ipf No Comments

New leaf, new financial habits

Do you feel in control of your financial situation, or do you muddle through and worry you’ll never be organised enough to meet your financial goals?

If you’re on top of it, well done you! It’s no mean feat.

If not, worry not.

We know it can seem like an uphill struggle and bad habits are hard to shake, but even small changes and a few good habits, could free up the money you need to fuel your financial future and those all-important goals.

You work hard enough for your money, so we’ve shortlisted three top tips to help turn the tables, take back control and make your money work for you.

1. Follow the money

Start tracking exactly where your money goes every month and scrutinise your spending. That means looking at your mortgage or rent, utilities, insurance, grocery bills, socialising, travel, debt, childcare and clothes shopping – everything right down to those pricey little indulgences.

You’ll be amazed just how much tracking what you’re spending will bring to light and it will make you a lot more mindful the next time you hit the ATM, supermarket or your favourite online store.

Allocating an allowance for the things you know you need to cover, like rent or travel to work and setting a budget for nice to haves like nights out or new clothes, will improve your money management immediately.

There’s lots of help available too. Start with your online banking services, as lots of banks now offer monthly income and expenditure breakdowns on accounts, or you could download a budgeting app that will do the math for you.

There are some great apps on the market that track spend, scan receipts and even take direct debits and bills into account, so you can get busy plugging any financial leaks.

2. Cut costs and splash out on savings

Smart changes mean more money to devote to your savings, kick-starting the pension you’ve been talking about or building up enough to invest for the longer-term.

The simple fix is often the most effective and one of the fastest ways to achieve a healthier bank balance is by prioritising your expenses.

Consider this scenario:

You spend around €5 Monday to Friday on a sandwich or something similar for lunch (and you’re no stranger to a chocolatey treat and coffee afterwards). That’s about €8 a day, five times a week. So, €40 a week on lunches you could easily make for about €10. Multiply that by four and you’ve just saved yourself €120 a month.

It’s not rocket science, but it works.

What about shopping around for the best energy, phone, internet, TV and insurance providers to shrink your bills so you can channel the difference into a saving or investment account?

It’s a good idea to question any memberships you pay on a regular basis too. Are you using your gym enough to justify the costs or could you get what you need somewhere less swanky (and expensive)?

If nights out are hammering your bank balance, maybe host friends at yours or use online deals to make socialising more affordable.

These ideas are just the tip of the iceberg and they all free up cash that can be put towards your financial goals.

3. Raise your financial IQ

Committing to increasing your knowledge on money management, saving and investing will allow you to think and act with much more savvy when it comes to your personal finances.

Following a finance blog that speaks your language, listening to podcasts on your commute or reading a chapter of a good book each day, is a great start.

The New York Times Bestsellers List is peppered with self-help and ‘How to’ titles that have helped people turn their finances around. Even scanning the business pages of the Sunday papers will keep you in the loop on money matters, without getting lost in technical commentary.

What’s the biggest lesson?

The biggest take away here is that your future belongs to you and as you grow older and take on more responsibilities, it becomes even more important to be aware of your financial situation and take control of it.

Remember, even the biggest journeys start with one step and the small changes mentioned in this blog can help you move in a much more positive direction.

Reference: www.irishlife.ie

ipf No Comments

Why everyone needs expert financial advice


We don’t perform surgery on ourselves or extract our own teeth, they say only fools represent themselves in court and yet we make some of the most important and expensive financial decisions of our lives, without ever consulting a financial expert.

Big mistake.

We’ve learned to our cost in Ireland, that overloading on property-based debt can produce not just disastrous outcomes for individuals, but an entire nation.

Even everyday things like buying the appropriate home insurance have led to serious financial hardship for thousands across the country, simply because people don’t always know what they’re buying.

In this case, the unfortunate homeowners will deeply regret not just the flood damage, but not taking informed advice.

Financial advice should be personal

Expert advice is centred on ensuring you get what’s best for you. A financial advisor can help you connect the dots between a good plan and the right products – all with an impartiality that’s impossible to achieve on your own.

