If the financial market meltdown and near collapse of the Irish banking system in recent years has taught investors anything, it’s that diversifying your assets and planning carefully for your goals – rather than going overweight in a few shares or in property – is a far more prudent approach to managing your money.
Marah Curtin, head of client services at Davy, says the market meltdown “changed the way families look at how their wealth is managed and consequently changed their approach to investing. We’ve seen a redefinition in risk. Portfolio performance is important,” she says, “but what clients really care about is achieving the goals that matter to them.”
When looked at in the context of an uncertain State pension and a shift away from defined benefit to defined contribution pension funds, it’s evident that people not only have to engage in planning but also take responsibility for their own financial health. “The landscape is clearly shifting towards people having to provide for themselves,” says Andrew Fahy, tax and financial planning director with Investec Wealth and Investment.
Getting started
In an ideal world, everyone would set out a detailed financial plan, says Fahy, looking at their future expenditure, college fees, retirement, etc. But of course this is not always possible.
As Fahy notes, getting started in your 20s and 30s can be difficult – and can be further complicated by the fact that people may still be dealing with legacy debt issues.
“Retirement planning is not to the forefront of everyone’s mind – often people are just trying to stay afloat,” says Fahy. “While the power of compounding is incredible, ultimately it comes down to affordability.”
But to use that old aphorism: if you fail to plan, you plan to fail. “If you don’t have a plan, the probability of having a bad outcome is much higher,” says Adam Cleland, head of portfolio construction with Davy.
Setting your goals
You might wish to plan for your children’s college years, or maybe you have your eye on a holiday home to purchase in a few years. We all have financial goals, and of these, planning for retirement is perhaps the most critical – particularly in such an uncertain environment.
“In a world where a defined benefit pension existed, you didn’t have to worry about it. But that era is gone, so people do carry more responsibility themselves,” says Cleland.
Consider the demographics. A 65-year-old man has a 41 per cent chance of living to age 85 and a 20 per cent chance of living to age 90, while a 65-year-old woman has a 53 per cent chance of living to age 85 and a 32 per cent chance of living to age 90. Those odds suggest that you may live for a further 30 years in retirement and need to look at the longer-term when it comes to planning.
“The sad fact is that pensions bore most people. But this is likely to be the biggest portion of your wealth in retirement and you really need to think about it,” says Fahy.
Picking a strategy
“Picking the right strategy is more important than picking the right assets,” says Cleland, noting that it’s about turning your personal objectives into a strategy.
Once your goals are in place, and you know your objectives, it then comes down to choosing the assets that will allow you to fulfil these. “The key thing is the timeline. If your children are still babies or toddlers (and you’re planning for college), you have a pretty long timeline. Given those circumstances, it might be appropriate to take on a bit more risk,” says Fahy.
Diversification plays a key part in allowing a portfolio to float through turbulent markets. “When you have single assets, it brings a high degree of risk,” says Cleland.
Irish investors have had to learn this the hard way through the collapse in the share prices of both AIB and Bank of Ireland. Curtin, who previously worked in New York, says she is shocked by the over concentration in bank stocks she has seen in customer’s portfolios since moving to Ireland. “People were assuming more risk then they need to,” she says.
Tax implications
When you’re investing for the long-term, it’s also important to keep an eye on how tax is affecting your portfolio. While experts say
that investments shouldn’t be driven by tax alone, it can eat into your return.
“Any return that you generate, a larger share is going to the Government. Hopefully tax rates will moderate, but it will be a while before it happens,” says Cleland.
Exit tax on funds and deposits (Dirt) has increased dramatically, up from 33 per cent to 41 per cent in last year’s budget, but capital-gains tax is less onerous at 33 per cent. This means investments that are liable to capital-gains tax (shares, property, etc) may be more attractive than others (deposits, investment funds, bonds, etc), all other things being equal.
Those saving are also likely cognisant of the recent diminution in tax relief on the size of an eligible pension fund – and the ongoing talk that income tax reliefs for pension saving may be cut.
“A lot of people are already thinking, I’m on my own, it’s up to me to provide for my own retirement. Their ability to do that would be further diluted by reducing tax relief,” says Fahy. “If reliefs were to be cut further, it would start to very much impact on middle earners.”
Your source of funds is finite
It’s nice to think that with sufficient planning, and a little help from the markets, anyone could achieve their financial goals, whatever they might be.
However, typically we all will have a finite pot from which to work,so you may not ever have enough for everything you desire. “In the age of instant gratification, it’s tempting to spend today and worry tomorrow,” says Curtin, adding that it’s important that people quantify the long-term impact of today’s financial decisions.
“It’s important to know exactly what the trade-offs are before making important financial decisions,” she says. It might be important to you, for example, to send your children to private school, but this may come at the expense of a sufficient pension pot and should be considered.
Stay engaged: Pay attention to how your money is invested
“The real secret in wealth management is to have good engagement,” says Adam Cleland, head of portfolio construction with Davy. This means keeping on top of your portfolio and strategy.
“The key thing is when you do a plan, that plan doesn’t guarantee you a result. It’s based on a certain number of assumptions, so you have to keep checking that you’re on target,” Cleland says. “People’s personal circumstances and the market changes, so there has to be a dynamic that takes those into account.”
Sitting passively by won’t reap you the biggest return. “The biggest thing we often see is people who have made a decision to start a pension and contribute to it,” says Andrew Fahy, tax and financial planning director with Investec Wealth and Investment.
“But all they do is passively make contributions; they’re paying no attention to how it’s invested, which is the most important part of it.”
With many advisers providing online access that allows you check your portfolio 24/7, should you check your portfolio on a daily basis?
Marah Curtin, head of client services at Davy, doesn’t think so. “I would recommend no more than quarterly for anyone,” she says, adding that you should also have a sit-down review with your adviser once a year.
A bit of distance from your investments can, in fact, help you through any market turbulence.
“A huge challenge for investors is to cut through the noise,” says Cleland. “Your longer term strategy should be the main driver. You should be alert to changes, but you should not change your strategy.
“It’s about having a clear vision of where you want to be.”
