation of 3% delivered no real return.


Sectors: These are used to describe different areas of an economy, such as financial services, construction, healthcare, technology and industrials. A well-diversified share portfolio will usually contain stocks from a wide range of sectors and geographical regions. The reason being to avoid having “all your eggs in one basket”.


Stock Exchange: There are locations, not always physical ones, where shares are traded.


Volatility: A measure of the degree to which a fund’s performance fluctuates. The basic rule is the higher the volatility, the greater the risk an investor is taking in search for higher returns from their investment.


Yield curve: This portrays the rate at which interest rates change when evaluating bonds with shorter maturities to those with longer maturities.


Of course this is not an exhaustive list, there certainly is no shortage of investment terminology. But we hope that these often used and sometimes misunderstood terms will help you shine in those investment conversations!

What are the risks to your investments?

When we’re designing an investment portfolio for our clients, we take into account quite a number of considerations. We start by understanding your investment goals and time horizons, and then we build a full understanding of your liquidity requirements, any asset class preferences that you might have and also the returns that you expect.

This final element brings the whole area of risk into the discussion – what your appetite is for risk and also your capacity to withstand any shocks within your portfolio. We look to build a portfolio for you that, in an overall sense, reflects this appetite and capacity for risk. We want you to achieve your investment objectives, while at the same time ensuring you can get a good night’s sleep and not lie awake worrying about your investments.

We’re asked a lot about risk in an overall sense and also more specifically about the different types of risk and how they might impact your portfolio. So we thought it would be useful to set out some of the main risks that can have an impact on an investment portfolio.

However we want to start with a note of caution. This is not an exhaustive list; it is simply a list of the main risks. Please note that the magnitude and impact of risks change all of the time too, as investment conditions change. Of course we’re always happy to answer any specific questions that you have in relation to any of these risks.


Economic Risk

This is certainly one of the most recognised risks. When there is a major economic shift, this can have quite a significant impact on investment portfolios. The last time we saw one of these was in 2008 / 2009 when the near-collapse of the banking industry plunged the world into recession, having a significant impact on investment portfolios around the world.


Geopolitical Risk

These are politically led events that happen across the world that create risks, which don’t always play out as expected. For example when President Trump was elected, many commentators thought that this would herald a swift decline in investment portfolios. However the opposite turned out to be the case – the S&P 500 index is up 21% since he was elected! But on the other hand, what impact would an escalation of the situation in North Korea have?


Market Risk

This is where individual shares can be dragged down as a result of a significant market downturn in their sector, as opposed to issues that may be affecting the individual company itself. Probably better known as collateral damage!


Currency Risk

This risk is impacted by changes within a single country or region. The value of a currency will be impacted by economic events that are specific to that country (along with other factors). So while the investment performance of (let’s say) British stocks that you hold may perform in line with expectations, the value of Sterling will have an impact on your investment too, either increasing or reducing the value when transferring the money back into Euros.


Interest Rate Risks

We’ve all become very accustomed to an extremely low interest rate environment. However nothing lasts forever, and we are seeing signs around the world of interest rates beginning to increase, albeit quite slowly. These will impact different asset classes. For example, as interest rates rise, the yield on existing bonds falls, as investors will get a higher return from new bonds issued. Fixed interest (bond) fund managers in particular watch interest rates like a hawk! In the same vein, inflation has an impact on some bonds (where a fixed rate of interest is paid), so inflation risk is another that is carefully monitored by fixed interest fund managers in particular.


Credit Risk

Bonds are effectively loans made by investors to issuers (governments or companies usually) in return for a coupon each year and repayment of the loan (investment) at the end of the term. There is always a risk, sometimes very small and at other times bigger that the issuer will default on the repayment of the loan. Higher risk issuers have to pay a higher coupon (rate of return) to attract money to make this risk attractive to an investor.