And, if your personal circumstances or the markets hit a wobble, they can provide the calming rationale you might need to turn things back around.

If we’re lucky, our first lessons in the art of money management start in childhood.

We’re given a piggy bank for pocket money and in time, it’s transferred into a child-friendly savings account in the post office, credit union or local bank and the life-long ritual of saving begins.

By the time we start earning our own living, we’ve hopefully managed to open a current account or arrange a small personal loan, without making too many mistakes.

Yet, under time pressure and most likely transacting online, how many of us shop around for the best terms and conditions when it comes to financial products?

It’s fair to say, the average young working adult will now spend more time researching their next smart phone than their first pension, despite the fact our financial lives are becoming more complex.
That’s something we really need to redress.

Financial decisions deserve our time and attention

A cavalier approach has no place when it comes to 30-year mortgages, insurance that protects the people and possessions we value most, and pensions that determine how we will spend the last quarter of our lives.

How many people fully understand the asset allocation that sits behind their pension, how tax relief works or even how to claim their retirement income come the time?

Very few is my guess, but here’s the thing…that’s okay, provided you get the advice you need.

Be planned and be practical

The earlier you strike up a relationship with a good independent advisor, the better.

That might be when you join an occupational pension plan, start investing, get married or buy your first home. And of course, starting a family will take you into a whole new world of financial challenges.

Good financial advice can help with all of that.

At its most basic, the role of an investment advisor is to create a realistic plan that will help you reach your financial goals. They can help get you there too, with practical advice on how to increase your income, budget better, invest wisely and sense check your spending priorities.

One of the greatest dangers of taking a DIY approach is that you never get an objective view of your financial position that includes all the bells and whistles, like income, tax, spending, saving, debt, assets and liabilities.

There’s no synergy between piecemeal actions and as a result, you end up reacting to events rather than planning for them. That means you’re also more vulnerable to short-term crises and run the risk of getting sucked in by headlines and hype.

With a neutral, informed voice at the other end of the conversation, you’ll be reminded there’s a tailored plan in place, allowing you to remain focused, resist the temptation to take unnecessary risks and make better financial decisions generally.
Now, what part of that doesn’t make sense?

Reference: www.irishlife.ie, Jill Kerby, Personal Finance Journalist.

ipf No Comments

How To Restructure Your Investments For Retirement

You’ve earned and saved money and now you’re headed into retirement. What could go wrong? Along with a new schedule and opportunities come new questions and challenges, particularly around finances. The most pressing ones are often: “Do I have enough savings to last my lifetime?” and “How do I turn my nest egg into a paycheque that I can count on throughout retirement?”

One of the biggest changes in retirement is going from receiving a consistent paycheque to needing to generate your own cashflow to cover expenses. This shift requires a new investment strategy and mindset.

The 3 Phases of Retirement

To start, you’ll want to think of retirement as a series of three unique stages:

The “Go Go” Years In the first years of retirement, you’ll likely be focused on the fun things in life, such as travel or enjoying activities with friends and family. The result can be a spike in lifestyle expenses. During this period, your investment strategy should account for a faster withdrawal rate from your portfolio and more money going out the door.

The “Slow Go” Years Throughout these years, it’s likely you’ll settle into a routine. Your desire to be as active may taper off, and with it, life expenses can tend to go down.

The “No Go” Years More people are living into their 90s or beyond. While this is a testament to our medical advancements, increased longevity is often accompanied by physical limitations. At this point in life, you may scale back your activity even more and find that your remaining expenses are focused on daily living and possibly health care-related.

