ISEQ ETF - Cash it in now and invest elsewhere?

[WGT]

Hi,
In February 2007 I made an investment of 10,000 euro in an ISEQ ETF.
Today, it is worth 3,060 euro.
I don't need the cash now but have thinking would I be better off cashing this in and investing it elsewhere.
For the last few months, I've been reading posts about investing in Gold and Silver, but would have to admit I'm not confident enough to take the plunge, due to lack of knowledge.

My current situation is as follows.
Married with 1 child.
Mortgage: 70k
My Savings (Northern Rock): 39,239
Wife's Savings (NIB): 40k
Global REIT Property fund: Initial Investment = 10k, Current Value = 5.7k
Quinn Life Freeway Funds: Total Contributions = 20k, Current Value = 17.75k
Parent Saver for child: 1800 euro

I would imagine that this puts me in a position to take some measured risks as I can minimise any gamble I take.

 

[aristotle]

If you decide to cash in and re-invest, or invest new funds, you really need to diversify into a range of investment types and funds. You have put 40k into just 3 different funds\etfs which puts you at risk if even just one of them doesn't perform and that is what has happened to you.

If I had 40k to invest in funds\stocks I would put 1-2k in 20-40 different things over time.

I would recommend Rory Gillen (investrcentre.com) as a good place to start getting info on where to put your investments. (I have no affiliation with him or the site).

 

[Jim2007]

If I had 40k to invest in funds\stocks I would put 1-2k in 20-40 different things over time.

Diversifying a small portfolio such as this into 20-40 items will result in portfolio that will constantly under perform!!! The point of diminishing returns has long been surpassed.

Jim

 

[aristotle]

Diversifying a small portfolio such as this into 20-40 items will result in portfolio that will constantly under perform!!! The point of diminishing returns has long been surpassed.

Jim

Please explain....thats a big claim.

 

[WGT]

You have put 40k into just 3 different funds\etfs which puts you at risk if even just one of them doesn't perform and that is what has happened to you.

I think I know what you mean, but my rationale (perhaps flawed) was
1. The ISEQ ETF 20 is effectively a basket of 20 Irish companies.
2. The Quinn Life Freeway is 60% Europe, 20% Irish, 10% China, 5% Latin America, 5% Emerging Markets.
3. The Global REIT Property Fund focuses on Real Estate in countries like Hong Kong, Australia, USA and Japan.

Does this not introduce a degree of diversification, particularly the ISEQ ETF 20 and also having a 60% exposure to the Europe market?
I think I might reduce my monthly contributions to Quinn and invest elsewhere.

 

[Jim2007]

Hi,
In February 2007 I made an investment of 10,000 euro in an ISEQ ETF.
Today, it is worth 3,060 euro.
I don't need the cash now but have thinking would I be better off cashing this in and investing it elsewhere.
For the last few months, I've been reading posts about investing in Gold and Silver, but would have to admit I'm not confident enough to take the plunge, due to lack of knowledge.

My current situation is as follows.
Married with 1 child.
Mortgage: 70k
My Savings (Northern Rock): 39,239
Wife's Savings (NIB): 40k
Global REIT Property fund: Initial Investment = 10k, Current Value = 5.7k
Quinn Life Freeway Funds: Total Contributions = 20k, Current Value = 17.75k
Parent Saver for child: 1800 euro

I would imagine that this puts me in a position to take some measured risks as I can minimise any gamble I take.

The best place to start is to define your financial objectives, such as I want to save X amount for my child's education in 5 years time, I want to be able to retire at 60 with a pension of X and so on. Doing so will help you determine how much money you need to start putting aside to for each objective and how much risk you can afford to take on in order to achieve your objectives.. And of course it is much easer track an objective the has been quantified!

For instance an objective such as saving for a child's education in starting in 5 years time, would suggest that you can't afford to take much risks as the period is short - so stick to cash or near cash items, which unfortunately will produce very low returns, meaning that you may need to increase your savings.

On the other hand saving for retirement is a long term effort and clearly can't be achieved by just saving, so you'll need to take on some risks to achieve it, but time is on your side so it should not be such a problem. In such a case you will also need to engage in some portfolio construction, mean determining how to spread your investment over several asset classes such as bonds, equities, commodities, property and so on... there is plenty of material out there on this topic, so take some time educate yourself on this. Given the size of your portfolio, I would expect that you should be able to achieve the desired asset allocation using between 5 to 7 funds...