As stated earlier, this is not an exhaustive list of risks! We all face risks every day in relation to every aspect of our lives, managing investments is no different. However the critical lesson is to be clear about your appetite and capacity for risk, and to ensure that your portfolio reflects this. Then you can leave the fund management experts to worry about all of these individual risks, as they seek to achieve the returns you expect in order to meet your investment goals and objectives.

Brexit, Trump etc. How do you keep your investments on track?

Lots of factors are currently creating a great deal of uncertainty for investors; Britain breaking up with Europe, President Trump settling into the White House (and everything that promises!) and continuing low growth across Europe. Then when you consider interest rates at rock bottom, uncertainty caused by global terror and other such negative factors, the picture is quite daunting for investors today.

So what do you do?

Well the answer is probably, not very much! Let us explain…


Stick to the plan

First and foremost, remember your investment objectives, and crucially your investment timeframes. In most cases, these are medium to long-term – at least they should be if you are invested in any sort of risky assets. These time frames are critical to your investment success. The markets regularly experience short-term volatility, but to try and time this volatility usually turns out to be folly. Research tells us time and time again that staying invested is the key to long-term success. Investors who look to sell out at the top and buy at the bottom usually miss both points, and often by very wide margins.


Volatility is not the enemy

Volatility is simply a feature of investment markets which go through periods of both calm and volatility, sometimes in line with the market cycle, at other times reacting to once-off events. Times of volatility have historically proven to be bad times to make significant investment decisions, as strategies tend to be coloured by short-term factors. Don’t let your emotions cloud your decision-making.


Stay diversified

A far more robust approach to investing is to stick to the asset allocation approach that was used in constructing your portfolio, as this is more likely to deliver long-term success. There are endless examples of investors chasing that one sure bet – technology companies in the late 1990’s, bank stocks in Ireland and foreign property investments in the 2000’s.  And we all know where these ended up. A key principle of successful investing is to stay diversified across asset classes, geographical regions and sectors. This will protect you against unforeseen calamitous events in a single area.


Don’t stop believing (or saving)

When short-term volatility happens, some investors are slow to commit more money to their investment strategies. This is effectively trying to time the market. It’s important that you keep the faith! Keep investing, although talk to us about the best way to do this. It may make sense for you to employ a strategy such as “euro cost averaging”. This is where you invest a fixed amount at regular intervals. This ensures that if markets are moving around, you are buying in to the market at various price points, thus ensuring you’re not exposed to the risk of investing and be exposed to an immediate fluctuation.


Look backward as well as forwards

While of course we are always at pains to point out that past performance is not a guide to future performance, at the same time it’s sometimes worth looking back and seeing where you came from. This hopefully will give you confidence in the future! Look at an investment that you’ve had for a long time – this could be an old pension fund, a children’s education fund or even your family home. Or for example, just look at stock market returns over any 10year+ time frame. With very few exceptions, the results are extremely heartening. This will give you a sense of how time is your friend and will bolster your confidence to stick with a consistent investment approach throughout good and bad times.
Often it simply makes sense to sit down with an expert who will look dispassionately at your situation and reassure you, or guide you towards a change. We would be delighted to help you.

Important: Past performance is not a guide to future performance

Image courtesy of Michael Vadon

Are deposits the answer to market fluctuations?

We understand that building an investment portfolio that meets your specific needs is no easy task. There are a few fundamental principles that we consider when advising you in this regard.

First of all, the aim in building a portfolio is not about “picking winners”, as this is a sure-fire recipe for disaster! Instead a portfolio needs to be constructed with an asset allocation that fully reflects your appetite for risk. This is why we spend time at the outset clearly establishing your own appetite for risk and then help you to build your portfolio from there.

Secondly we are firm believers in the importance of diversification in a portfolio, the concept of not having all of your eggs in one basket. The merits and de-merits of all asset classes need to be considered when building the portfolio. This brings us to the subject of deposits and their place in a portfolio today.


