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Q I have money in investment funds but I’ve been reading up on DIY investing using new tech brokerage platforms and was all ready to have a go (while keeping money invested in my current funds), but with the alarm being sounded about recession in recent weeks I’m having second thoughts. So I’m wondering if I should hold off starting my own portfolio until the economic clouds have lifted? Ian, Co Wicklow
A Firstly, congratulations for having some savings and putting them to work in an investment fund in the first place.
There are significant numbers of Irish savers sitting on cash deposits who are nervous about investing at all, even though inflation is running at over 7pc.
When it comes to investing in markets, I always prefer to see clients invested anywhere rather than not invested at all.
To answer your specific question though, it is extremely hard to time markets accurately. I would encourage you to consider this new investment portfolio as part of your wider plan. So rather than worrying about current market levels and economic conditions, I would ask the following questions instead:
1. What is your required rate of return?. If you need 8pc per annum from your investments, there is no point investing in lower-risk corporate bonds.
2. How much thought and research are you prepared to put in? You have to assess and decide on each individual investment yourself, on its merits. It is hard to avoid letting emotions and cognitive biases influence your decisions.
3. How will your new investment be taxed? Are you prepared to do your own income and CGT (capital gains tax) return each year or would you prefer that to be looked after by your investment provider? Most online low cost providers don’t provide any tax information.
4. Is your new portfolio appropriate enough to exist alongside your current fund portfolio, and are they compatible?
5. Do you have a pension? Investment funds are taxed quite highly in Ireland (41pc on gains), and direct DIY investments are taxed at 33pc CGT on gains and income tax on dividends. In many cases, a pension is a better long-term investment vehicle for savings, as all tax is deferred. This allows for compounding to work its magic.
Finally, in my experience, it is very difficult to beat a basic global equity index fund. There are mountains of research papers comparing DIY investor returns to returns achieved by the benchmark, and all of them show lower returns for the DIY investor. I would encourage you to check studies run every year by DALBAR, or go to the investor education section of Vanguard.
Stick with a Master Trust?
Q I received a letter a few weeks ago from the office of my former employer telling me my pension scheme with them is to be moved to a Master Trust, which from what I read about them seems fair enough, but then I was told by an ex-colleague that it’s going to work out more costly for ex-staff because they will apply a different pricing structure. Do I have any options? Emma-Jane, Co Dublin
A The pensions industry has been set into a bit of a tailspin over the past few weeks with European legislation on Master Trusts and Occupational Pension Schemes suddenly coming into force here.
This has triggered changes to how many companies manage and administer their pension funds. You have a number of options open to you.
Firstly, you can always leave your pension where it is, within the existing scheme. Most larger company pension schemes are quite competitively priced. I would send a request to the administrator asking for the ongoing charges within the new trust.
Your next option is to set up what is called a retirement bond. This is a standalone pension structure that maintains some of the benefits of an occupational scheme, such as links to your old salary and service, while removing any control the existing trustees might have. You can take more control of the investment options, pension provider and charging structure.
The third option is to move your existing benefits into the scheme of your new employer, if that is available.
In many cases, I prefer the first two options for some flexibility at retirement. Many advisors recommend consolidating pensions into one place, for control and simplicity.
David Quinn is managing director of Investwise
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