Investing SSIAs: The original Eircom flotation inflicted considerable damage to the Irish public's attitude towards the stock market as a vehicle for saving. But the success of the SSIA programme has surely set the record straight regarding one of the most basic principles of successful stock market investing: that of committing to a regular investment programme as an effective way of eliminating the impact of stock market volatility.
To this day, the majority place the blame for the Eircom losses squarely at the Government's feet. But that is much too convenient. Undoubtedly, the issue was over-hyped, fuelled by the awesome growth prospects that the internet era appeared to offer at that time. Some blame must also be laid at the doors of the main Irish banks for the aggressive way in which they made credit available.
However, the majority of blame must be shouldered by individuals for making two of the most frequent errors in stock market investing: taking a single stock bet and not taking the time to ask what "value" was on offer.
The confidence gained from the SSIA programme should improve the level of stock market participation in the Republic over time. In addition, wealth has been created in the Republic in the past 10 years, and with wealth comes the desire for choice and the need for diversification.
Personally, I have little doubt that the percentage of Irish people saving through the stock markets will rise in time. Of course, stock-market investing is not as straightforward as property investing, but nor is it anywhere near as complicated or risky as the general Irish public believes.
Of the 1.1 million people who took out an SSIA, 20 per cent opted for an equity-related product and, at the time of writing, are likely to have generated a minimum annual return of 9-10 per cent per annum before costs, but also before the government top-up. Those who opted for the cash deposit SSIAs will probably average a return of 3-4 per cent per annum over the same period.
The equity SSIA products have delivered positive returns in a particularly difficult five-year period in stock market history, which incorporated both the initial dismal years of 2001 and 2002, where markets fell heavily, and the subsequent recovery years of 2003-2006, which saw markets recoup some or all of those earlier losses.
Tables A and B below highlight this striking point. In Table A, I have profiled an SSIA holder who opted for a representative equity product at the outset in May 2001 - New Ireland's Euroland Equity tracker product.
The chart demonstrates two things: the cumulative amount that an investor would have invested in an SSIA account over this five-year period - the straight line - and the fluctuating value of an SSIA account over that same five-year period.
The figures exclude the 25 per cent top-up from the Government. Yes, investors were losing money in the first two years but, by sticking to the programme, they came out ahead.
Table B highlights the progress of the European markets over that same five-year period, as represented by the FT Euro First 100 Index.
What is clear is that the SSIA holder made a positive return and did so against a backdrop where the stock market was still modestly down in value. By buying units in this fund on a regular basis, the SSIA investor was able to take advantage of lower prices to buy more units for the same € 254 monthly investment.
Regular investing cuts straight through stock market volatility and, while a simple concept, is a key tool in dealing with the natural volatility that exists in stock markets.
• This series of articles is being written by Rory Gillen, who manages the Select GV Equity Fund in Merrion Capital and is the course director for the stock market training company,
Invest Like the Best (www.investlikethebest.com). A copy of all six articles can be obtained at the end of the series by e-mailing r.gillen@iltb.ie