Deposit accounts have their (limited) place

There’s no doubt that deposits always merit some consideration when building a portfolio. They used to be considered risk free, however this notion was tested somewhat during the financial crisis as some banks teetered on the brink! However they are generally recognised as a very low risk investment vehicle, which is attractive to some investors. They also are extremely liquid. You can walk into a bank, and if your money is in a demand account you can withdraw it all on the spot. Deposits also make a lot of sense if your investment horizon is very short.


Never forget about diversification

However there are also issues with deposits that cannot be ignored. Some savers simply put all of their money in the bank and leave it there. This may be a mistake for a number of reasons. First of all, this approach may not suit your appetite for risk and it completely undermines the merits of diversification. Depending on your investment timeframe and risk appetite, you may be better served by also considering other asset classes in order to achieve your investment objectives. Yes, there is very often merit in having some of your money on deposit, however it often makes more sense when your money is split between deposits and other asset classes.


Timing markets is folly

Of course some people like to keep their money on deposit while they wait for the markets to fall, with a view to jumping in when investment assets are cheaper. From our experience this is folly, as trying to time the markets is not much different to trying to pick winners. Typically when investors try to time markets, they miss the peaks (to sell out of markets) and the troughs (to buy into markets) to the detriment of their investment portfolio. And they end up constantly questioning themselves, “Is now the time to buy / sell”?  Statistics have shown time and time again that successful investors stay invested through good times and bad. They make sure that their portfolio reflects their risk appetite and as a result, they can live with the swings and roundabouts of the markets as they take a longer-term view of their investments.

Coming back to the title of this article, seasoned investors recognise that market volatility is simply a feature of investment markets. They learn to accept it, once they have a risk-based portfolio in place that reflects their own appetite for risk. If deposits have a place in that risk-based portfolio, then they should be included. Removing volatility altogether is not the answer.


Negative interest rates?

And then of course, you just can’t ignore the really poor interest rates that are being offered on deposits. We’ve recently seen one of Ireland’s main banks starting to charge corporate customers for the pleasure of holding their money, rather than paying interest! And while this trend hasn’t carried through to consumer deposits as yet, already a number of the banks are paying 0% or very close to it to consumers on demand deposit accounts, meaning your hard earned savings are simply treading water. And then to cap it all off, DIRT (deposit interest retention tax) has been increasing over recent years and now stands at 41%. It’s hard to win with deposits!



In summary, deposits always warrant consideration and often make sense as part of an overall investment portfolio. However tying all of your money up in deposit accounts may not be the wisest strategy.

5 Principles of Sound Investing

Investing today can be a bit of a minefield. You could end up paralysed by fear, worrying about the possible impact of the likes of Brexit, market fluctuations, elections here and abroad and terrorism threats! However as your financial adviser, we remain focused on your long-term investment and pension objectives, and always do our best to keep you on track to achieve them.

Of course we remain vigilant about all of these potentially damaging events, but all of the time we stick to some important principles that have stood the test of time for investors for many years now.

Learn the Market Cycle                  

The investment market usually (but not always) follows a typical cycle as shown below. While you obviously cannot rely on all of the different factors coming together as illustrated, this is a useful picture to bear in mind.

There are always anomalies, such as the unprecedented low interest rates that we’ve seen in the last few years, but remaining aware of the market cycle can help you to avoid letting greed or excessive caution cloud your judgement.


Diversification is key

There is always the temptation for investors to follow the latest and supposedly greatest hyped-up investment. This might be investing only in property (remember what happened in Ireland 10 years ago…) or indeed acting on a great share “tip” that you got. Putting all of your money into one area is an extremely risky strategy; if it goes wrong, you could lose the lot.

Always spread your risk and build your wealth through funds or pools of assets. This diversification will give you some protection against one of the companies you’re invested in, or even one of the asset classes going south.

Volatility is okay!

When people get fixated on short-term changes in their investment and pension assets, volatility can cause a lot of concern. The focus turns to those short-term dips in returns and investors get anxious.

