Being Smart With Your Money During High Inflation

April 11, 2022

I read an article during the week in the Irish Times and it was forecasting inflation to increase 8.5%, which means the cost of living will increase by 8.5%, on top of that was a pretty high cost to start with.

I want to write today about how we can be as smart and efficient with our money as possible.

There’s a number of different ways that you could do that.

The first is tax relief on various financial products.

And the next is cash flow modeling, which is similar to budgeting.

And the last then is simple as shopping around to get better value on your health insurance and utilities.

So I’ll start with the first one, which is getting tax relief on financial products. If you’re someone who has taken on life cover on a personal basis for dependents or our families, and you’re paying €100 a month, there is a policy available which is pension term insurance.

It sounds like a pension, but it’s actually life over and you can avail of tax relief on the premiums. So if you’re paying €100 for life cover on this product and you’re paying the higher rate of income, you can claim 40% after tax back (€40). So instead of paying €100 you actually pay €60

Similarly, similar for illness covering you Income Protection.

So if you pay €100 a month and you’re paying the higher rate of income tax, you claim the 40%, which is €40 back.

Those two options are also available for company directors to pay from the company account and corporation tax is also available on monthly premiums.

So just a couple of smaller items to help be a bit more efficient and maybe save some money on financial products.

Managing Investment Risk

March 23, 2022

I started work in the Financial Planning industry in October 2007, right before the financial crash and learned, like many others in the industry working in the industry at the time, huge amount about investment risk and investment volatility. 

I’ve had lots of conversations with clients whereby you have had a good chat about their priorities, their budget and so on, and move forward with the decision to invest a pension or investment or regular saver. 

And then a conversation would come up about how much risk am I taking or how much could I lose, and I think it’s one of the best questions that you can ask when investing. 

Identify and Quantify Risk

So in terms of identifying the risk, that’s a good place to start. 

The industry has come on a huge amount in terms of measuring risk since 2007.  

When you’re investing, we do a quick risk profile questionnaire at the outset. That establishes the risk bracket that you are in.

The first thing to do is when you identify the risk bracket, to identify how much volatility or fluctuation in the price of the investments that you might see during a 10 year time period, and what the returns can be over that time period factoring in and the price volatility – so how much risk and return can you expect over the 10 year time period.  

 At least then you know if markets deteriorate, as we’ve seen this year, what can be expected.

Diversification

The next thing then, is to diversify so – across different regions, we’ve seen this conflict in one region, so to make sure you’re spread out across the world. 

 I put up a post on LinkedIn recently and it showed that certain companies had seen a big jump in the share price during locked in and they had seen a big drop this year. 

Diversification across different industries is also important you’re not getting total exposure to just one. 

Lastly, investing across different assets such as stocks, cash, bonds, property and alternatives like gold and commodities. 

Limit Exposure to Single Investments

In keeping with diversification, I think the next thing is that if you are going to invest in a particular sector or region or asset, it’s to keep that to about 20 percent of the overall portfolio and to make sure all your eggs aren’t in the one basket. 

Reputable Fund Managers

I think investing with a reputable fund manager is crucial. A company with a track record of delivering good performance and customer service for clients. 

Remain Invested

The last part is remaining invested, because when things do deteriorate in the markets, as they are at the moment, the first instinct is to exit the markets and then reinvest when they recover or settle down. But what can often happen is that you can exit the market on the way down and then you miss the recovery and so that that is a risk. 

If you apply the above principles to your investments, you will go a long way to managing your investment risk

Investment and Economic Implications of the Russian invasion of the Ukraine

March 3, 2022

Just wanted to share a blog on the Russian invasion of the Ukraine, from an investment point of view.

This comes a very distant second to what the Ukrainian people are enduring with remarkable courage.

When the invasion started last week, there was a pretty sharp drop in the stock markets across Europe. They were down up to 5% during the day, and there was a small recovery the following day, but I’d expect that sort of volatility over the the near term until investors get an idea of how long the conflict might last, or whether it’s going to broaden out.

