Dear Money Mentor,
I have €40,000 to invest, but I’m unsure where to invest it. The money is part of an inheritance which came unexpectedly. One thing I know is that I will get very little for it in the bank on deposit. I am not in dairying, but when I asked a neighbour about investing he said Kerry shares have done very well for him. Would it be a good idea? I don’t want to lose the money as I may need it in the next three to five years. We have two children who are in primary school.
When someone asks me about which shares to buy I run a mile. One reason is that share tips are very dangerous, even when it’s a Kerry farmer tipping Kerry shares. It’s not that I have anything against Kerry shares, but investing directly in any one company is a high-risk activity. The Kerry farmer probably did not have to buy them as he most likely received them during a spin-out, so of course they did well at little risk to the initial investment.
But imagine that any shares you invested in based on a tip then halved in price overnight. Would you go looking to thank the person who gave you the tip?
The situation raises a lot of questions about making investments in the current markets.
The problem is that while deposits have little or no risk, they provide low returns. Three years ago you could put money on deposit and get a 5% interest rate for five years. People were being encouraged to do it and in hindsight it turned out to be a good decision if you did not need the money during that time.
Now, with interest rates closer to 1% and the Deposit Interest Rate Tax (DIRT) at 41%, you can see why some people are willing to take a bit more risk in the hope of a higher return.
To even start telling you where to invest, you would have to look more deeply at what your financial goals are, as well as how likely it is you will achieve them. That should be the starting point of the conversation.
You mentioned you have two children. Is the reason you might need the money in three to five years linked to them and their education? Have you thought about the extra costs needed as they grow up? Many people at your stage in life set goals around education funds, but you should also be thinking longer term, for example about funding your retirement.
Just because the money came unexpectedly should not change the way you invest it. It should be used to allow you to reduce the level of risk you have to take to achieve your goals.
The other big area of investing you need to consider is what risk you are actually happy with taking. The question here is, do you understand the risk that you are going to take? Investment is about risk and reward. Ideally, you want to take as little risk and volatility as possible to get the reward you want.
I talked to Ian Cooke, head of investment services at FBD Financial Solutions, and he recommends running a risk-questionnaire first, to assist you in the decision-making process.
“It does not take long and helps to inform, with a view to reaching the best solution,” says Ian.
This can even be done on the internet and Ian says there is a straightforward nine-step risk profile questionnaire on the Zurich website which you may also find helpful. I went through it and it was easy to fill out and gave me good feedback.
However, it will not give the answer of where to invest. For this, there are a number of key points that Ian says have to be considered:
• Which is more important for you: income from these funds or security?• Do you have the capacity to remain in the investment for the long-term in the event of a sustained period of poor returns in the future?When discussing the point above, FBD Financial Solutions recommends that you give thought to:
• The objectives for the funds at this point.• The requirement for the funds or access to them in the future.• Your desire, if any, for capital security.After answering these questions, you can ask yourself if you would still be comfortable with the risk levels of investing in one company’s shares. Ian made the point that while the person may be very comfortable with Kerry and what it has achieved, it’s just one company and there are things that can go wrong in companies and sectors. You should consider the investment from the perspective of being diversified.
So the big question is, what are the real objectives for the funds at this point?
If it is to beat deposits, there may be safer ways to achieve this than buying one share.
Equity markets and company shares have the ability to generate very attractive returns, but involve a high level of risk to your capital. It could be argued that this risk is greater after a strong bull run that we have seen.
Ian says there have been a number of developments and innovations in the investment arena, which have led to a number of options that the person could now consider:
• More sophisticated methods of assessing risk tolerance.• Funds that are managed relative to the assessed risk profile or tolerance.• Funds that have a mandate to deliver absolute returns – ie not linked to or dependent upon rising markets.I will return to look at a few of these options next week. But for now, I’m afraid there are no easy answers. But if you start asking yourself the key questions, making a decision will be easier. CL
In brief
• Set out your investment criteria and timeframe.• Go to advisers regulated by the Financial Regulator.• Compare what options are available against your criteria.• Identify exactly where the money will be invested.• Undertake a full financial review with an authorised financial adviser before making any investment decisions.
