Friday October 30, 2020

Don’t let the handbrake on your deposits fail

With €120 billion of Irish household savings currently earning next to nothing in the banks, seek advice and get more options

10th October, 2020
Ronan Doyle of BCP Asset Management

As a child growing up in Ireland in the late 1980s and early 1990s, I vividly remember my Dad owning a continuous stream of unreliable cars. There was a Renault 18, a Renault 19, a Saab 900, an Audi 100, and any number of old Mercs (190E, 200E, C180).

Many a cold winter’s morning was spent helping my older brothers to push my dad’s car down the road so that he could attempt a jump start or, if that failed, pulling the choke out to prime the engine would always increase the odds of it starting.

Another issue with cars of that time was the extremely poor quality of handbrakes. To be certain that your car wouldn’t end up rolling down the hill and into a wall/parked car/oncoming traffic you had to perform an engineering masterclass that involved pulling up the handbrake to the point of nearly snapping the brake line, leaving the car in gear, and turning the wheels towards the kerb – foolproof.

Aside from poorly built cars, the late 1980s were also a period when hyperinflation was the norm. The cost of debt would increase daily, as did the cost of ordinary goods such as bread and milk.

However, skyrocketing inflation also resulted in high deposit rates. So, if you weren’t already crippled by the rapidly increasing cost of living, and if you were even more fortunate to have funds available for deposit, then it was possible to generate some very attractive returns.

Based on data derived from a Central Bank research technical paper, if you had €10,000 to spare in 1990, you could put it away for five years, sit back, and generate a guaranteed return of 10.08 per cent per annum. That’s a return of more than 50 per cent over five years, with no risk to your capital whatsoever. Bite my arm off now please!

Fast forward 30 years to the present day and deposit rates are at or near zero (and in some cases negative) and likely to remain at these levels for the foreseeable future, having already spent the majority of the last decade generating next to nothing.

By remaining on deposit, investors are letting the handbrake fail on their hard-earned money and sitting idly by as it rolls backwards down the proverbial hill.

Inflation, even at relatively modest levels, will significantly erode the future value of these zero- rate deposits over the long term, which is contrary to the often heard reason for remaining on deposit – “because I don’t want to lose money”.

Furthermore, this money misses out on the potential gains that can be earned elsewhere. Today, just as we have witnessed significant improvements in car technology since my dad’s dodgy handbrake days of the late Eighties, there is now a multitude of other investment options available in the Irish market, designed to suit all investor appetites.

Irrespective of where money is invested, be that the stock market, property, managed funds, kick-out bonds, capital secure investment products, gold, loan notes, crowd funding, or even low-cost passive ETFs, it is incumbent on deposit holders to at least consider these other available options.

Don’t simply sleepwalk through a prolonged zero interest rate cycle and wake up in five to ten years with a depreciated pot wondering how that happened.

According to a recent report by The Central Bank of Ireland, household deposits here have reached an all-time high of €120 billion.

This colossal amount of money is currently earning, at best, very close to nothing. Deposit rates are not going to change any time soon.

One ‘back of the envelope’ exercise that all deposit holders should complete goes something like this; add up your total deposits, set aside your ‘rainy day’ fund (typically one to two years’ net salary or two years’ living costs), and take account of the few bob you want to spend on things like home improvements, changing the car, contributing towards your son’s or daughter’s wedding costs, or helping them with a deposit for a new home.

Make sure that all of these needs/wants, where appropriate, are accounted for. That is the total amount that you need to keep on deposit.

After that, if there is any surplus, please don’t let it rot on a bank balance sheet. Pick up the phone, call your financial adviser or product provider, ask for a meeting, and find out what investments are appropriate for you.

Needless to say, here at BCP we offer a wide range of investment solutions with high levels of capital protection attaching that we feel can fit well as part of an overall investment strategy, particularly for lower-risk investors, and we are always happy to talk to anyone who is interested in finding out more.

Ronan Doyle is a Senior Investment Consultant with BCP Asset Management. The opinions expressed in this article are his own and do not constitute financial advice from BCP

BCP Asset Management DAC, trading as BCP, is regulated by the Central Bank of Ireland.

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