However volatility is simply a feature of long-term investing. Markets will go up and down, the critical tactic is to stay invested and not react to short-term factors.

Trying to time markets is folly…time and again it has been proven that you are better off riding out the peaks and troughs, rather than trying to call them yourself. However if you really struggle with the volatility of your portfolio, it’s possible that you don’t have the right risk-adjusted portfolio for you in place. Give us a shout, as we’ll help you to identify your appetite for risk and will design a portfolio that will allow you to sleep at night!

Know the magic of compound interest                                                                

Compound interest has a huge impact on investment and pension portfolios. For this reason, it is really important to start investing early, and to keep investing. The more time each tranche of your investment has to grow allows the magic of compound interest to really deliver!

To help see the effect of compound interest, it’s worth remembering the ” Rule of 72″. This is a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to duplicate itself. For example, the rule of 72 states that €100 invested at a 10%p.a. return would take 7.2 years ((72/10) = 7.2) to turn into €200.

Knowing this rule will help manage your expectations in relation to the performance of your portfolio or will help you identify the return needed to double your money in a specific timeframe.

Time and compound interest are great friends of investors!

Cash costs you money

Cash in the bank today is simply a missed opportunity. Yes it is a safe haven and staying true to the diversified portfolio principle, it makes sense to have an allocation of your portfolio in cash. But many investors today have too much of their money sitting in the bank, being eroded by inflation and very low interest rates.

You have long-term financial goals and probably need a level of investment growth to achieve them. Leaving your money sitting in cash is likely to undermine your chances of achieving your goals.
At the end of the day, investing is not always straightforward. Your emotions, doubts and behaviours can get in the way and undermine your likelihood of success. But that’s where we come in. As your independent financial adviser, we can be completely objective and can help you plot your course to help you ultimately achieve your investment goals. These are a few tips to help you along the way – we of course would be delighted to discuss any of these or indeed any aspect in relation to your investments.

Warning: If you invest in these funds you may lose some or all of the money you invest.

Warning: The value of your investment may go down as well as up.


Help your Kids to be Wealthier than You!

We all want the best for our children, as we help them every day to build up their social skills, develop relationships, maximise their education opportunities and most of all be happy children! We can also help them in a financial sense too. Below first of all are a few valuable lessons you can teach them about managing money, followed by two ways you can ensure they receive money from you more tax efficiently. Hopefully these will all help them have a healthy relationship with money into the future!
Teach your children about saving

Show your children the benefit of saving small amounts of money each week out of their pocket money. The old adage of “Look after the pennies and the pounds will look after themselves” stood us all in good stead over the years.

This teaches children that they cannot have everything they want on demand, and that by being patient and saving a few bob, they then get to enjoy more expensive toys / games / clothes than they could otherwise buy. They also tend to become more tuned in to making sure they aren’t just frittering their money away.
Teach them to be wary of borrowing

Borrowing money is a part of life and often makes good financial sense. Getting a mortgage to buy a home or even a loan for a car are often necessary. However borrowing money simply to support a lifestyle you cannot afford is a recipe for disaster.

Credit cards can feel cool to children! That is until they get their bill and suddenly realise the rates of interest being charged… Children should be taught about the dangers of credit cards in particular and loans in general, and that they are only suitable as part of a structured financial plan.
Educate them in your own financial errors.

Unfortunately we’ve all made financial mistakes over the years. Maybe too much property in the boom, maybe we didn’t get proper independent financial advice early enough in our lives.  Tell your children about lessons you’ve learned and how they can avoid making these same ones themselves.

Give money to them in a tax efficient way

One of the impacts of the economic crisis was a slashing of the amount of money that could pass tax free from a parent to a child either as a gift or as an inheritance on death. In the good old days, a parent could gift more than €500,000 to a child before any tax applied. However this lifetime tax-free threshold now stands at only €280,000.

