Irish Financial Review

Investing for success; the key rules

By Frank Conway

With the stock markets roaring ahead, US Republicans planning a major tax overhaul, UK authorities increasing interest rates and North Korea staring down the US and it’s allies while Saudi Arabia ratchets up the rhetoric of war, uncertainty reminds us that it never went away.

When planning for long-term financial well-being, it is important that you keep a few simple rules of investing in mind. Those are:

  • Invest according to your goals. Take a careful look at your portfolio, and ask yourself if your overall long-term strategy is sound. Do you have the right asset mix for your investment goal and time horizon? Are you properly diversified?
  • Focus on the big picture. Your investment decisions should always be strategic and not based on whether the market is up or down. Step away from the news, and ask yourself, does this event change my investment goals?
  • Rebalance. Disciplined rebalancing is vital to achieving long-term goals. It keeps your investment risk in check with your long-term plan.
  • Save more. Putting away something extra every opportunity you get isn’t easy, but it can give you the flexibility to get through tough situations.

Investing and wealth growth are a long-game. Short-termism can seem the right move when events become rocky but those short-term reactions are more likely driven by emotion and not reason. Time is the great healer, provided you diversify and rebalance on an ongoing basis.

Fees really do matter – yes, this is the key to long-term investing success. Reducing management fees to a minimum will result in higher growth rates and faster wealth accumulation. Remember, ask what your overall charges are, you can ascertain this using the TER or OCF measure. The lower your overall fee structure (not just the AMC) the more money you should have in your portfolio, provided you follow my four simple rules laid out above.

Best of luck growing your personal wealth!

 

Budget 2018 – 5 Pension Planning Tips

By Frank Conway

Top 5 Pension Planning Tips

There are a few smart tactics to be considered to keep pension plans on track, depending on the types of pensions an individual may hold and where they are in their life cycle.


Tip 1: Take FREE money and max out on tax relief that belongs to you!
If you are a higher rate of tax payer you should contribute as much as you can afford to avail of tax relief at 40% (2017 rate) subject to the maximum contribution limits. This chart provides the maximum allowable limits for personal contributions:

Age Amount which qualifies for tax relief
Under 30 years 15% of net relevant earnings
30 to 39 years 20%
40 to 49 years 25%
50 to 54 years: 30%
55 to 59 years 35%
60 and over 40%

Tip 2: Consolidate your accounts

Increasingly, we work for more than one employer and if you have been contributing to various pensions, you may want to examine the value of those perhaps even consolidate them to have one unified account (some employers may not permit this option). But it is always good to carry our this single-view exercise as it means that employers will have your personal records up to date, plus, it will make it easier to file for your benefits when the time arrives.

Tip 3: Start early

The best way to grow your pension pot is by starting early. Why? Well, it is because you can put the power of compound interest growth to work for you. And this is an important point in the growth of pension wealth. Remember, it is not just the savings and tax relief that you, your employer and Government offer, at the end of the day, it the very significant growth potential of compound interest growth that creates very significant personal wealth and the longer you are making pension contributions, the greater the ‘compounding’ impact.

Tip 4: Reduce management fees and charges

As outlined in Point 4, the real growth in the value of a pension fund is the compounding impact of interest over time. But, many older pension accounts have very high ‘management’ fees and charges and these simply rob your long-term growth potential. So, it is important you become familiar with what the overall Ongoing Charges Figure (OCF) that is applied to your fund(s).

Tip 5: Put yourself first

With any pension plan, the longer you contribute and the more you know, the more likely that you will start early, reduce fees, maximise contributions and minimise fees, this is a winning formula. But, be humble – ask your adviser all of the difficult questions and remember, there are no ‘dumb’ questions when it comes to growing and protecting your personal wealth. If you are not prepared to put yourself first, chances are high that your pension may not grow as fast as it could

 * Net Relevant Earnings: Earnings from a trade, profession, office or employment which are subject to income tax. Net relevant earnings are capped at €115,000 for 2016. (Part 30 of the Taxes Consolidation Act (TCA) 1997 as amended.) Tax relief is only available where you have Net Relevant Earnings in the tax year. 

* * The rate of 30% applies to certain specified occupations irrespective of age

Nobel Prize for ‘Nudging’ Economics and Better Money Habits

By Frank Conway

What great news! US economist Richard Thaler, one of the founding fathers of behavioural economics, has won this year’s Nobel Prize for Economics.

Professor Thaler’s behavioural economics ‘nudge’ can help people make better money habits

Why this is so important is that in an era where more and more financial responsibility is being placed onto the shoulders of consumers to nurture, grow and protect their financial well-being, Prof Thaler’s research provides very important insights into how people can be ‘nudged’ to make small yet important decisions that impact their long-term financial well-being.

Nudging

Prof Thaler’s work explores how human psychology shaped economic decisions. His insights helped people to recognise marketing tricks and avoid bad economic decisions.

Prof Thaler’s central insight is that we are not the rational beings beloved of more traditional economic theory.

Given two options, we are likely to pick the wrong one even if that means making ourselves poorer.

In financial education talks given by MoneyWhizz to working adults, the four core elements of building and protecting personal wealth are explored in great detail, those include:

  1. How to build a rainy day fund.
  2. How to buy a home (it acts as a forced savings account)
  3. How to have adequate protections in place to protect income, health etc).
  4. How to save for retirement

Professor Thaler’s studies reveal that a lack of thinking time, poor money habits and poor financial decision-making mean that even when presented with a factual analysis (for example on healthy eating) people are often still likely to pick burger and chips over healthier options. But these decisions are driven by lack of understanding (and lack of financial education) and emotional reactions to creative marketing and even financial incentives to buy poor products over ones that provide long-term benefits.

Professor Thaler’s ‘nudge theory’ takes account of this, based as it is on the simple premise that people will often choose what is easiest over what is wisest. But that is not to suggest that prudence is a hopeless cause when it comes to making the best decisions.

For example, tests have shown that putting healthier foods on a higher shelf increases sales. Awareness campaigns can also have a positive impact.

The food is more likely to be in someone’s eye line and therefore “nudge” that person towards the purchase – whether they had any idea about the obesity argument or not. This same theory applies to major financial decisions. For example, in pensions, where people are ‘nudged’ to sign-up by way of auto-enrolment, the prospect of becoming a regular pension contributor is far higher than if one were given the mere option to sign-up on their own.

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