Regular saving best way to cut risk to your capital

CAUTION is the watchword for anyone considering putting money into an investment at the moment. Miserable returns from saving accounts in banks and credit unions mean that many people with a lump sum, or spare cash to save every month, are seeking better returns. They are considering investment funds, some are buying property and others are investing directly in shares.

One thing is fairly certain, and that is that interest rates on savings accounts and An Post certs and bonds are not going up any time soon.

Yes, the election of Donald Trump as US president may herald higher interest rates in that country — but the prospects of higher interest rates in the Eurozone, and by extension higher interest being paid on savings, are some way off.

KBC Bank economist Austin Hughes reckons it will be the second half of 2018 before interest rates rise. That is earlier than previously thought, but still a long way off for someone hoping for better returns from a savings account. So what to do? For a cautious investor, the advice is not to make a lump sum investment right now. People would be better off waiting until we get a better sense of Trump’s economic and fiscal policies.

This means that regular saving is probably the best option.

The key priority for a conservative investor is to avoid a permanent loss of capital. This means avoiding going into a higher-risk investment, seeing it fall in value, and then switching back to cash, and never recovering that initial loss.

With regular savings you have the advantage that if the market falls, then at the outset you only have a small amount of capital at risk and you can buy more units at a cheaper level. This is known as Euro cost averaging. It helps reduce that risk of permanent loss of capital.

Regular savings plans tend to be a little more expensive than lump-sum plans, according to Vincent Digby of Dublin-based Impartial Financial Advice.

He favours the Zurich Easy Access savings plan which offers a monthly savings option from €75 per month. The annual charge is 1.25pc. There are no entry charges, which means all your premiums are invested and there are a good range of investment options, he says.

As you are making contributions monthly you can probably afford to select funds that are higher risk than you might for a lump sum investment.

There are no exit charges, so you can combine the savings plan with a lump sum investment in future if you become more confident about investing, he adds.