Should you be in the fortunate position to help your child buy a house for example by gifting them money, the amount you give them will be set against the threshold. This will mean that at a late stage, such as when they inherit from you on your death, their tax bill will be bigger as they will have used up much of their threshold.

The answer may lie in how you gift the money to a child. Rather than giving your child a large sum of money in any one year that is offset against their lifetime threshold, it is more efficient to gift them a smaller amount of money each year. There is a “small gift exemption” that allows any individual to gift up to €3,000 to any other individual each year without impacting the lifetime threshold at all.

So two parents can gift €6,000 to each of their children each year tax free, and without impacting the lifetime threshold. So if you started this at birth, your child could enjoy the fruits of your savings of €120,000 (plus all growth on this) at age 20 without any tax implications. Now there’s a nice start to their adult lives!

Life assurance can help too

Even without gifts prior to death, these lower thresholds are causing problems for many families that are inheriting money from parents. Many families are facing sizeable inheritance tax bills, as a tax rate of 33% is applied to the inheritances received by individuals above the threshold. This has resulted in many family homes having to be sold by beneficiaries when they would have preferred to keep it, just in order to generate cash to pay the tax bill.

Life assurance is one of the best solutions to deal with this issue. In fact there is a specific type of policy (a section 72 life assurance policy) for this purpose. A section 72 policy does not form part of the estate, instead its purpose is solely to pay the inheritance tax liability. The premiums can be paid either by the parents or by the future beneficiaries. Having this cover in place should ensure that a tax bill won’t decide whether inherited assets can be retained or not.
If you can teach your kids a few valuable lessons about money and maximise the amount of money they will receive from you during your life and on death, there’s every chance they will end up wealthier than you one day!

Why Are You Just Giving Your Money to the Bank?

We really sat up and took note of some analysis carried out by the stockbroker Davy into the Irish banks that was carried out a few months ago. The analysis found that there is €50bn (yes €50 billion!) sitting in current accounts in Ireland. Yes current accounts, not deposit accounts! And how much do the banks pay you for this money that they in turn lend out at meaty enough interest rates? Absolutely nothing…

Why is this money just sitting there? Well the main reason is that traditionally people may have moved spare cash to deposit accounts where they then earn interest on it. However with interest rates pretty much at zero today, people just aren’t bothering. Savers are being offered on average only 0.31% p.a. in deposit accounts and don’t see it as worth the hassle of filling out the forms, getting copies of this, that and the other in order to move your money on to deposit… So what should you do?

You may like the feeling of security of having money in the bank, where at least the actual value of it is not going to fall. But really this is not a good strategy, as any inflation at all means you are losing money in real terms. The good news is that there are alternatives out there that are worth considering, and different strategies that you can use to further minimise any risk.

We really believe that it’s in situations such as these that we can really earn our corn, when faced with a challenge of helping cautious investors find a slightly riskier strategy, and ensuring you are still able to enjoy a good night’s sleep…


Be clear about your objectives

Why are you actually saving money? Is it for a big holiday next summer or is it for your children’s education in 10 years time? Or indeed are you thinking about your retirement? Your goals and objectives will sit at the heart of our advice, as they determine the strategy. And maybe they will determine that putting your money on deposit is in fact the right thing to do.


Be clear about risk

Once we’re clear on your objectives, we need to get clear about your attitude to risk. If you are a very cautious investor, this requires a different approach than that followed by more aggressive investors.

Your appetite for risk (how much you like to take) and your capacity for risk (how much you can afford to take) need to be carefully determined, as these will fundamentally change the required investment or savings vehicle needed and the type of assets that you might invest in.

If you are a very cautious investor who leaves money sitting in your current account, we’ll run through some alternative ways of saving your money. While they might mean slightly more risk, we’ll give you some proper perspective on this – when it is explained fully to you, you might decide that the alternatives are definitely better than your current approach.