Historically after conflict gets resolved, there is a a pretty quick recovery in the investment markets over a number of months, on occasion that has stretched out further.

From an economic point of view, the Russian and Ukraine economies combined to about 2% of the global economy, so the conflicts and the impact on their economy shouldn’t be enough to impact the global economy. They are resource rich countries so they export a lot of fuels and commodities.

So any sort of disruption to that (exports) will likely cause inflation. As an example, Russia pipes 40% of the EU’s gas into the EU, so if they were going to limit supply, that’s going to push up the price of gas in EU or may lead to a shortage. If there’s any sort of issue with supply will see an increase in the cost which will push fuel/commodity up into an inflationary situation.

What that means for consumers is higher fuel prices pump, higher shopping bills or heating bills, and certainly for the short term.

The invasion will also create uncertainty and instability in the EU and Western world.

I think that’ll feed into business and consumer confidence and will just mean that businesses and consumers hold off on making big investment decisions until they get an idea of whether it’s going to be stability anytime soon.

And that’s something that’s going to likely slow down the global economy.

And post COVID and lock down, a lot of the money that’s built on the sideline, particularly from a consumer point of view.

Consumer savings were expected to help drive the recovery, but that money is probably going to sit on the sidelines and for a little while longer.

For long term investors, I think it’s going to be very difficult to try and time this, with no sight of how long this could go one or what the intentions are of the Russian military. So to try to figure that out and try to time in and time out it’s going to be hard to do for investors.

For long term investors it’s a matter of riding out the storm.

Looking historically the stock market has recovered quickly.

Given the percentage of the overall global economy, the conflict isn’t going to take a major effect on that side of things.

So I think it’s a matter of remaining invested for long term investors.

The State Pension

February 8, 2022

A quick blog to share some thoughts on the new about the State pension age.

At the moment at 66 you can access the state pension. The full contributory pension is approx €13,000 a year.

For lots of people, that’s going to be all or maybe a lot of their retirement income, so it’s pretty material.

The news is about a recent Oireachtas Committee recommended keeping it to 66 going against a previous recommendation by the Pension Commission who recommended to start to move access to the State Pension to age 68.

The problem with keeping access at age 66 is that it’s not financially feasible for the Government.

At the moment, for every one person retired, there are four and a half people working, so four and a half workers taxes can support one person’s annual state pension.

Whereas on current projections in 2050, that’ll be two people working for one person retired so two workers taxes can cover one person and state pension. So it’s not sustainable from a government finance point of view.

Unfortunately I think changes would have to be made and it’s going to be a reduction in accessibility or a lower annual pension.

If this is the case we need to put a far greater emphasis on private pension funding, to counteract any reduction in the state pension.

Autoenrollment would be a solution to increase Private Pension Funding and has been spoken about for quite some time.

Autoenrolment has been rolled out  in the UK successfully. It means that  employers have to set up and contribute to a pension for an employee, and the employees have to match the percentage of their salary.

Initially it starts at a low level, so maybe the employer would contribute 2% of employee salary and the employee would match that.

At the moment, in the current economy with inflation, I think it’s going to be a difficult thing to do, so there will have to be the right supports in place for a tax point of view of a government point of view.

But I do think any reduction in the state pension will have to be offset by a broader plan on increasing private pension funding.

COP26

November 30, 2021

Some thoughts on COP26. Lots of issues discussed:

Phased reduction in coal
End of Deforestation by 2030
30% Reduction in Methane

$100bn per annum from 2021 – 2025 pledged by Developed Countries

Net Zero Emmissions by cars by 2040 for all countries

And much more…

Interesting investment information. A group of companies led by Mark Carney (former Governor of the Bank Of England) have pledged up to $130 TRILLION funding for technology and infrastructure for a move to renewables. Asset Managers and Pension Funds are included in this so likely we will see investments proposed to Private Clients.

Publicly quoted companies in the UK will have to disclose Climate Related Financial Info which will could help investors and fund managers when making ESG investments #investments #renewables

Inflation and what it means for you

August 25, 2021

What is Inflation?

