# 400K to invest



## Rusty Cogs (9 Mar 2009)

Guys & Gals, toss up whether to post this here or in property so please move as necessary.

I've a friend with 400k to invest, they are fairly risk adverse and do not want to have to actively manage the money. The investment could be tied up for at least 10 years. They are looking at the best deposit returns (say Investec) and wondering if there are other deposit / (safe) investment options. Alternatively, they are thinking about buying say a two bed apt in the city outright and letting it out. You can get Docklands 2 beds for circa €290k atm letting for circa €1,200 pm. That's 5% return (subject to tax) with the possible long term upswing on capital. 

I think the property is a good investment but maybe that's just because they've been discounted circa €150k from two years ago. 

Any thoughts on the best place for the €400k ?


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## NorthDrum (9 Mar 2009)

Funny that so many people generally consider investing in property as a low risk . . .

Risks:

- Value goes down
- Cannot rent property
- Cannot sell property (ie access to capital limited)
- Costs in purchasing, selling, refurbishing, mgt costs
- New Tax on second property (could come up in budget soon)
- Buy property and councel buys up a load of new units beside it (value drop)

Once they are happy taking these risks on board and are happy to take the plunge, they should buy the property and perhaps leave the rest of the cash on demand deposit. Any of the income they receive from the rental property should go into the best regular savings account (at moment halifax are good). But they would have to monitor the rates (or get a professional to do so).

Property prices, like shares, are a huge risk at this moment. I personally believe that theres good value to be gotten out there, but the next person might think differantly . . .


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## smiley (9 Mar 2009)

NorthDrum said:


> Property prices, like shares, are a huge risk at this moment. .



This doesnt make any sense.

You can now buy companies and assets at bargain basement prices meaning you are taking on less risk.

"Price is what you pay. Value is what you get." Warren Buffett


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## meatmonger (9 Mar 2009)

smiley said:


> You can now buy companies and assets at bargain basement prices meaning you are taking on less risk.


 
you remind me of a day around six months ago that both bertie ahern and gerry ryan on his show said how good an investment in any of the irish banks would be.  i would be delighted if bertie backed that horse.

half of nothing is still nothing


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## z103 (9 Mar 2009)

> You can now buy companies and assets at bargain basement prices meaning you are taking on less risk.


So why are they 'cheap'?  Why buy something that is plummeting in price? I would say that's very risky.
Maybe this time next year these investments could be worth zero.


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## spursfan1234 (10 Mar 2009)

smiley said:


> This doesnt make any sense.
> 
> You can now buy companies and assets at bargain basement prices meaning you are taking on less risk.
> 
> "Price is what you pay. Value is what you get." Warren Buffett



its not a good idea to be quoting mr buffet at the moment. his investments last year were mind bogglingly stupid. i.e. buying the rails at the top of the market, crazy investment in goldman sachs


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## Chris (10 Mar 2009)

spursfan1234 said:


> its not a good idea to be quoting mr buffet at the moment. his investments last year were mind bogglingly stupid. i.e. buying the rails at the top of the market, crazy investment in goldman sachs



While they may look crazy now, in hindsight, his protfolio depreciated by just under 10% last year. Compare that with the S&P losing about 40% and the Dow Jones down 35%, and his overall investments do not look that stupid.


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## colm5 (10 Mar 2009)

He could try an investment with an energy company who set up solar PV schemes and sell electricity into the grid at a government backed 40-50c per kWh. Great long term investment with the right company and there are a few doing it abroad, I believe, in Italy and Spain.

maybe a bit longer term, but I think the capital investment is paid back after 10 years (approx)


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## george.shaw (10 Mar 2009)

Speak to a fee based wealth manager and do not put all your eggs in one basket !!


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## North Star (10 Mar 2009)

Agree with George.shaw, with the situation so uncertain, diversification is an absolute must have. No one can be realistically confident on any one asset. Couple of other points; 
1) what matters is where the assets prices are going to, not where they have come from. Cheap can always get cheaper
2) There are times when capital preservation is more important than capital growth
3) The studies that show equities always outperforming, tend to have a longer time horizon than what you are looking at
4) Any investment strategy needs to be tied into an expected/required return and a loss tolerance. You cant expect high returns if you have a low loss tolerance. Every one will have their own expected return/loss tolerance dynamic
5) The assets that worked well before a downturn may not work well coming out of a downturn. e.g leveraged investments like property need a continuing supply of leverage i.e debt to provide fuel for the buyers. It may be some time before the system will support lots of leverage 
6) Take your time , there are few clear trends at the moment, very few assets will in the short term run away from you in terms of price. 
7) Get advice from someone with the right knowledge/experience that you can trust. 
8) Avoid any conflicts of interest.

