After a boom year for the Irish economy many people may now have extra money from bonuses, payments under profit-sharing schemes, company profits and profits from the sale of property, shares or other assets. The question is: how can you make this money work for you?
There is a huge variety of options to choose from if you want to invest funds. They range from the simplest deposit account to property, stocks and shares, unit-linked and managed funds, art, antiques and even wine.
The key question when weighing up investments in financial products such as shares, managed funds or bonds, is what is the level of risk you want to take. Brokers call it the "sleep-easy factor". They advise potential investors to pick a level of risk at which they will sleep easy at night. There is no point, they say, in picking a few high-risk, and therefore usually volatile, shares and then having heart attacks every time they move on the stock market.
The first thing investors must decide is what amount of risk they are prepared to take. Shares, for example, would be considered high risk especially individual shares that do not form part of a balanced investment portfolio while deposit accounts are at the low risk end of the spectrum.
Since risk and reward are directly related you can expect to get a better return for the greater the risk you take. But remember you are also taking the risk of losing some or even all of your investment.
As the level of risk investors are prepared to take increases, more investment doors are open to them. Conversely the less risk an investor is prepared to take, the narrower the investment options.
Investors in financial products can be separated into three broad categories according to risk: low risk, medium risk and high risk.
The low-risk investor: At the low risk end of the scale investors are more or less limited to three types of products: deposit accounts, guaranteed capital products and guaranteed capital and interest products.
With the low or almost negligible interest rates currently on offer on ordinary demand deposit accounts most financial advisers now see these accounts as only a very short-term home for funds while investors make their real investment decision. More attractive for low-risk takers are term deposits.
Mr Douglas Farrell of National Deposit Brokers says investors should be able to get interest of 4.75 per cent fixed per annum on a five-year deposit. He recommends the Anglo Irish Bank five-year product which allows investors access to 20 per cent of their capital per annum without any penalties. The capital sum is guaranteed and the only risk is that interest rates could rise over the five years reducing your effective return.
For low risk takers there are products where the capital and interest payments are guaranteed. But financial advisers suggest that investors would do well to just match inflation on these products. Failure to match inflation would mean that the buying power of the amount invested is falling in real terms.
Where investors only want their capital sum guaranteed the outlook is better. Here investors can choose between tracker bonds, with-profit bonds, or guaranteed capital funds. These are investment products where the funds of a large number of investors are pooled and invested by fund managers with the investor owning units or a share in the overall fund. The return is related to the underlying performance of the funds invested.
With trackers the investor's return is linked to the performance of a particular stock market - the investment is tracking the index. But investors must be prepared to have their funds tied up for periods of 18 months to five years - whatever is the full term of the investment.
With-profit products require a five to 10-year investment with the capital sum guaranteed on maturity and a terminal bonus guaranteed if the product is held to maturity. Annual bonuses, which are not guaranteed, are added to the value of the investment depending on the performance of the underlying assets in which the funds are invested - usually a mix of equity, property and government bonds. Guaranteed capital products are usually five-year products with no guarantee on the return but the capital sum invested is guaranteed if the product is held to maturity. The only risk therefore is the amount of money you could have earned if you left the money on deposit.
Usually up to 70 per cent of these type of funds is invested in equities with the balance in Government bonds. Financial advisers now recommend them as a way to move from a low-interest deposit accounts into equities without any risk to the capital sum involved. But returns could be volatile.
The medium-risk investor: Investors prepared to take some more risk will generally look at investments in shares and in property. A big investment in one or two equities is much higher risk than the same amount spread over a large number of companies. Unless investors are going to watch the market assiduously and keep abreast of company, sectoral and economic developments, medium-risk takers would be better advised to buy into a managed fund invested in equities.
By putting their capital into funds invested and managed by fund managers investors can choose exposure to a particular sector, for example, the telecommunications sector, or particular countries or geographical areas or a mix of countries or sectors. Examples of such funds include the Irish Life telecommunication and Eurostocks funds. Investors can choose funds which match the risk profile they require.