We won’t try and time the markets

None of us have a crystal ball and if we knew when markets are about to fall, well we probably would have retired long ago! Nobody can time the markets. And as a result, this introduces risk if you are going to put money into the markets. Of course you are worried that you might invest, and then markets might start to slide, resulting in you losing money.

If this is a concern, we might recommend that you drip-feed your money into the markets over a period of time. As a result, if markets fall, you are buying into the market at a lower price with some of your money. This is a great way of smoothing out some of the highs and lows of the market, if you have concerns that markets are a bit high. This strategy known as “pound cost averaging” means that you actually buy less of the market if prices are high and more of the market when prices are low.

At the end of the day, leaving money sitting in your current account makes little sense. There are alternatives out there for everyone. We would welcome the opportunity to chat through these alternatives with you, and find the right one to meet your specific objectives and your attitude to risk. And no matter what happens, we’ll do our best to make sure your sleep is not disturbed!

The language of Investments made simple

Spending all of our time advising clients in relation to their investments and pensions, researching markets and investment propositions, and meeting fund managers and investments specialists comes with a significant occupational hazard: the use of jargon!

So first of all, our apologies if you have been on the receiving end of jargon from us. We’re now going to put that right by explaining some of the main terms that we commonly use in relation to investment markets, to ensure we all have the same understanding of them.

Asset Classes

This is a term that is used to describe the different types of underlying investment funds that make up a typical investment portfolio. The most popular asset classes include the following;

  • Shares or Equity: Equity funds buy a fraction of the ownership of a range of companies. These shares (to denote a ‘share’ in the ownership) are typically traded on a stock exchange.
  • Bonds: Companies or governments issue these, where they effectively borrow money from investors in return for an agreed rate of return over an agreed period of time.
  • Cash: In a cash fund, the manager places money on deposit with a bank, across a range of varying maturity dates. This was seen as an absolutely secure means of investing, for which the returns gained are generally quite low. However as we’ve seen in Greece recently and their banking challenges, nothing is 100% secure…
  • Property: This is where an investment fund (usually) buys a number of properties and the performance of the fund is dependant on the rise or fall of the value of these properties and the income they produce from rent.
  • Currency: In a currency fund, the investment is based on the performance of a number of currencies in relation to each other. A specialist manager identifies opportunities based on his/her knowledge and expectation of currency movements.
  • High Yield funds: This is another type of equity fund that is made up solely of shares in companies that have a common characteristic – a history of having paid and/or an expectation of higher than normal levels of dividends in the future.
  • Absolute Return funds: These are funds that use complex investment instruments to invest in a range of asset classes. By using these instruments and investment methods, they can produce positive investment returns in both rising and falling stock markets. This approach is utilised widely by hedge funds.

Most investors don’t want to “bet the house” on the performance of a single asset class or worse still, the performance of a single share price. As a result, we would usually recommend a diversified portfolio to investors. Rather than having all your eggs in one basket, this approach spreads the investment amount over a number of asset classes, and within each asset class over a number of underlying investments. The aim is that if one company / sector / region / asset class underperforms; the whole investment is not significantly affected. People in Ireland who had a significant amount of their investments tied up in property in 2007 / 2008 probably rue not having a more diversified portfolio.

Portfolio Management Strategies

Active management is where a fund manager makes investment decisions in relation to investment assets with a view to outperforming an investment benchmark or peer group. In this strategy, they use their knowledge and expertise in relation to stock picking and market timing with the aim of beating their competitors.

Passive management on the other hand removes this need to get timing and stock picking right. Instead the investment fund simply mirrors the investment make-up of the benchmark to produce similar performance to the benchmark and achieve average returns. This reduces the risk of outperformance or underperformance against the benchmark. This investment strategy has gained in popularity, as seen through the growth of a range of index-tracking funds.

Investment Styles

The two most popular investment styles are value investing and growth investing.