Once you have executed your investment plan it is important to rebalance the portfolio on a regular basis, this means to check it about every six or twelve months to see that the asset allocation is still in line. Again this is will documented in the literature.

Good luck with that,

Jim.

 

[Brendan Burgess]

Hi WGT

I am in a similar position with a big loss on the ISEQ ETF. However, it's best to leave it there if you don't need the money. You cannot use the losses realised against any other investment for tax purposes.

So if you leave it there any gains from here to €10,000 will be "tax-free".

if you put it in a different fund and it rises by €7,000, you will pay around €2,000 exit tax on it.

The ISEQ ETF has the top 20 shares in equal amounts so it should be reasonably well diversified.

Brendan

 

[aristotle]

I think I know what you mean, but my rationale (perhaps flawed) was
1. The ISEQ ETF 20 is effectively a basket of 20 Irish companies.
2. The Quinn Life Freeway is 60% Europe, 20% Irish, 10% China, 5% Latin America, 5% Emerging Markets.
3. The Global REIT Property Fund focuses on Real Estate in countries like Hong Kong, Australia, USA and Japan.

Does this not introduce a degree of diversification, particularly the ISEQ ETF 20 and also having a 60% exposure to the Europe market?
I think I might reduce my monthly contributions to Quinn and invest elsewhere.

Yeah thats true, I didn't think of it that way. But you still put over 25% of your investment into Irish stocks which in itself is a heavy weighting. You also put another 25% into a property fund.

I think you could diversify a bit more.

 

[Marc]

Ireland is currently about 0.07% of the world's stockmarket by market capitalisation according to the Msci world index. Having 2% in Irish stocks would be massively overweight let alone 20%!

CRH is about 20% of the iseq 20 index and Kerry foods about 16% it is certainly not equally weighted

Exactly how is this well diversified?

The downside risk is a big fall in the value of one or both of these stocks will hit your investment hard. Remember that this has already happened with the banks.

So tax is a red herring here. Which is more significant to you a tax free loss or a taxable profit?

Jim set out the right way to think about this problem

 

[Brendan Burgess]

The ISEQ ETF has the top 20 shares in equal amounts so it should be reasonably well diversified.

WGT

Sorry this was incorrect. They have the top 20 shares but not equally weighted. But they don't allow any one share to exceed 20% of the fund. (I knew that there was a "20" in their somewhere)

You have 103k in total investments, 3k of which is the ISEQ ETF.

Marc, I think you are overdoing diversification. You frequently suggest that people put 10% of their portfolio in gold. I would have thought that putting 3% in CRH would not be overdoing it. As it is, WGT is putting less than 1% in CRH. Even if his Quinn Life Freeway funds are in the ISEQ Freeway, he would still not be overexposed to any one share. (Given that his Freeway fund has fallen only marginally, I suspect that it is not in the ISEQ fund)

In this case, the certain tax advantages of the ISEQ ETF outweigh the other considerations.

If his only investment was the ISEQ ETF, I would still disagree with you , but would agree to differ. In this case, I can't agree to differ with you.

Brendan

 

[Marc]

Brendan,

I have thought long and hard about your comments and I wish to clarify a few of your points.

Firstly on diversification. I defer to my learned friend....

"Diversification is the only free lunch in investing" Dr. Harry Markowitz, Nobel Memorial Prize in Economic Sciences 1990.


Secondly, as a matter of accounting the poster has a net worth of just €35,749 once the mortgage is accounted for.

Which would suggest the following asset allocation:

REITs €5,700
ISEQ 20 €3060
Euro Stoxx 50 €10650
ISEQ 20 (again throught the Freeway funds) €3550
Emerging Markets €3550
Cash €9239

Of course, we also need to properly adjust the overall weightings to correctly account for the fact that Ireland is also represented in the Euro Stoxx 50 with CRH making up 0.65% of that index.