Some investors might want something more tangible than shares - property for example. But with the boom in the Irish property market a lump sum of £20,000 (€25,400) would not even buy a room in a modest house. Even £50,000 is unlikely to go further than a run-down remote rural retreat which would require another £30,000 or more to make it habitable.
On the commercial property front, such has been the rise in prices that it would now be impossible for an investor with a modest sum to make a direct investment. One property source said that the minimum entry amount now required would be about £1 million.
Again for individual investors the easiest route and probably the only one still open to the modest investor is through managed property funds. A number of the large institutions run property funds in which investors can buy units.
The funds generally comprise up to 30 different properties, each of which should have good quality tenants guaranteeing an income stream. Investing through a fund offers a better spread of property and a lower risk profile and returns have been strong in buoyant markets. The big jump in property prices means that the opportunity to own a holiday home in the Republic is now no more than a dream from most Irish investors. But investing in a holiday home abroad could be an option. There is huge Irish interest in property in Spain, Portugal, Florida and even in South Africa.
An advantage of buying in Europe is the absence of currency risk to either capital or rental income following the launch of the euro. A good quality studio in Paris could be got for £70,000 to £75,000 while a typical two-bedroom apartment would cost about £180,000, according to Mr Ronan O'Driscoll of Hamilton Osborne King. Rental income is good in Paris but he says that the real potential here is for capital growth given the current weakness in French property prices.
In Spain apartments on the Costa del Sol or the Costa Blanca start at around £40,000 although really good locations with the potential for good rental income will cost more. Maintenance and management costs can be high and VAT and local taxes add about 10 per cent to the purchase price.
The high-risk investor: Investors prepared to take a high risk can do very well through investing directly in equities. But the risk of loss is high too.
Generally high-risk investors look to the high growth and emerging sectors or to geographic areas where economies are expected to turn around or produce strong growth. Shares in favour currently include high technology companies, telecoms, Internet and e-commerce operations - the go-go shares of our time.
Small private investors have been piling into these shares at such a rate that regulators in the City of London have become concerned. Recently the Financial Services Association issued a warning reminding investors that the prices of technology shares could go down as well as up.
Many observers are dubbing the current boom in international high-tech shares prices as "irrational exuberance" and there are serious question marks over the survival of some of these companies.
For private investors prepared to play the high-risk/high-reward stakes, ABN-Amro is currently recommending a number of shares: these include German technology company SAP, French construction company Lafarge, British software company Misys and the Italian mobile telephone operator TIM.
Most observers consider Irish shares good value at current levels with many shares trading at well below the corresponding price-earnings ratios (a market measure of expected performance) in foreign markets. However, the downside is that because the Irish market is relative small, comprising just 1.4 per cent of the market capitalisation of the 11 euro countries, many investors are now focusing on other European markets which is depressing Irish share prices. In this market ABN-Amro is currently recommending Bank of Ireland and Smurfit.
Other options: Potential investors could consider art or antiques, wine or jewellery as investments. Mr Stewart Cole of James Adams says that the pitfalls in the art and antiques market are the same as those in any other market - buying a bad product or paying too much.
"My initial advice to anyone new to the market is not to buy for a long while," he says. Potential investors should first acquaint themselves with the market by going to auction rooms, asking questions, and reading about art and antiques, he advises.
Should investors buy something they like themselves or go for what they are advised to buy? Mr Cole says it depends. Investors new to the market will find that as they develop their interest their taste will change quite significantly, he says.
An investor who is buying only as an investment and has no interest in "the look" of a painting or piece of furniture should seek professional advice.
Silver is the easiest antique for the new investor, he suggests. "It can be dated and you can tell exactly who made it, so there is no ambiguity". With furniture there are a number of issues: investors should look for something in as close to its original condition as possible, should check whether it has been repaired or restored and if this has been done properly.
Poor quality repairs or restoration reduce the piece's value. Mr Cole says potential investors should not be afraid to ask for a condition report from the auctioneer.
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