General Query on ‘unit linked’ regular investment plan options

As deposit rates factoring in a DIRT rate of 41% result in protection of capital but little growth, I am looking into a long term investment [15yrs approx] of regular savings [circa €500 per month] as a plan to fund/partly fund college education for our 3 young children.

I have spoken to one financial adviser from AIB who are linked to Irish Life & their Multi Asset Portfolio range of funds.

I have a medium approach to risk & will not need access to this money for the duration of the 15 yrs.

Obviously there is no 'right' answer to this but I am only wondering if anyone else has investigated this area and has any high level advice/thoughts.

The main area I was looking at are fees as returns are obviously subjective, the fees are 1.8% for the funds I referenced above but they do mention that these can be increased should performance reach a-z, i.e. they will be higher, trying to read through terms & conditions to see if they give any definites such as if fund does this then fee goes up by this.

If you are investing a regular sum over 15 years, you should be building up a portfolio of shares directly.

It's crazy to have a fund where you pay 1.8% in charges, and the Total Expense Ratio is probably a lot higher.

Have you a mortgage? If the rate is Standard Variable you should be paying this off before investing.

Thanks for the response Brendan.

Yep I have a mortgage but luckily it is a tracker and amount outstanding < 100K so monthly payment is small.

When you mention building up a portfolio of shares - could you expand on how you think it is best to go about this if possible?

Are you saying that we should save for a few months and buy shares in a company in one industry, eg food, then next time in a different industry and repeat this process thus only incurring transaction fees for stock purchases over possibly 9/10 companies.

That makes sense as recurring charges probably in the region of 2-3% annually would be substantial over such a lengthy period of time.

1.8% management charge is on the high side for a unit linked regular savings plan. There are better ones but AIB are tied agents of Irish Life, so will only recommend their products.

I wouldn't agree with Brendan though on building up a portfolio of shares. It will take a long time to build a diversified portfolio at €500 a month.

At least when buying a unit linked fund or an ETF, you get instant diversification. Also, you have to research the companies that you are going to buy in. Are you going to do that? Remember, if you read a good news story about a company in the newspapers, it has been factored into their share price a long time ago.


Steven
www.bluewaterfp.ie

There is a misunderstanding that if you buy shares your portfolio must be diversified. This is only true if a substantial proportion of your wealth is in shares.

The amount you will be putting into shares will initially be only a small part of your overall wealth, so you do not need diversification.

Hi Infoseeker, it's exactly as you describe. Costs are quite low now, so you don't really need to invest a lot. But I would keep it fairly simple. Build up €5,000 worth of shares in your food company. Then build up €5,000 worth of shares in some other industry.

Have some in your wife's name and some in your own name, to avail of separate CGT annual exemptions.

Couple of ancillary points in the context of the current tax law.

USC is paid on dividend income so if your other half is not working then you can use her USC ceiling for the dividend income.

There is no CGT issue with transferring assets between spouses so you could leave as much as suited in her name and then when you want to sell, use a stock transfer form to transfer shares to you for sale.
I don't think there is any stamp duty payable on these stock transfers.

Consider using the annual 3k as well as the education fees CAT exemption for transfers to your children once they get old enough. www.revenue.ie

Look closely at broker fees: opening, closing annual, inactive, account maintenance and transaction charges to name just a few.

Some share registrars are worse than others: search this site for examples.

Brendan Burgess said:

There is a misunderstanding that if you buy shares your portfolio must be diversified. This is only true if a substantial proportion of your wealth is in shares.

The amount you will be putting into shares will initially be only a small part of your overall wealth, so you do not need diversification.

Click to expand...

It is a personal preference. Having diversification is a method of managing risk.
Put it all in one company and if there is any bad news about that company or industry, 100% of your share value falls.


Steven
www.bluewaterfp.ie

Hi Steven

100% of your share value falls, but if you have only 1% of your assets in that share, you lose 1% of your assets.

This is a common mistake from people who think about investments in isolation from the rest of their wealth.

Brendan

Of course, there is nothing wrong with having a share portfolio if your capacity for loss can absorb the potential losses and/or if you have other assets elsewhere.

If it is the latter, then you have a diversified portfolio anyway, so you are not investing 100% in shares.

We don't know what InfoSeeker's total wealth is or where his other assets are invested. All we know is that he says he is medium risk with a 15 year time horizon.

Even if he was to buy shares, shouldn't he buy a number of different stocks in different industries and locations? €500 a month won't get you much of a spread. It would take a long time to diversify your stock portfolio.


Steven
www.bluewaterfp.ie