So, we actually need to add back €115 to Ireland and deduct this from Europe giving an overall allocation of:

REITs €5,700 (15.94%)
Ireland €6725 (18.81%)
Europe ex Ireland €10535 (29.47%)
Emerging Markets €3550 (9.93%)
Cash €9239
Total €35,749

We could have a debate for hours about the overall merits of this allocation but let's just focus for now on the Irish equity allocation.

A total of 18.81% against a rational market allocation of 0.07% by market cap according to Morgan Stanley.

That is 268 times overweight Irish Equity. To put this in perspective an investor in the USA would have to invest 14,740% of their capital in US stocks to have the same overweight position. A UK investor around 2680% of their capital and so on.

The inference here is that those 20 Irish companies are 268 times better than all of the tens of thousands of other investment opportunities out there like Microsoft, Wall Mart, Shell, BAT, Google, Apple, IBM, Sony, Toyota,AXA, Gazprom. China Mobile, Johnson and Johnson etc etc etc.

This never ever made any sense and never ever will. It is a simple manifestation of a home bias and nothing more. Our familiarity with the names gives a false sense of security about the investment being made. However, markets do not reward investors for investing in familiar companies. A company half way across the world you have never heard of is not necessarily a more risky investment.

Ask yourself this question: If you lived in Canada, the USA, Japan, the UK, most of Western Europe or virtually anywhere except Ireland would you ever consider investing in the ISEQ 20?

Now let's break down the allocation to the stock level.

We know that CRH is 20% of the ISEQ 20 and therefore the weighting to that company is 20% of the Irish Stock allocation or €1345 (this is 3.76% of the total portfolio not 1%)

We also know that Kerry Foods is 16% of the index so that is another €1076 in Kerry Foods (3.01% of the total)

Put another way we have 6.77% of the entire portfolio invested in just 2 stocks in Ireland where presumably the OP has their home and business interests. Could you imagine if they were actually employed by an Irish Company as well. I think the phrase eggs and baskets comes to mind....

Just for reference there are 5000 companies listed on the New York Stock exchange alone. Yet the OP has no allocation at all to the USA (which represents some 55% of the global market cap) and nobody said a word.

This simple failure to appreciate appropriate proper global diversification is a contributing factor to the problems facing Irish investors today.

Just for illustration, a simple alternative of an MSCI World Index tracker would offer exposure to around 1000 companies for half the cost each year of the Quinn Funds.

That said, we would typically have between 12,000 and 15,000 stocks in a typical client portfolio. This represents proper global diversification reducing the idyosyncratic or stock specific risks that investors are not being paid to take as set out in the 1960s in the Capital Asset Pricing model by Bill Sharpe again Nobel Prize in Economics 1990.

Regarding your comment about Gold, I would be interested to see where I have frequently suggested that people should invest 10% in gold. For the avoidance of doubt our Private client advisory portfolios have had a maximum allocation of 5% to Gold since Jan 2008. I would therefore be delighted if everyone reading this would please search askaboutmoney.com and please confirm exactly the number of times I have recommended putting 10% of a portfolio in Gold.

Be that as it may the difference between an allocation of say 3% to gold and 3% to a single stock is simply this: how many times in recorded history has the value of a stock gone to ZERO........NIL.....NOTHING........SUSPENDED.

Now, how many times in the last 2000 years has anyone with some gold been told; "I'm very sorry Mr TutanKhamun but your seemly bluechip investment is now totally worthless but don't worry you can carry it forward as a tax write off"?

I don't expect to change people's opinions. We are all entitled to believe what we wish and to invest accordingly but I do think it is important that the facts are presented in a fair and balanced way.

All the best to everyone on askaboutmoney and a Happy New Year to all.

 

[Brendan Burgess]

Hi Marc

I think that you thought too long and hard about it You have not been able to see the wood from the trees. You have got completely lost in the numbers and academic theory which resulted in incorrect advice to WGT.

WGT has invested €3,000 in the ISEQ ETF and wants to know what to do with it. He says that he does not need the cash so the right answer is to keep it as any gains will be tax free.

Let's say Ireland implodes tomorrow and every company on the ISEQ is wiped out. He won't be happy but his loss will be €3,000 which he can well handle.

We don't know his net worth, but it's reasonable to assume that his mortgage is backed up by a home worth at least €70,000. His net worth is at least €103k.

