If you want to make money on your investments, you’re going to have to take a least some risk. But how much are you prepared to take and how do you establish the level that is right for you?
“Risk should sit at the heart of your investment decision making. Every choice should start with a clear view of how much risk an investor can take, how much they actually want to take, and the strategy should be built around that,” says Emma Morgan, head of investments at Davy Select, a platform for self-directed investing.
When deciding how much investment risk to take on, she believes investors need to weigh two distinct factors: their ability to take risk, determined by their financial circumstances, age and time horizon; and their willingness for it, which is their emotional resilience.
“Many people are naturally cautious, uneasy with uncertainty or influenced by difficult past experiences in the markets, and these instincts don’t always align with what their financial position might otherwise allow. Balancing these two dimensions is essential,” she says.
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Long-term investing requires the capacity to stay the course through periods of short-term volatility.
“Looking at market history can help set realistic expectations for that. As Mark Twain famously put it, history doesn’t repeat itself but it often rhymes. Recognising those recurring patterns, and keeping long-term objectives firmly in view, can materially improve an investor’s chances of achieving positive outcomes,” says Morgan.
In fact, the biggest threat to long-term financial goals isn’t the kind of short-term market volatility that tends to keep us awake at night, it’s actually the silent erosion of purchasing power.
“Inflation in Europe has averaged around 2 per cent a year for decades, steadily chipping away at the real value of cash. Money held in guaranteed or low-yielding products may look secure on paper, but over time its ability to fund future needs diminishes,” she points out.
By contrast, thanks to the joys of compounding, a 7 per cent annual return, which is broadly in line with long-run equity market averages, “can double an investment in roughly a decade”' she points out.
That’s why taking some level of investment risk is often not only prudent but necessary. “Sensible exposure to markets gives your capital a chance to grow faster than inflation and keeps long-term goals within reach,” says Morgan.
“The challenge is that many people still see risk purely as something to avoid. In reality, the bigger hazard is often taking too little risk and falling short of future needs.”
People don’t think about risk at all when it comes to savings. But these, too, can be eroded by inflation, so it’s important to choose the right account, from the right provider.
`Under the mattress’
Raisin Bank, headquartered in Germany, is an online marketplace that allows users to access and manage savings accounts from 31 banks across Europe. Between them these offer more than 150 term deposit accounts and 11 overnight accounts, boosting your chance of securing a better interest rate for your savings.
Leaving your savings in a zero-interest rate demand account is the equivalent of “keeping it under the mattress”, says Raisin’s Ireland country head, Eoghan O’Hara.
But research from the Central Bank of Ireland shows that’s exactly what we do, with almost 90 per cent of Irish deposits kept in low to no interest overnight or current accounts, compared with 55 per cent in the euro zone.
With Raisin you can divide your savings into several accounts, with the amount in each limited by deposit guarantee schemes of €100,000 per deposit, per bank, in all EU and European Economic Area states, so you get the exact same protections as in Ireland.
Not all savings are equal, he cautions. “There are a number of products on the market that may appear to be overnight savings products but if you dig a little deeper, they actually aren’t. Some are categorised as investment products, which means that the deposit protection on them is €20,000, a significant difference,” he points out.
“In this day and age of fraud and scams, it’s also about making sure you are saving with a regulated bank, whether that be in Ireland or beyond,” he adds. Choosing one with good customer service, including both in-app messaging and a real live person on the end of a phone, gives peace of mind too, he adds.
Another element to be careful of is tax.
If you save with an Irish bank, for example, deposit interest retention tax is withheld directly. Irish residents with savings in another EU member state are taxed at 33 per cent too but may have to self-declare. Where your savings account is actually an investment account, it will be treated differently for tax too so, again, do your due diligence.
O’Hara says he “always encourages” first-timers to invest if they can at all, because of the potential for greater returns.
“But if people are very risk averse, and volatility is something that keeps them awake at night, savings can be a very nice safe haven for money,” he says, “but only if it’s in an account that is beating inflation.”
