5 things the recession has taught us By N e a l K e l ly
It’s said that we learn more from our mistakes than from our successes. If that’s the case then smart investors and savers have a lot to learn from the trials and tribulations of the Irish economy over the last few years. With a challenging few years ahead of us we need to re-evaluate where we are when it comes to managing our assets. Property is not always the answer Given the events of recent years this point now seems like a bad joke but it’s an important one and one that we should striving never to repeat. The rapid expansion in the country’s prosperity and population in the late-1990s drove the value of Irish property through the roof. Many people stopped seeing their houses as homes and began to view them as assets to be bought and sold in a bid to capitalise on rising values. ‘Unlocking the value’ became the buzzword along streets, avenues, estates, highways, byways, backstreets and boreens nationwide. Investors began to use whatever money they had available to snap up apartments and houses across the land, banking substantial profits on sales; profits which were fed back into the market to buy more properties. No longer was it enough to own the family home plus another property as a ‘nest egg’, people began to speak about their property portfolios. For many amateur investors there was quite simply no other show in town. But the show quite simply couldn’t go on. When the property market stalled in 2007 and then began it’s downward plunge, many property investors were left with assets that they simply couldn’t sell. Those that did sell were more often than not
left nursing big losses. Seemingly bullet-proof and future-proof, Irish property as an investment asset quite simply proved not to be market-proof: in short, it has its up and downs just like any other asset and right now it’s on a major downer. Diversify, diversify, diversify If the dramatic collapse of the Irish property market taught us anything, it taught us the value of diversification. Many Irish property investors appeared to focus their attentions and money on just the one asset: property. This left them over-exposed to the market’s 2007 collapse as they were unable to counter-balance the fall in values with a rise in the value of other investment assets and sectors. Even investing in Irish shares wasn’t a good diversification strategy, because construction and property-related stocks accounted for a sizeable proportion of the Irish stock market. These assets were heavily-correlated which meant that they would experience their ups and downs at the same time. Effective diversification involves the selection of investment assets which are uncorrelated - different assets types such as a mixture of stocks, currencies, bonds and property, and different territories such as Ireland, Europe, the Far East and emerging economies such as the BRIC countries of Brazil, Russia, India and China.
2012
Nothing is certain - so protect what you’ve got For years the Irish economy and its citizens seemed certain to always be facing a bright future. Jobs and money were easy to come by and prosperity was more widespread than ever before. Many seemed convinced that things would stay like that forever. But as we saw with the economic downturn, life can sometimes take a turn for the worse. Like the savvy investor who keeps a lump sum of cash on deposit for a rainy day, the savvy citizen would be well advised to protect the things and people who are most valuable to them: their income with Income Protection, their loved-ones’ lifestyles with Specified Serious Illness Cover and Life Assurance. Protection like this offers enormous financial peace of mind in these already stressful times. Never, ever believe the hype Word of mouth is a dangerous thing. When an investment is going well for someone they are often eager to tell others about it, partly to share the news of their good fortune but also because it can work to increase the value of the investment itself by increasing demand for it. The same people will be less eager to share news
of an under-performing investment, partly out of embarrassment but also because it can work to drive down its value by lowering demand for it. So many people invested in Irish property simply because it’s worth as an investment proposition was talked up so much, very often by those with vested interests. This is an example of why you should bypass any hype surrounding an investment proposition by going straight to your independent financial adviser and getting the real, honest facts before making any decisions. Saving and investing is the way forward So much of the perceived wealth generated by the Celtic Tiger economy was actually money borrowed against the value of capital assets. From householders re-mortgaging to ‘unlock the value’ of their homes to developers borrowing on the strength of rising land values, relatively easy access to credit was driving much of the economy. With the supply of such easy credit at a standstill and unlikely to return to Celtic Tiger levels, saving and investing your money with the prospect of earning a real return is the smart and secure route to a sound financial future.
About Neal Kelly is a Co-Founder and Director of Thomond Asset Management and can be contacted @ neal@thomondam.com 82 O’Connell Street, Limerick | T +353 (0)61 462 024 | F +353 (0)61 312 055 | E info@thomondam.com www.thomondam.com Folk Asset Management Ltd t/a Thomond Asset Management is regulated by the Central Bank of Ireland.
Warnings: 1. The income you get from an investment may go down as well as up. 2. The value of your investment may go down as well as up. 3. Benefits may be affected by changes in currency exchange rates. 4. Past performance is not a reliable guide to future performance. This outlook does not constitute an offer and should not be taken as a recommendation from Thomond Asset Management. Advice should always be sought from an appropriately qualified professional