Shares ARE a gamble – and we are banking on these two to get it right
But while we wait for them we can follow these tips to turn a profit
Share prices are at a record high, while savings rates have hit rock bottom, with a derisory 0% offered on term deposits. However, savers tempted to put money into the stock market could be investing just before shares plummet.
Some commentators predict they will soon come crashing down to earth.
Yes, they’ve been saying that for years – and those who dumped their shares have missed out on big gains.
So anyone with a nest-egg to look after has some tough decisions to make.
Should you leave it earning practically nothing on deposit – or take a punt on shares that have never been as highly priced as they are now?
The unprecedented run has to end sometime and there is huge uncertainty around Theresa May’s Brexit negotiations, Donald Trump’s shenanigans in the US and potential financial crises in Italy and Russia, which has just bailed out its banks.
If you have a long-term savings plan, keep drip-feeding your money into it as the risk is far less for incremental investment.
‘But regular savers have no excuse. They should stop prevaricating [and get investing],’ says wealth management advisor Rory Gillen.
However, those with lump sums to salt away have a ‘genuine concern’ over a potential market downturn. Either way, it’s time to bone up on investments.
Traditionally, Irish investors use advisers who are paid on commission by the providers of the products they sell – a dubious proposition. There are also a handful of fee-based advisors.
But what’s there for wannabe investors who want to learn about how to make the right investment calls themselves?
Gillen Markets has a unique service in Ireland – a training centre for DIY investors.
It provides seminars, training, and a website that has featured some red-hot stock tips. The firm can also co-manage your investments with you.
‘There is an unbelievably low understanding (of investment) compared to the US and UK,’ says Mr Gillen.
‘We have no history of wealth. We don’t get it passed on through families. It’s not taught in schools or universities.’
So where does he see markets heading now?
‘Stocks used to be priced at 13times their earnings. Now its 21 times. With a 35% downside, it makes you feel very uncomfortable but what’s the alternative?’ he says.
‘If interest rates stay at these extremely low levels, then equity markets are priced fine.’
Interest rates, however, are unlikely to stay at current levels – although he doesn’t see the European Central Bank making any drastic increases either to rock the boat.
So what should we do with our nest-eggs?
Paying off your debts is the first move in every wealth manager’s playbook.
If your mortgage rate is 4.5% – that’s how much you save per year by paying it off early. You’d earn the kind of return that’s now a long distant memory for savers.
Another tip – though one not without risks – is to look across the Irish Sea for sterling assets. Sterling is down by over 20%, greatly increasing the value of such assets in euro terms.
UK property companies get an honourable mention from Mr Gillen.
‘British land, for example, is a different beast than it was in early 1990s. Debt is limited, revenues are back up and there are good asset values – it’s not in bubble territory. Dividend yield is also 4-5%.
‘People will say, “What about Brexit?” But that’s contrary investment [ie. buying when assets are cheap].’
There is always a risk that it will decline further but the big drop already priced in provides a degree of comfort.
Real Estate Investment Trusts (Reits) are property investment vehicles quoted on the stock market.
Mr Gillen thinks these are an excellent way to invest in property without the hassle of borrowing for a buy-to-let.
‘I’d be a big fan. People who like property get a diversified portfolio. REITs are very good long-term way to invest in property.
‘Rental yields are pretty decent compared to bond yields,’ he adds.
Shares in Irish REITs were sold off last year in anticipation of a slowdown but recovered since then and now offer only ‘fair value’ in relation to the rest of the market.
Mr Gillen also recommends shares with good dividend yields – the annual return on top of growth in the share price.
Buying shares in a company that pays decent dividends is one way to beat the poor return from banks – albeit with the risk that the underlying shares can fall in value.
Traditionally, Irish companies such as Smurfit and C&C paid decent dividends – and still do at 2.76% and 4.47% respectively – although again there is always a risk of the share price falling.
REITs also pay decent dividends, with UK REITs providing a dividend yield of up to 5.85%.
Irish-based REITs pay around 1% (Green and Hibernia) and 2.32% for Irish Residential Properties REIT.
But the main thing is – don’t panic
Some desperate investors are turning to some overhyped solutions such as computer-generated crypto currencies like bitcoin.
The value of bitcoin soared 350% this year as investors piled into this difficult-to-grasp concept. Their total value hit $77bn – more than the GDP of most countries.
However, bitcoin has no intrinsic value. It’s basically a medium of exchange whose limited supply is driving up its value.
Yet if bitcoin is going to be a new form of global currency, the supply will have to be increased, thereby reducing its value. If it isn’t used as a medium of exchange, what’s the point?
There are those who see bitcoin’s real value as a means of transacting business surreptitiously, which would appeal to criminal elements.
But again, that’s not a longterm proposition. Governments will move to clamp down on it – as China did this week – says Mr Gillen.
What about the perennial safe haven – gold?
Mr Gillen is ‘not a fan’. The primal appeal of glittery gold has been marketed to investors for thousands of years because of its rarity and intrinsic value for jewellry etc.
But it has proven to be more volatile than shares in recent times and, unlike stocks, it produces no income.
Far from being the choice of sensible investor, buying gold can be pure speculation.
‘Gold is an uptrend that may continue. But it’s way above the levels justified by long-term inflationary trends,’ he says.
So where do we go from here?
Savers and pensioners are being hammered as central banks keep interest rates low to drive growth and support stressed borrowers.
Governments debt levels are at record highs globally – higher than even before the crisis.
Meanwhile, income growth continues to lag inflation, stoking up social tensions globally, which led to Brexit and Donald Trump’s election.
What will happen when the tide of ‘cheap money’ reverses as interest rates start to rise?
‘Will house prices slump? Will stock markets suffer? How will governments afford their debt?’ asks Gillen Markets.
It is pinning its hopes on recent incredible advances in technology to drive economic growth and see us safely through the crisis.
Whatever happens, buckle up – it may be a bumpy ride.
The End of Cheap Money – a seminar on September 19 – will explore these issues. See gillenmarkets.com for details.