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!

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!

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!

“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!