11th November 2019
This week I aim to share some brief insights that might be worth knowing when you want to know how to build an investment portfolio in Ireland.
When it comes to investing it’s probably fair to say that there is so much choice, probably too much! Reminds me of that weird situation referred to as the ‘paradox of choice’ where, when confronted with too much choice we can stall, suffer from inaction and often make choices that are far from the ones that really wanted! Barry Schwartz’s TED Talk is here, worth a watch!
That same paradox seemingly happens to often to investors and pension-holders in Ireland also. When we are faced with a choice of multi-asset funds, private banking funds, insurance products, index funds, Lithuanian car parks, Alaskan leisure centres, you name it, there are options available for all tastes!
For investors that are keen to NOT put their funds are risk, the most rewarding asset to own has been well diversified shares in the great companies of the world, or in other words, global diversified equities.
I recently came across an Irish Independent article from Jan 17 which was saying that equities will be very rocky and not worth pursuing, but that instead should invest in a couple of specific medical companies. Why would you back a couple of horses when you can put your money on the entire field! The chart below show the growth of a simple yet effective portfolio of Equity Indices since 1/1/2017 – up 25%.
If you want to know how to build an Investment Portfolio in Ireland you have lots of choice. If you build an equity portfolio, you will own a slice of some of the great companies of the world. You therefore must be prepared for the significant volatility that goes hand and hand in owning the great companies of the world. On average an owner of such would have experienced annual intra-year declines of almost 14% over the past 60 years. When we are periods of significant growth such as we are now it is easy to forget those periods. However, when markets are in decline it’s easy to forget how worrying it can be, particularly when the media are calling it the end of the world at every opportunity.
At Informed Decisions we invest heavily, and have sacrificed a lot in order to stick to what I know to be fact. Evidence-Based Investing is a form decisions-making in investing which is based on what we know to be factually true. It is not investment decisions based on biases, old beliefs, marketing, inducements, self-interest or fancy brochures.
I was very fortunate to be asked to write an article for The Sunday Times last week. I was asked to write an article in response to a reader question. The reader asked the question of how to build an investment portfolio. Here I share my thoughts as they appeared in The Sunday Times last week.
Based on the past 90 years of the S&P500, 100% of all 20-year periods have delivered positive returns for investors, in comparison to 73% of 1-year periods. Your 10 years+ horizon, this will likely serve you well.
Investors who have clear investment objectives have a higher probability of success. It may be a desired average annual return, a final investment value, or a level of peace of mind as markets fall and rise.
Once you have clarity on your investment objective it’s time to build the portfolio. If picking the funds yourself be sure to understand the tax implications of where they are domicilied, as it could dramatically impact on the tax you will have to pay and therefore the end result you achieve. Here are 5 of the main aspects of equity and bond index funds utilised in modern investment portfolios.
‘Developed Market’ equity index funds typically track the larger companies in the geographical areas of USA, Europe and Australasia. They tend to be slightly less volatile than some of the below, but have still delivered double-digit average annual growth over the long-term.
‘Small Cap’ equity funds track the performance of stock in global companies valued at less than $2BN. These have been 10-15% more volatile than Developed Equity but have also delivered a risk-premium as a result.
‘Emerging Markets’ equity indices track the performance of companies within countries such as China, Taiwan, Brazil, Mexico, Russia and India. Much like ‘Small Cap’ they can carry significant volatility but often deliver significant returns.
Bonds make up the other aspect you mentioned. The two main types being Corporate and Government Bond index funds, which can have a global or local focus. Despite recent negative press these typically deliver long term stability in a portfolio.
How To Build an Investment Portfolio in Ireland?
The % that one would invest in each of these should be guided by the outcomes you seek, the level of volatility and return you are hoping for. If your objective is maximum returns then your focus will be Small, Emerging and Developed Equity, and few Bonds. If you seek more of a balanced approach you may aim for an element of each.
Take a portfolio of 5 index funds; 20% in each of the above. Had you invested your €100,000 evenly across these 5 main funds 4 years ago, your portfolio is today valued at approximately €120,000. Had you invested in the country’s best-selling Multi Asset Fund of a similar portfolio composition it would be worth €112,000 approx. And that is before the higher costs of the latter is factored-in.
Self-service investment brokers such as Degiro are becoming more and more the norm here for many investors. The level of access to some of the most appetising funds were cut-off however in 2018 due to an unintended consequence of PRIIPS Regulation. As a result of that investors have less choice via those platforms. Thats not to say that you cannot build your own portfolio on them, it’s just a little more tricky. Another key consideration which can make it less attractive to investors is the fact that the tax treatment and management of same can depend on the domicile of a fund. It has made it a bit murky and potentially costly for investors.
The Value Of Advice
And then there is the whole argument about the long-term success, or supposed lack of, for some DIY investors. Some investors do so very well on their own. On one hand you could say ‘OK, I invest in these funds and then just forget about them, right?!’. In essence this is precisely the right thing to do. While it is simple, it is far from easy. If you recall the sheer panic that beset us in 2008-2012. Daily news of worsening economies and equity turmoil. Joe Duffy & Co telling us that the world was going to end, that our investments and pensions would be totally worthless by the end of the week. It is far from easy to keep your cool in those situations. Very far from easy. And it is precisely at that time when selling your holding would have been the absolutely wrong time to do so. There would literally be no coming back from that decision at that time. I had a conversation with a client today, we were discussing the merits of property and equity as a long term investment vehicle. A property bought for €500,000 in 2008 is approximately worth €400,000 in East Meath today. A €500,000 investment in a simple simple equity index on 1st Jan 2008, just before it fell 40% in 12 months, falling to a little more than €250k by March 2009, is worth €1.18m today.
The majority of those terrified individuals that sold their holding in March 2009 took a major hit, suffered significant and damaging losses. The majority of them have never re-invested, always fearful of the next big ‘crash’. Those that remained invested, whether they were DIY investors or were guided by a professional advisor, have benefited from the constant upward curve.
Several recent studies have shown investors who have the support of a professional and empathetic investment advisor have achieved an additional 2-3% in annual returns than investors without. This is only partly attributable to the initial portfolio design, the majority to an advisor’s role in keeping an investor invested when the value of your portfolio has temporary declines of 30% or more. It will do this every 5 years on average. Likewise, I believe an advisor’s role is to help an investor from jumping on short-lived band-wagons that turn out to be investment disasters. If that advisor costs you 0.5% per year, it may be money well spent.
Anyone can be a DIY investor, anyone can build an investment portfolio, but time and time again it has been shown that few of us can be a successful DIY investor!
Thanks for reading,
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