Making the right decisions for your money
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Those fortunate enough to have significant cash assets have enjoyed a short but relatively benign environment over the past five years with deposit rates climbing to more than 4 per cent in some cases.
There has been a steady decline in this figure over the past 12 months as fears have generally eased in financial markets and bond yields have fallen from the high levels reached during the financial crisis.
Now the downside risk is for those who are holding too much in cash. Deposit interest rates have declined sharply and when the effects of deposit interest retention tax (Dirt) and inflation are taken into account, keeping your funds in cash simply doesn’t make sense any more.
“The good run on deposits and bonds has come to an end so investors need to factor in a greater degree of risk if they wish to preserve and grow their wealth,” says Rory Mason of Key Capital Private, which is the exclusive distribution partner in Ireland of Deutsche Bank Private Wealth Management in Ireland.
Investors need to consider three areas, he says: cash for liquidity; the need for on-going income; and the need for longer growth to create assets for either retirement or for the next generation.
Having all of your assets in illiquid form will bring down your level of return, he notes, so he favours an equity level of about 40 per cent in a typical portfolio.
Equities continue to outperform other asset classes and have had a particularly good run over the past couple of years.
It is vital for all investors to make asset allocation decisions, says Pat McCormack of Barclays Private Wealth. Those who have a 100 per cent cash portfolio have actually made an allocation decision, if only by default, he says.
“Private clients are often more sensitive to the downside risk of losing money than to the upside risk of not achieving good returns,” he says.
“It’s important for investors to identify their risk profile so we work closely with clients around a range of five common risk profiles from which we can then tailor a bespoke solution.”
By way of example, in Barclays’ current model, an investor with the highest risk profile would have a cash and short maturity bonds exposure of 2 per cent, with 50 per cent of the allocation going to developed market equities, 18 per cent to emerging market equities, 7 per cent to real estate and 7 per cent to alternative strategies.
The most risk averse of the profiles, would place 46 per cent of the allocation into cash and short-maturity bonds, 16 per cent into developed market equities, 3 per cent in emerging market equities and just 2 per cent in real estate.