Simply put, it is an increase in the cost of goods, materials or labour.

You can see inflation in anything from a litre of milk to house prices. The most noticeable at the moment (August 2021) is in construction prices for building and renovating houses.

How does it happen?

Inflation increases usually from a shortage of good/material/service or increase in demand. As lockdowns are eased, the economy opens up and there is a sharp increase in demand for goods and materials (eg timber for construction) as construction restarts and consumers start spending.

Is the inflation increase expected to be temporary or permanent?

Most economists expect the spike in inflation to be temporary, but normal levels of inflation at 2% (approx) to resume in 12 to 18 months.

What does it mean for you?

Your money doesn’t go as far. You earn the same amount but goods/services are more expensive.

House prices have reflected inflation as prices are near all time highs.

What does it mean for investors?

Persistent inflation means central banks will raise interest rates. Deposit savers probably won’t see this passed on by banks.

Persistent inflation above 4% is bad for stock markets but this is unlikely to materialise.

Residential property remain elevated for a number of years.

Alternative assets – sharp spike in commodities which will abate as demand normalises.

Crypto currency – seen as alternative to monetary system and inflation hedge – likely valuation increase.

Setting Up A Savings Plan

July 29, 2021

Monthly Investment Plans have been gaining in popularity since deposit rates have been reduced to nearly zero.

Long term savers are looking for returns that will make their money work for them or in some cases just get them a better return than deposit without taking a lot of risk.

Setting up a Monthly Investment Plan is simple and goes as follows:

Have a coffee/chat with your financial advisor to establish how much you wish to save/invest and your overall goals and circumstances

Complete a Risk Profile Questionnaire to determine what level of risk you are comfortable taking

Select a fund or funds with your financial advisor

Establish the time frame that you wish to invest for

Complete the application forms and direct debit mandate

Start investing and benefit from long term compound interest returns

Monthly Investment Plans can be set to have full access to your money and ability to change funds at anytime. They are flexible and can be amended if things change for you.

You are not locking yourself into a long term commitment and you can pause payments if you need to so.

For more info contact hlambert@integralfinancialplanning.ie today

Principles of Investing

June 21, 2021

When investing, whether in a regular monthly investment or a lump sum investment, the following are some principles to keep in mind when doing so:

Diversify

Spread out your investment across many different types of investment classes – shares, property, alternatives (commodities, crypto etc). You will avoid being overly exposed to one particular asset – as an example, property or bank shares during the financial crisis from 2008 to 2011.

Keep Specialist Investments To 10%

Keep specialist investments to 10% or less of your overall fund/portfolio. In keeping with diversification, it means you are avoiding taking the entire drop in an asset valuation such as Cryptocurrency over the last number of weeks (May/June 2021).

Long Term View

Time is an asset in itself when investing. The longer the time frame the greater the chance of positive returns. Investing in shares for 10 years or more gives you a 94% probability of making positive returns (https://www.nutmeg.com/nutmegonomics/increasing-your-chances-of-positive-portfolio-returns-the-facts-about-long-term-investing/).

Savings and Investment Plans are only suitable for a 5 year plus time frame. If you think you will need to access money sooner then you would be better off putting on deposit. The returns are minimal but your money is secure and accessible.

Take Some Measured Risk

Put simply, you have to invest in growth assets for a medium to long period of time. This means shares, property, commodities and possibly Cryptocurrency. Other options are bonds and cash but the return just isn’t there on these investments at present. Over the long term US equities have returned 8% per annum (https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp) and you can expect commercial property to return approx. 6% when the market reverts to a more stable condition and employees return to work (estimated 2% inflation plus 4% rental income). Returns on bonds and cash are virtually zero now (June 2021).

Most managed funds have what is called an ESMA (European Securities and Markets Authority) rating which has expected volatility level (the movement in the value of the fund) so you can then assess what you are comfortable with.