I think that this discussion illustrates the value of Askaboutmoney. Someone like yourself who usually gives very good answers, gets an occasional answer wrong. Someone else corrects it and we all learn.

 

[spreadsheet]

In my humble opinion if I was in the OP's position i'd sell all those ETF's and buy an apartment in Dublin city centre (if the OP is from Dublin). There are plenty of 1 bed's available for €100k. Don't worry about capital appreciation. The rent will be minimum €500 per month. Great yield and you are in control.

 

[Brendan Burgess]

Hi Marc

I said

You frequently suggest that people put 10% of their portfolio in gold.

Regarding your comment about Gold, I would be interested to see where I have frequently suggested that people should invest 10% in gold. For the avoidance of doubt our Private client advisory portfolios have had a maximum allocation of 5% to Gold since Jan 2008. I would therefore be delighted if everyone reading this would please search askaboutmoney.com and please confirm exactly the number of times I have recommended putting 10% of a portfolio in Gold.

Sincerest apologies. I was mixing you up with your employer who publicly recommends this figure.


The first item in the media list on your website is an interview on 30 October 2010 between George Lee with the founder of your company and Stephen Flood.

Stephen(?) says at around 5 minutes and I quote verbatim

It's very important that you look at gold as part of a diversified strategy. A small component of a spread of assets - 3% to 10% might be productive for people to have in terms of a good allocation. Anything more than that and you need to know what you are doing and you need to get fee-only advice

A quick Google search finds the following Sunday Tribune article:

There is an old Wall Street adage: you put 10% of your portfolio in gold and hope to God it doesn't work. It's a message that Stephen Flood, director of gold investment specialists Goldcore, is happy to endorse – especially in uncertain times. As the prices of traditional investments remain volatile, gold has absorbed unprecedented cash flows, driving the price to nominal records.

and later in the same article

Why not put 5%-10% of your money into a firm form of money that can't be debased," said Flood. "I'd rather bank it and not get a return, but know it's there. I don't think that's crazy. I think it makes a lot of sense.

I had not seen this article before or heard the RTE interview, so I suspect that I have heard them saying this elsewhere as well.

 

[Jim2007]

Please explain....thats a big claim.

There is plenty of literature around on over diversification, just google it! But in basic terms if one of 40 items doubles in value it still will have very little impact on your overall return and in fact in such circumstances you might well be able to achieve the same return at a lower risk level by using some sort of income generating alternative such as a time deposit.

Jim.

 

[farmerette]

I think I know what you mean, but my rationale (perhaps flawed) was
1. The ISEQ ETF 20 is effectively a basket of 20 Irish companies.
2. The Quinn Life Freeway is 60% Europe, 20% Irish, 10% China, 5% Latin America, 5% Emerging Markets.
3. The Global REIT Property Fund focuses on Real Estate in countries like Hong Kong, Australia, USA and Japan.

Does this not introduce a degree of diversification, particularly the ISEQ ETF 20 and also having a 60% exposure to the Europe market?
I think I might reduce my monthly contributions to Quinn and invest elsewhere.

you seem overweight in europe ( no .2 ) and id have thought americas dire property market alone would drag the 3rd one down

 

[WGT]

Thanks for the feedback

Thanks to everyone for your feedback. Food for thought for me definitely.
Having digested the responses I will now plan an investment strategy.
Thanks Jim, for your sound advice about how to invest and plan.
My child is 18 months, so I'll have plenty of time to save for his education, between our savings (80k and also the Parent Saver Account (150 euro per month).
In terms of retirement, I also have a seperate pension plan worth 100k that I didn't mention aside from all the bits and bobs and etf's that I mentioned in the email.
Marc and Brendan, your responses were very informative and appreciated.
Our house is certainly worth a lot more than 70k, it's hard to put a value on it in today's market, as the market is stagnant, but as we live within the immediate Dublin area and we're not planning to move, we feel the house will hold it's value and bounce back. Let's put it this way, if we put it on the market for 200k, I think people would jump at it.
Marc, a point of yours that I picked up on, about being overweight in the Irish markets and not having anything in the US. I might have a closer look at this and also reducing my 60% exposure to Europe.
Still undecided about the option to buy silver or gold.
Anyway, thanks all for your feedback