5 Ways to Restructure Your Portfolio for Retirement

Throughout the different phases of retirement, you’ll need to develop strategies around covering your day-to-day expenses as well as the best ways to tap into your assets. Both strategies should meet your goals and reflect your views on risk. Regardless of your circumstances, be sure to address five key areas when mapping out your retirement income plan:

  1. Protect against sequence risk If the stock market takes a tumble and you’re not appropriately diversified, you could be forced to pull money out of investments that have declined precipitously. The returns during the first few years of retirement can have an especially significant impact on your long-term wealth picture — this is known as “sequence risk.”So consider keeping some of your money in liquid investments such as cash or other relatively safe, short-term vehicles to cover expenses for the first two or three years of retirement.
  1. Match your assets to your expenses  Identify which of your expenses are required to meet your basic needs of living, (such as food, shelter, utilities and health care) and which are discretionary (like travel and hobbies). Then, target sources of guaranteed or stable income to meet your essential expenses. This can include Social Security, a pension if you’ll get one and perhaps an annuity with guaranteed payments. You can use investments that may vary in value to meet your discretionary expenses.
  1. Remember that taxes are an ongoing expense   As you create your own paycheque in retirement from your savings, remember that you may still have a tax liability. Unlike your working years, taxes may not be automatically withheld from your sources of cashflow. Even the majority of Social Security recipients are subject to tax on the benefits they receive.Depending on how effectively you manage your income level, you may qualify for a 0% long-term capital gains tax rate when liquidating certain investments in a taxable account.Working with a financial professional before, and throughout, retirement can help you calculate how much you may owe in taxes or which tax breaks you may be eligible to receive.
  1. Pay attention to required distribution rules for your retirement accounts I f you have money in traditional Individual Retirement Accounts (IRAs) or workplace retirement plans, remember to comply with the government’s required minimum distribution (RMD) rules.After age 70 1/2, you must take withdrawals from these accounts annually — even if you don’t need the money — based on a schedule provided by the Internal Revenue Service. Failure to comply can result in a significant tax penalty. (Money held in Roth IRAs is not subject to RMD rules).
  1. Keep in mind that growth is still a concern  When you are younger and accumulating wealth, your primary investment focus is growing your assets. However, in retirement you need to think about the potential impact that inflation could have on your future income needs.

To keep pace with rising living costs, you will still need to grow your assets. That may mean keeping a portion of your portfolio invested in equities that historically have outpaced inflation, but could also be subject to more market volatility.

Start planning early to protect what you’ve accumulated and position your assets for their new purpose — to generate income to last throughout your retirement.

Source: Marcy Keckler, Next Avenue Contributor, Forbes.com, Nov 14th 2017

ipf No Comments

Investing a lump sum: wait, drip feed or take the plunge?

New research shows waiting for a correction is often profitable but can prove costly

Overall, the potential costs associated with waiting greatly outweigh the benefits.
Overall, the potential costs associated with waiting greatly outweigh the benefits.

You have a decent pot of money earning next to nothing in the bank. Frustrated, you want to invest in a diversified portfolio, but you’re worried you might buy just before a sudden market drop. Should you wait for a correction? Should you drip feed your money over time? Or should you just invest all the money now, and be done with it?

Being nervous about investing a large amount of money is understandable, especially in the current environment.

Merrill Lynch’s August fund manager survey shows a record percentage believe global equities to be overvalued. Almost all valuation metrics indicate the US stock market – the largest in the world – to be overvalued relative to history. It could hardly be otherwise: the ongoing bull market is in its ninth year, making it the second-longest rally in history, and stocks have surged some 250 per cent over that period.

At the same time, caution can backfire. Legendary fund manager Peter Lynch once quipped that “far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves”. Was Lynch right? Or is there a case for waiting out an expensive market?

Wait for correction?

Quantitative expert and Elm Partners founder Victor Haghani recently investigated, his curiosity piqued by a client who had some investable cash but who wanted to wait for a correction before putting it to work. Haghani was sceptical: although double-digit corrections are common, they may happen at a much higher price point, or take so long the investor loses patience and gets “pushed in” at a much higher level.

As it happens, Haghani found it is often profitable to wait. He looked at previous times where markets were expensive, defined as one standard deviation above their cyclically-adjusted price-earnings (Cape) ratio. In 56 per cent of cases, he found, stocks would have fallen 10 per cent below your entry price at some stage over the next three years.

However, waiting can also prove costly. In the 44 per cent of cases where the correction doesn’t happen, Haghani found, stocks went on to appreciate by about 30 per cent – much greater than the average amount you would have saved by waiting. Haghani ran a number of other tests, tweaking the criteria regarding time horizon and correction size. He found the longer you are prepared to wait for a correction to occur, or the bigger the correction for which you are waiting, the higher the average cost.

