In recent years, cash investing has been profitable for savers, with 5-year fixed deposit accounts paying as much as 5% p.a. That has now changed as interest rates fall sharply due to a combination of ECB action and the repair of bank balance sheets. Savers now have an additional burden to carry – DIRT has increased to 41%. Holding your money in cash or on deposit may make sense for people who are totally risk averse and/or have short-term goals but investors seeking a reasonable return on their money must now look at alternative options to investing in cash.
Historically, equities and bonds have outperformed cash but it is important to be aware that investing in other asset classes, such as equities, property and bonds, carries the potential for higher returns than cash, but it also carries the risk of higher losses to your investment.
There are four main types of investment, which are often called ‘asset classes’. Each one works in a different way and carries its own particular rewards and risks.
Cash: money on deposit (e.g. cash in a bank)
Property: bricks and mortar, or property shares
Equities: shares in individual companies.
Bonds: loans to companies or governments
An investment fund generally holds some or all of these different asset classes. The fund manager buys and sells the different asset classes hoping that their value will increase over time. These funds allow you to invest in a range of assets, countries and market sectors, spreading your investment across many different companies and bonds. The fund manager will adjust the asset mix of the fund in anticipation of changing market conditions.
World stock markets are difficult to predict – perhaps that’s why so many Irish investors have followed a ‘wait and see’ strategy and remained invested in cash. However, by diversifying investments across different asset classes – whether as part of an investment portfolio or through a single fund solution, over the longer term, the benefits can be very attractive.