Making the right decisions for your money

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.

In applying diversification, it is important to look at the full portfolio of asset classes available to investors including commodities and real estate in addition to cash, bonds and equities.

Hedge funds and other alternative investments can also play roles in a portfolio, Barclays advises.

Some Irish investors may have developed an irrational distrust of equity markets given the poor performance of certain high-profile Irish stocks over the past decade, McCormack agrees.

It is important for investors to think internationally when considering equities, given that Ireland accounts for less than 1 per cent of the global equity market.

The likely risk profile of an investor is also determined by their age as examined elsewhere in this report, with conservatism likely to grow as investors age.

Tim O’Rahilly from PwC notes an increased level of caution on the part of clients with safety and wealth preservation top of the agenda. A return to fundamental market principles such as having a diversified portfolio of asset classes is now the order of the day again. ‘Protecting wealth’ has been the mantra of investment advisers in recent years. Given the shocks that many financial systems have been subjected to since from the events of 2008 onwards, caution understandably has been a by-word for investors here.

“Investors are doing a lot more due diligence. Many were burnt in the 2008/2009 downturn. A lot had over-exposure to property, in some cases this accounted for up to 80 per cent of their portfolios. Unfortunately, those that were highly leveraged are no longer having to think about wealth management,” he says.

While acknowledging that property currently offers good value for Irish investors, he recommends that in the longer run it should only account for around 10-15 per cent of an investors’ portfolio with a weighting of 30-40 per cent towards equities for a typical investor.

For those with an appetite for risk with the prospect of high returns, private equity is also worth considering for about 5-10 per cent of a portfolio, he says.

For those who favour a more “hands on” approach to investing and who are prepared to take risk, spread betting could be an option to consider.

This form of investment has become increasingly popular, especially for those who wish to take a more active approach to their wealth management strategy.

“It is a very flexible leveraged instrument which can suit a variety of investors from those looking to build a long-term savings portfolio to those using it as a hedging tool,” says Declan Bourke, managing director of IG Index Ireland.

“One of its key advantages is that profits are free from capital gains tax (CGT).”