Dear Money Mentor,
I have €40,000 to invest, but I’m unsure where to invest it. The money is part of an inheritance which came unexpectedly. One thing I know is that I will get very little for it in the bank on deposit. I am not in dairying, but when I asked a neighbour about investing he said Kerry shares have done very well for him. Would it be a good idea? I don’t want to lose the money as I may need it in the next three to five years. We have two children who are in primary school.
When someone asks me about which shares to buy I run a mile. One reason is that share tips are very dangerous, even when it’s a Kerry farmer tipping Kerry shares. It’s not that I have anything against Kerry shares, but investing directly in any one company is a high-risk activity. The Kerry farmer probably did not have to buy them as he most likely received them during a spin-out, so of course they did well at little risk to the initial investment.
But imagine that any shares you invested in based on a tip then halved in price overnight. Would you go looking to thank the person who gave you the tip?
The situation raises a lot of questions about making investments in the current markets.
The problem is that while deposits have little or no risk, they provide low returns. Three years ago you could put money on deposit and get a 5% interest rate for five years. People were being encouraged to do it and in hindsight it turned out to be a good decision if you did not need the money during that time.
Now, with interest rates closer to 1% and the Deposit Interest Rate Tax (DIRT) at 41%, you can see why some people are willing to take a bit more risk in the hope of a higher return.
To even start telling you where to invest, you would have to look more deeply at what your financial goals are, as well as how likely it is you will achieve them. That should be the starting point of the conversation.
You mentioned you have two children. Is the reason you might need the money in three to five years linked to them and their education? Have you thought about the extra costs needed as they grow up? Many people at your stage in life set goals around education funds, but you should also be thinking longer term, for example about funding your retirement.
Just because the money came unexpectedly should not change the way you invest it. It should be used to allow you to reduce the level of risk you have to take to achieve your goals.
The other big area of investing you need to consider is what risk you are actually happy with taking. The question here is, do you understand the risk that you are going to take? Investment is about risk and reward. Ideally, you want to take as little risk and volatility as possible to get the reward you want.
I talked to Ian Cooke, head of investment services at FBD Financial Solutions, and he recommends running a risk-questionnaire first, to assist you in the decision-making process.
“It does not take long and helps to inform, with a view to reaching the best solution,” says Ian.
This can even be done on the internet and Ian says there is a straightforward nine-step risk profile questionnaire on the Zurich website which you may also find helpful. I went through it and it was easy to fill out and gave me good feedback.
However, it will not give the answer of where to invest. For this, there are a number of key points that Ian says have to be considered:
• Which is more important for you: income from these funds or security?• Do you have the capacity to remain in the investment for the long-term in the event of a sustained period of poor returns in the future?When discussing the point above, FBD Financial Solutions recommends that you give thought to:
• The objectives for the funds at this point.• The requirement for the funds or access to them in the future.• Your desire, if any, for capital security.After answering these questions, you can ask yourself if you would still be comfortable with the risk levels of investing in one company’s shares. Ian made the point that while the person may be very comfortable with Kerry and what it has achieved, it’s just one company and there are things that can go wrong in companies and sectors. You should consider the investment from the perspective of being diversified.
So the big question is, what are the real objectives for the funds at this point?
If it is to beat deposits, there may be safer ways to achieve this than buying one share.
Equity markets and company shares have the ability to generate very attractive returns, but involve a high level of risk to your capital. It could be argued that this risk is greater after a strong bull run that we have seen.
Ian says there have been a number of developments and innovations in the investment arena, which have led to a number of options that the person could now consider:
• More sophisticated methods of assessing risk tolerance.• Funds that are managed relative to the assessed risk profile or tolerance.• Funds that have a mandate to deliver absolute returns – ie not linked to or dependent upon rising markets.I will return to look at a few of these options next week. But for now, I’m afraid there are no easy answers. But if you start asking yourself the key questions, making a decision will be easier. CL
In brief
• Set out your investment criteria and timeframe.• Go to advisers regulated by the Financial Regulator.• Compare what options are available against your criteria.• Identify exactly where the money will be invested.• Undertake a full financial review with an authorised financial adviser before making any investment decisions. 
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