Overall, the potential costs associated with waiting greatly outweigh the benefits. If your plan is to wait for a lower entry point, be prepared to accept there’s a good chance it will cost you a fair amount of money.

Easing into stocks

What about the drip-feeding approach, whereby you gradually invest your money over a period of time? Euro-cost averaging (ECA) has an intuitive appeal, in that your money buys more shares when prices are low and less when prices are high. More often than not, however, stocks rise in value; doesn’t this mean that if you delay investing your money, you will miss out on some of the gains associated with investing?

Short answer: yes. A 2014 analysis conducted by New York-based Alliance Bernstein found that since 1926, stocks averaged annual gains of 12.2 per cent. If you’d invested your money over a 12-month period via fixed monthly instalments, however, average annual returns fall to 8.1 per cent.

“The costs were even higher in strong markets”, the firm added.

A recently updated Vanguard report, ‘Invest now or temporarily hold your cash?’, comes to the same conclusion. Vanguard looked at three national stock markets – the US, the UK and Australia – and examined the performance of a balanced portfolio consisting of 60 per cent equities, 40 per cent bonds. Investing immediately, as opposed to drip-feeding money over a 6- or 12-month period, led to better returns approximately two-thirds of the time.

The results were even worse if you averaged in over a three-year period: in such instances, investing immediately won out 92 per cent of the time. Vanguard also examined alternative asset allocations – for example, 100 per cent equities, 100 per cent bonds or a 50:50 stock-bonds portfolio – but the results were essentially unchanged.

Clearly, averaging into investments over time typically hurts returns, but advocates argue it can lower risk, protecting cautious investors in the occasional instances when markets stumble. One overlooked danger, however, is that averaging into an expensive stock market can backfire, resulting in more shares being purchased closer to a market top.

Many strategists argue stocks are in the late-cycle phase of the bull market, but this phase can last a long time. Furthermore, recession risk appears minimal at the moment and almost none of the traditional bear market indicators are present, according to Citibank’s global bear market checklist. Accordingly, investors need to be alive to the danger that the ECA approach will result in them buying shares at successively higher prices over time, closer to the eventual market peak.

Still, easing one’s money into the market beats the lump sum approach in almost one-third of cases, according to Vanguard’s study. Occasionally, in very poor markets, the savings involved are substantial. However, Alliance Bernstein’s research shows the results are asymmetrical – although ECA can save you money in poor markets, it tends to cost you a lot more in strong markets.

Overall, then, the slowly-does-it approach to investing typically hurts returns. It will save you money on occasions, but not as much as it will cost you when markets are strong.

ECA holds psychological but not economic appeal, although that doesn’t mean the strategy is without merit. Behavioural economists have shown that for investors, the pain of a euro lost is roughly twice as great as the joy of a euro gained. This loss aversion means the mere prospect – however remote – of buying just before a sharp fall is likely to give would-be investors sleepless nights. Drip-feeding into investments over time eases this tension, and gradually gaining investment exposure will always be preferable to no exposure at all.

World’s worst timer

Finally, it’s worth remembering that even if you do invest a lump sum immediately before a big market decline, time is on the side of long-term investors. In his 2015 book A Wealth of Common Sense, Ben Carlson details the case of a fictional investor, Bob, who invested only at market peaks. Bob invested $6,000 at the market top in 1972, just before stocks halved in 1973-74. He didn’t sell and invested another $46,000 in savings in October 1987; within months, stocks tanked 34 per cent. Again, he didn’t sell, and invested another $68,000 in late 1999. The dotcom bubble then burst; by late 2002, stocks had halved. Undaunted, he held on and invested another $64,000 in October 2007, just before the biggest crash since the 1930s depression.

Bob may have been “the world’s worst market timer”, but he did okay; by 2015, his total investment of $184,000 was worth $1.1 million. It may be the stuff of nightmares but there are, it seems, worse things than investing at market peaks.

Reference: The Irish Times