LAST week’s article about safeguarding your savings and investments has resulted in a number of letters and e-mails from readers who are interested in more detail about some of the suggestions recommended by the three advisors I spoke to – Eddie Hobbs, Vincent Digby and Mark O’Byrne.
The Jill Kerby Column in association with Aviva
“I was very interested to read about tracker bonds in your recent column,” wrote one reader. “My personal experience several years ago was not very successful. I did get my money back, but with only a tiny return. How are these new ones any different and are the charges lower?”
Another asked if Eddie Hobbs recommends any emerging market funds as well as energy funds, while another asked, “how do inflation-linked bonds actually work?”
The level of interest in these quite sophisticated investments is a huge development and very welcome. For too many years investors here bought expensive mixed managed funds or the endowment mortgage version that produced very poor returns (except to the commission paid broker) or, at the other end of the investment spectrum, invested solely in Irish shares, and mainly bank shares.
We know, unfortunately, how badly those choices turned out.
The questions from these readers suggest they are more aware of the importance of diversifying their savings or investments away from a single asset (like cash, or property, or financial shares) as well as the product type. A recent survey by Aviva confirms that while three quarters believe the world is more risky, 49% wish to invest in the next 12 months by splitting their cash between deposits, fixed term capital guaranteed investments, bonds that will protect against inflation, into blue chip dividend paying shares directly or in pooled funds; into companies or funds in growing productive parts of the world as well as the commodities that they also need for their growing populations and industry.
First –tracker bonds: Mr GH’s experience was not satisfactory and after inflation he probably made a small net loss after inflation and tax was taken into account.
New version trackers, said Vincent Digby of Impartial.ie, have improved because some – like Ulster Bank’s Index Combination Bond and Aviva’s new Secure Plus Fund - guarantee not just your cash back, but a c10% deposit return (paid after year one in Ulster Bank’s case) and exposure to commodities and emerging markets in the investment side of the product. Costs, he says, are still relatively high, but they do offer more liberal shares of growth than many previous trackers, he says and could be vulnerable to inflation. They need to be considered as only a part of a diverse portfolio.
Mr PO’B, another cautious investor, was debating buying into the new four year state National Solidarity Bond, “but I am wondering now if a foreign inflation-linked bond would be better. How do they work and where can I buy them?”
Inflation linked government bonds can be purchased with the assistance of a stock-broker. They also come in the form of bond funds, with several country’s bonds represented.
When you buy a conventional bond, say, for five years, you not only receive your capital or ‘principal’ back at the maturity date, but every year the bond pays a ‘coupon’, a fixed rate of return. However, if your coupon is worth, say, 4% of the principal, and inflation runs at 6%, you will suffer a loss of 2%. What sets inflation-linked bonds or bond funds apart from traditional ones is that both the initial principal amount and the coupon payments are indexed to the inflation rate. If inflation rises, your money more than keeps its spending power.
A good advisor or your stockbroker can discuss the finer points and lay out a selection of bonds or funds that suits your needs and your budget.
Mrs LY, a teacher with two teenaged children has saved all their child benefit payments: “They are now in their teens and I figure they might end up working someday on the other side of the world so I thought I might take a chance at put a few thousand euro into an investment. You and Eddie Hobbs and others write about emerging markets but I haven’t got a clue which ones are worth considering.”
Mrs Y is right. Investment options can be baffling, but even the reluctance of fund managers up to even five years ago to invest in places like China, India, Brazil, Malaysia is long gone. These great, developing countries are the growth centres of the world now, but are not risk-free by any means.
Every familiar Irish life assurance company and also the likes of RaboDirect.ie offers different emerging market funds that you can examine at your own pace, on-line. Some funds represent several countries and companies; others, just a single country. You can see, on-line, when the fund was launched, the companies represented and what the annual and cumulative return (or loss) has been. Most are risk-rated.
Many of these funds are duplicated (or nearly so) in the form of a low cost ETF – exchange traded fund that trade on stock markets as a single stock. These can be bought from stockbrokers or, more cheaply, via your own on-line trading account. (I use TDWaterhouse.ie)
The free www.lovemoney.com UK website is a terrific source of information about emerging markets, ETFs, commodities and other investment options, but here in Ireland, ex-stockbroker Rory Gillen of the excellent InvestRcentre.com offers day long courses around the country on stock market investing as well as specifically investing in ETFs. A course is worth taking if you want to really understand how investments work and the risks and rewards involved in also taking more control of your own money.