Best of luck, whatever you choose


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## Rusty Cogs (10 Mar 2009)

Thanks North Star (an everyone else).

As said individual is risk adverse, I'm considering a diversified mix of the best deposit rates going (I'm assuming the country won't go bust and the govt guarantee on deposits will hold true). I don't see property prices running away on us for a while.


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## NorthDrum (10 Mar 2009)

smiley said:


> This doesnt make any sense.
> 
> You can now buy companies and assets at bargain basement prices meaning you are taking on less risk.
> 
> "Price is what you pay. Value is what you get." Warren Buffett


 
Are you suggesting that a low risk investor should be looking to buy companies and assets?

Quoting Buffett is only helpful when you have somebody willing to take a risk on their investment. 

Yes there is potential to make money in the marketplace, but this doesnt mean there isnt the potential to lose a fortune. Right now investing your money outside the walls of deposit is a gamble.


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## Marc (10 Mar 2009)

Re the view that Deposit accounts are a  low-risk investment. In nominal terms, yes, your nominal savings are relatively safe. In real terms however, adjusted for inflation, it can be a very different story.

Here is a simple logical argument for all savers to consider:

A simple definition of inflation is "too much money chasing too few goods" 
Governments around the world are now printing money (quantitive easing). 

The quantity of money in circulation is increasing, which all things being equal might be expected to result in higher inflation. 

In the words of the economist Roger Bootle, ‘the umpteen billions of dollars which have been magicked out of nowhere must return whence they came"

For a more detailed explanation of the issues have a look at this:

[broken link removed]

Remember that real interest rates in the 1970s were negative. That is to say the net rate of interest paid to savers allowing for inflation was negative. Each and every year the value of their savings account declined in value.

If real interest rates remain below inflation, the credit crisis will unwind as the burden of debt is reduced in the economy. Those with existing debts will see an improvement in their financial position whilst those with savings on deposit, will see the value of their savings reduce. 

Low interest rates and high inflation will be terrible news for savers.

What should a cautious saver do to offset the risk of inflation?

Ideally, one needs a secure form of investment which offers the potential to appreciate as inflation feeds into the economy.

There are two simple options to consider:

1) Inflation linked government bonds
These offer a government-backed interest payment and inflation protection on the capital invested. However, they have two risks here:
i) Currency risk - movements in currency rates can swamp movements in bond returns so US$ or £ bonds which are un-hedged can create serious problems for a € investor.
ii) Maturity risk - most bonds are issued with very long durations typically 20 or 30 years. Small movements in interest rates can have a very large impact on the movement in prices. The price of bonds moves inverse to the movement in interest rates. So, a low interest yield  purchased today, can spell a lot of trouble if interest rates increase.

2) The second option is therefore what was once described by a Professor of Finance as an "inflation hedge fund" 

Savers purchase a euro currency hedged, short-term government bond fund. This  offers a high level of security for the cautious investor since they are buying government debt rather than corporate debts. Furthermore this actually offers very good protection against inflation.

The reason is that the bonds are held for a relatively short period of time (sometimes only a few months) they then mature and the proceeds are reinvested into new short-term bonds. Each time the bonds are reinvested, the investor gets to benefit from any changes in interest rates and inflation expectations. 

The result is less volatility in prices (the thing most cautious savers are trying to avoid) but with a higher expected return than a deposit account over time.

Why would we buy a fund rather than simply buying a bund on the German market? Two reasons diversification and tax.

Diversification is the closest thing that an investor has to a "free lunch" 

A government bond purchased directly is subject to marginal tax at up to 41% whereas a bond purchased through a fund is only subject to exit tax.

The solution?
How about a slice invested in a Euro currency-hedged, Irish Domiciled, Global Short-Dated Bond fund with an annual management charge of just 0.25%pa?

This is what we recommend for our cautious clients.


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