Value Investing is where the fund manager seeks to buy shares or other securities that appear to be under-priced or “cheap” when they examine the shares using their investment analysis tools.  Warren Buffett has long been a proponent of this investment style.

Growth investing on the other hand is where fund managers invest in companies where they expect significant growth in the share price, even where the share price may look expensive using their investment analysis tools. This investment style fell out of favour somewhat after the dot-com bubble burst, where the expected growth of companies never materialised.

These are just a snapshot of some of the most often used terms / jargon used by us in discussing investments with clients. There are of course many more, and please never be afraid to ask us to slow down and explain them fully to you!

However it is of course one thing understanding the terms, another altogether knowing which is the right approach for you. But that is where our expertise comes in, understanding your specific investment objectives, determining your appetite and attitude in relation to taking risk and then guiding you towards the best investment solutions to fit your own requirements. You just can’t beat good, independent advice!

If there are any other terms that you would like explained, please just ask!

Are you leaving over half the return from the stock market on the table?

“We have met the enemy, and he is us”, is a quote attributed to Pogo, a comic strip character created by American cartoonist Walter Kelly. Pogo may well have been referring to investors, whom it would seem are their own worst enemies when it comes to making investment decisions.

According to a recent study carried out by DALBAR, a leading financial services research firm, the average stock market investor over the last twenty years (to end 2011) has earned a return of 3.5% p.a. versus the average fund return of 7.8% p.a. Less than 50%! Are you leaving more than half the stock markets’ return on the table?

People make poor investment decisions because they are human. We all come with mental software that tends to encourage us to buy after results have been good and to sell after results have been poor. Exactly the opposite of what we are told to do, i.e. buy low and sell high.

So why does this happen? To explain, I’ll introduce two investment terms – time-weighted returns & money-weighted returns for funds.

  • The time-weighted return which is the return typically reported, is simply the return for the fund over time.
  • The money-weighted return on the other hand calculates the return on each of the Euros invested. These two calculations can yield very different results for the same fund.

So let’s look at an example to explain the difference between the two.

Say, a fund starts with €100 and goes up 20% in year 1. It’s now worth €120. The next year however, let’s assume it loses 10% (-€12). So the €100 invested at the beginning is worth €108 after two years and the time-weighted return is 3.9% p.a.

Now let’s say we start again with the same €100 and the same first year results of a 20% return. Investors see this very good result, and because they assume the good returns will continue (remember we’re human!), they pour an additional €200 into the fund. So now they have €320 at the end of year 1 — the original €120 plus the additional €200 invested. The fund then goes down 10% in year 2, now causing €32 of losses.

The fund will still have the same time-weighted return, 3.9% as this is calculated on the fund’s performance over two years (an increase of 20% in year 1, a drop of 10% in year 2).

But now the fund will be worth only €288, which means that in total, investors put in €300 — the original €100 plus €200 after year one — and lost €12.

So the fund has positive time-weighted returns but negative money-weighted returns. Investors’ tendencies for buying high and selling low means that investors earn, on average, a money-weighted return that is less than 50% of the market’s return (as per above). The results of our decisions with respect to timing are simply appalling.

The DALBAR study also identified something even more startling. An investor committing money on a regular basis to the stock market fared even worse than the lump sum investor, with a return of just 3.2%. So what are we to make of this?

Patterns of stock market returns are important to the regular investor. Investment strategy cannot be simply ignored if an investor is committing money on a regular basis. You can’t just throw money blindly at the market.

To investors that commit lump sums to the stock market, you’re pre-disposed to undermining your return through your own actions. Emotions, like hair growth or your heartbeat can’t be controlled. You need to take the emotion out of the investment decision making. To do this, at a very minimum, have a proper plan when investing and seek external validation of your plan. Or better still, employ an expert who won’t get caught up in the emotion of the investment decisions to invest the money on your behalf.