The Biden Administration Stimulus Plan

May 17, 2021

The Biden Stimulus Plan has gathered alot of headlines because of the enormous scale of the investment – approximately 2 trillion dollars if the Democrats get their way. Some of this will be financed by raising taxes on Wealthy Individuals and Corporations and some by issuing debt.

From an investment point of view, there are a number of long term implications:

Inflation to increase

Government or Central Banks pumping substantial amounts of money into the economy (through Spending/Bond Buying) typically creates inflation as there is more money to purchase goods and services. Individuals and businesses can borrow cheap money when interest rates are low which further increases demand for goods and services.  Increased demand will push the cost of good and services. The Federal Reserve recently said that they don’t see inflation as a problem at present but it’s difficult to see it not becoming an issue in the next 12-18  months.

Deposit Rates to remain low

With interest rates at low levels, inflation will be higher than interest rates and money on deposit will be eroded and lose value over time. Interest rates will likely increase but that does not mean that Bank Deposit Rates will increase. Banks are pushing further into charging negative interest rates (now charging personal customers with €1m plus).

Global Shares to see positive returns over next 12 months

Stock markets have correlations with interest rates. As a rough rule of thumb, if interest rates climb above 2% and are expected to increase further, shares should start to decline. Shares also have a correlation with Fiscal Stimulus (Government Spending) and Monetary Policy (Central Banks buying bonds is the most common). When either of these two increase, stocks markets should increase also. As the Biden Plan sets out to raise taxes on Corporates, this will moderate company earnings growth. We would still expect positive growth in Stock Markets over the next 12 months.

Commercial Property to decrease over next 12 months

Property contained in investment funds tends to be commercial property/office space. With a strong preference among workers to not return to the office on a full time basis, demand for office should decrease which we expect to have a corresponding impact on commercial property prices  

CryptoWho Knows!

Cryptocurrency as an asset class is in its infancy. What started out as a currency is now more so a store of value. Crypto does have a more significant role in the future economy with notable business people endorsing it recently such as Paul Tudor Jones and Elon Musk. More institutions are accepting Bitcoin as payment such as Microsoft, Starbucks and more. Tesla being the notable company to withdraw from accepting Bitcoin payments. In a conversation on LinkedIn with an Irish Fund Manager, he advised me that Bitcoin was too volatile to be considered for mainstream funds in Ireland. That is changing the US and will likely change here. Demand may drive that as more and more people are interested in Crypto as an investment. The funds industry may have to provide a product to meet demand. With ‘Stablecoin’ coming to the market soon, this may the first actual Crytocurrency

Crypto Investing

April 12, 2021

I must confess to being reasonably new to ‘Crytpo’ investing. I have been aware of it as an investment alternative for quite some time but have always been cautious about it as I have no way of knowing what it should be valued at. I would also advise any potential investors of this as well. It is very difficult to know what direction the price will go when there are no valuation metrics. With shares, at a basic level you can value a share as a multiple of it’s annual earnings. Historically on average this tends to be 15 (so a share is valued at 15 times it’s annual earnings) but I am not aware of any metric for Bitcoin. There is some Technical Analysis available where prices are charted over a long period of time but no valuation methods like those used in the more traditional assets such as property and shares.

That said, Bitcoin/Crypto does have a more significant role in the future economy with notable business people endorsing it recently such as Paul Tudor Jones and Elon Musk. In a conversation on LinkedIn with an Irish Fund Manager, he advised me that Bitcoin was too volatile to be considered for mainstream funds in Ireland, but that is changing the US and will likely change here. Demand may drive that as more and more people are interested in Crypto as an investment so the funds industry may have to provide a product to meet demand.

It is unclear if Crypto in it’s current form will be accepted as a mainstream digital currency in the future. Will the likes of Amazon accept a payment which could decrease by 10% overnight? Perhaps Stablecoin will have a greater use in High Street Business

With any niche or specialised investment, I would recommend doing thorough research and limiting your exposure to the asset to 15% of your overall fund/money.

This article is opinion only and does not constitute investment advice.