By Eamon Dwyer and Stephen Barry
We’ve a problem we need to fix in Ireland.
The first thing you do when you have a problem is admit there is a problem. Then make some behavioural changes. The changes we’re outlining today can be made individually by people, no matter what their financial background or investment experience. We don’t need government policy or legislation for this.
It’s a financial matter, but it’s really about individual responsibility. Like, if you want to live in a nicer, cleaner and tidier Ireland, you start by cutting your own hedge and picking up the litter outside your own house. If we want to make our personal financial situations in a boom-bust economy a bit more stable, we need to look at our own behaviours year in and year out. We need to change how we invest our money so we can soften the bumps for our own selves and families.
The issue on our minds today is both the timing and quantum of how people invest any surplus cash they have throughout their working lives. This could be in relation to medium term savings and investments or longer-term vehicles like pension funds.
It’s no secret that many Irish savers and investors are locked in to a cycle of “perpetual disadvantage”, whereby they often tend to possess more significant investable surpluses towards the end of the global economic/market cycle and invest heavily at that stage. At exactly the wrong time.
Of course, the perhaps inevitable, ensuing economic crash, if simultaneous with an investment market crash, leads to a collapse in personal wealth at the same time as businesses are struggling and cash flow tightens. This was the perfect storm that hit Ireland particularly hard in the aftermath of the 2008 Global Financial Crisis. Families still need to eat, clothe themselves and (perhaps!) go on a holiday even if the economy and the markets are depressed. Investments need to be cashed in, at low values, crystallizing losses and, in the words of the economist Carl Richards, we “repeat until broke”!
There is no doubt that as wealthy nations go, Ireland is certainly rich in spirit, culture and other somewhat intangible traits. However, when it comes to personal wealth, we really are second tier compared to many other countries. Yes, there are deep rooted, historic reasons that play into this. However, the more common day behavioural issue of continually having, relatively large, investable assets at the wrong time in the cycle compounds the problem too. It, in fact, magnifies the boom-bust cycle.
The 2006 mismatch in the interest rate level between a struggling European bloc, requiring low interest rates to stimulate growth, and a booming Ireland, which could have benefited from a higher cost of borrowing to dampen demand, was a classic example of having a wall of money available at just the wrong time.
So, what to do? This is a blog, not a thesis. There are many facets to this discussion but we will end with a few dos and don’ts.
- The one thing in everybody’s control is the ability to be a bit more disciplined. This doesn’t take much skill or talent, just doggedness and focus. Savers and investors need to find a way to invest both during the leaner times but also to invest more modestly during the boom years. Smoothen the process out.
- Educate ourselves. Investors need to gain a better appreciation of market risk, asset specific risk and their time-frames. Markets rise and fall, and you need to be comfortable with the ups and downs that will inevitably occur in the journey ahead. Don’t go “all in” on win big, lose bigger whims like leveraged property syndicates or cryptocurrencies which the wise old sages like Warren Buffett detest. There’s absolutely no need to do this. An average of 4% or 5% compounded over 20 years is a more than adequate return for most.
- A solution is to manage an investment account that you drip money into monthly, quarterly or even yearly and set an investable figure that will get you to where you want to go in the long run. Invest your money in a diverse way and only take on a risk level that suits you and your timeframe. Try not to look at it every day. Once a year is absolutely fine.
So, the day you cut your hedge and do the spring clean on your road, take a look at your regular investment account with your advisor. Then park it, move on and do something else!
Eamon Dwyer CFP® is Managing Director of City Life in Cork and a director of City Life Galway. He joined the firm in 2003 and advises private clients on financial planning, investment strategy and tax efficient savings strategies.
Stephen Barry CFP® is a director of City Life. A financial services professional with over 15 years’ experience, Stephen joined the firm as a financial planner and pension consultant in 2012. Stephen is a qualified accountant and won first place in Ireland when awarded the Graduate Diploma in Financial Planning.