Where do you find and get access to such an expert? Well this is where we come in. It’s our job to show you the range of investment options available to you, to talk you through the different funds and fund managers available and to help you find the one that best suits your needs. We’re on your side and again, will be able to leave the emotion out of the decision making!

If you have any comments or queries in relation to this article, we look forward to hearing from you!

8 Investment Tips Worth Remembering!

People face a whole range of different personal finance challenges and often ask us for tips. The area of savings and investments is the one we’re asked about the most. So we thought it might be useful to give you a few tips to consider to best manage your hard-earned cash. Of course we strongly advise you talk to an expert about these first, to help you identify which of these are right for you.


Pay yourself first & save up to 10% of your monthly income

One of the biggest mistakes that people make in relation to saving is that they place it as the lowest priority item in their monthly budget. They pay their mortgage, their bills, they go shopping, they spend on luxury items and entertainment, they probably waste a few bob…and then they save whatever is left over! So effectively you’re paying yourself last.

One great habit of saving is to pay yourself first every month, immediately after you are paid. If you’re running out of money then at the end of the month, yes, you’ll have to “dip in”. But you’re much less likely to waste money, if you have to dip into your savings to do so. And how much should you be saving? Aim for 10% of your income, even more if you have no pension scheme in place.

Be careful of individual shares

So you get a great share tip. What do you do? Throw a lot of your money at it to really make a worthwhile gain? Well, be really careful, this is a very risky strategy. We only have to consider all the unfortunate people in Ireland who only 6 years ago had their wealth tied up in the shares of an Irish bank. Because they were a “sure thing”, with no risk attached. These people lost the lot.

Always spread your risk and build your wealth through funds or pools of shares. This diversification will give you some protection against one of the companies you’re invested in going south.

Learn the ” Rule of 72″

The Investopedia definition of the Rule of 72 is that it is a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to duplicate itself.

For example, the rule of 72 states that €1 invested at 10% would take 7.2 years ((72/10) = 7.2) to turn into €2.

Knowing this rule will help manage your expectations in relation to the performance of your portfolio or will help you identify the return needed to double your money in a specific timeframe.

Follow an Asset Allocation Strategy

Spending time getting your asset allocation right, and adjusting it as your investment objectives and/or market conditions change, is a much more robust investment strategy than trying to pick the right stocks. Yes picking the right stocks can result in very sharp gains in a portfolio. However they also can result in very steep drops too. Spending the time getting your asset allocation right and then adjusting it as required is likely to result in a more consistent return. Of course this is where we can really help you! We can help you identify the right allocation to suit your investment objectives and risk profile, and then help you to implement it.

Use investment strategies to increase wealth

There are a number of different strategies that you can use that are likely to serve you better than an ad hoc approach. A few to consider include:

  • Buy and hold: This is where you buy investments (usually stocks) and keep them for a long time, ignoring short-term fluctuations in the market.
  • Pound cost averaging: This is where you invest a fixed amount of money in a fund or basket of shares on a regular, monthly basis. When prices are high, your monthly amount will purchase less shares of a well-performing asset, but if the price falls, your “new” money will buy more shares.
  • Rebalancing: This is where you identify your desired asset allocation at the outset and then buy or sell assets in your portfolio to maintain this allocation as the prices of the assets change.


Adopt a non-emotional investment approach

Look at investment markets coldly and don’t allow emotion to cloud your judgement. Greed and fear are two of the greatest threats to a good investment strategy.                                                                                       

Learn the Market Cycle                  

The investment market usually (but not always) follows a typical cycle as shown below. While you obviously cannot rely on all of the different factors coming together as illustrated, this is a useful picture to bear in mind.


Get independent advice

Well we would say that, wouldn’t we? But this is so important. Your independent financial adviser can help you navigate your way through the choppy investment waters, with their sole objective being to help you achieve your investment goals. We’d be delighted to talk you through any of the tips in this article.

Warning: If you invest in these funds you may lose some or all of the money you invest.
Warning: The value of your investment may go down as well as up.