How would you put €1m to work?

[begbie]

Thought experiment:

Let's say you had €1m in cash and you wanted to put it to work.
The goal is to generate enough passive income or investment yield to cover your cost of living.
Let's say your cost of living is €30k/year all-in and to keep things simple you will pay 50% tax on any yield.
So you need to hit €60k/year or a 6% yield on €1m.

How would you go about this in Ireland?
What % yield would you say is achievable in Ireland with relatively low risk?

 

[Marc]

I have just posted a detailed analysis of a real clients portfolio over the last 9 years compared to a range of popular alternatives such as an absolute return fund, a multi asset portfolio, gold and a “typical” private client stockbroker portfolio.

This analysis is based on a real client account investing in a “low risk portfolio” since 2012 with an initial investment of €1.7m and included both a personal investment in non-EU ETFs and other securities with a tax advantage and an ARF.

The average annual return on a 40% risk portfolio over the last 9 years net of fees and expenses has been 4.49%pa.

So, historically you have needed approximately 10% risk assets for each 1%pa of return.

So, in theory, a 60% risk portfolio would have generated around 6%pa in gross of tax returns. But that hardly meets a definition of low risk. It’s either or I’m afraid.

The real challenge of course is that we are not now investing over the last decade, but rather over the next decade and unfortunately our Crystal Balls are cloudy about that. But history should be your starting point.

In Search of the Perfect Investment Portfolio - Everlake

Many investors find it difficult to achieve returns offered by the markets due to a misunderstanding of investment risk, costs and taxes.

globalwealth.ie

My analysis of how insanely risky a small collection of rental properties is compared to a globally diversified investment portfolio can be found here

Investing in Property Investing in Property in the UK and Ireland

Investing in Property is a topic that is frequently under consideration in Ireland and the UK and the intention with this guide is to conduct an objective, empirical comparative study to assess the relative risk, return and correlations across these investments with a view to informing Portfolio...

joom.ag

 

[moneymakeover]

Option 1
Low risk fund: mix of property, bonds, equities.

Option 2: buy say 3 investment properties. Today in Dublin rents for two beds are 1800/month. Three properties today gives 64,800 per year.

What I like about option 2 is that rents will gradually increase over time. Property prices similar.

So in several years time, you should have more than 1m in assets.

Also the rental income will increase over time. I estimate the monthly rental income on an average 2 bed will be at least 2,400 in 10 years time. That's annually 86,400 for 3 properties.

 

[DublinHead54]

Option 1
Low risk fund: mix of property, bonds, equities.

Option 2: buy say 3 investment properties. Today in Dublin rents for two beds are 1800/month. Three properties today gives 64,800 per year.

What I like about option 2 is that rents will gradually increase over time. Property prices similar.

So in several years time, you should have more than 1m in assets.

Also the rental income will increase over time. I estimate the monthly rental income on an average 2 bed will be at least 2,400 in 10 years time. That's annually 86,400 for 3 properties.

Thats 64,800 gross before out of pocket costs, probably looking at anywhere between 300-500 per month of costs (property tax, income tax, apartment management fees, letting / property management fees etc).

 

[galway_blow_in]

Thought experiment:

Let's say you had €1m in cash and you wanted to put it to work.
The goal is to generate enough passive income or investment yield to cover your cost of living.
Let's say your cost of living is €30k/year all-in and to keep things simple you will pay 50% tax on any yield.
So you need to hit €60k/year or a 6% yield on €1m.

How would you go about this in Ireland?
What % yield would you say is achievable in Ireland with relatively low risk?

Could you not just invest in perhaps ten well known huge companies that pay good dividends?

Think of a well known soft drinks company or a huge bank in America ,fast food company with a clown for mascot ,large Japanese car
company

If those go bust ,we are all in serious trouble

30 k should be easily achievable

 

[Marc]

Could you not just invest in perhaps ten well known huge companies that pay good dividends?

Think of a well known soft drinks company or a huge bank in America ,fast food company with a clown for mascot ,large Japanese car
company

If those go bust ,we are all in serious trouble

30 k should be easily achievable

Here are the arguments against just picking a few “blue chip “ companies

[broken link removed]

 

[NoRegretsCoyote]

Think of a well known soft drinks company

Dividend yields for these types of company have been around 2% to 3% the last few years.

After tax that doesn't get you your €30k per year and you've got currency risk and of course risk of capital loss.

that rents will gradually increase over time

Unlikely. Irish rents in the last 25 years have been either stable (01-05; 10-13, increasing rapidly (95-01; 06-08; 14-date), or falling rapidly (08-12). There has never been a sustained period of something like 2% increases per year.

Otherwise as a general rule a very tax-efficient use of your wealth is to buy a house and live in it.

 

[galway_blow_in]

Dividend yields for these types of company have been around 2% to 3% the last few years.

After tax that doesn't get you your €30k per year and you've got currency risk and of course risk of capital loss.




Unlikely. Irish rents in the last 25 years have been either stable (01-05; 10-13, increasing rapidly (95-01; 06-08; 14-date), or falling rapidly (08-12). There has never been a sustained period of something like 2% increases per year.

Otherwise as a general rule a very tax-efficient use of your wealth is to buy a house and live in it.

well i suppose it depends on the rate of tax the OP is paying ?

3.5% is a good dividend on a company with a century plus old existence i think

 

[PMU]

It depends on (a) whether you intend to exhaust totally your initial sum or leave an inheritance; and (b) your life expectancy. If you intend to leave an inheritance your investment needs to generate an internal real rate of return thath leaves your initial investment with a value of zero, i.e. so only the inheritance remains over your expected life span. Otherwise it the IRR that leaves you with a value of zero when you reach your life expectancy. As you are investing in risky (i.e. variable return) assets you require an expected annual return that is greater than your target return. And this is the after tax return your investment must earn.

 

[Marc]

It depends on (a) whether you intend to exhaust totally your initial sum or leave an inheritance; and (b) your life expectancy. If you intend to leave an inheritance your investment needs to generate an internal real rate of return thath leaves your initial investment with a value of zero, i.e. so only the inheritance remains over your expected life span. Otherwise it the IRR that leaves you with a value of zero when you reach your life expectancy. As you are investing in risky (i.e. variable return) assets you require an expected annual return that is greater than your target return. And this is the after tax return your investment must earn.

This is a really important point. Many people select an ARF because they don't want the pension to "die with them" but unless the investment returns are adequate many are finding their funds depleting (known as bomb out risk)

We model these variables against life expectancy. Its absolutely critical to distinguish between an income of €60,000pa or 6% of the value of the portfolio. These are very different beasts.

I model below a fixed €60,000pa and, on average, I'd expect to run out of money while I could still reasonably expect to be alive!