We have seen interest rates on savings and deposit accounts decrease almost every other month since the beginning of 2013 – to the point that, depending on the type of account your money is held in, it could in fact be costing you money to have it on deposit.
This happened to a client of mine last week, who had €12,000 in a deposit account with a bank earning 0.3%, and when you factor in DIRT tax at 41% and inflation at .5%, her real return was negative at -0.323%.
And when you look at the rate An Post are offering in their three-year bond account, at just 4% when 18 months ago it was 10%, you can see how much rates have reduced in such a short space of time. Worse, the rate An Post is offering is about the best available for that time period.
Interest rate reductions hit those the hardest who need the interest earned on their savings to supplement other income they might be in receipt of, so if you were getting a 10% rate which is now 4% you will have seen your income reduce by 60% - that’s one helluva drop.
What concerns me most in these scenarios is when people try to make up this difference by putting their savings into riskier investments. I have received literally hundreds of emails from readers in the past 12 months looking for advice and information on accounts, where they would be willing to take a risk on if that meant they could make more money.
And of course they were asking the wrong guy – my mantra is and has always been - keep your capital safe, don’t increase your risk and don’t move your capital into riskier investments.
Let me give you the three most common mistakes I personally have come across over the past 25 years where people make really poor investment decisions simply because they are looking for better returns.
The first is their inability analyse risk.
People invest in products that they have absolutely no idea about that, that later come back to bite them. In fairness they might seek out advice but in the end they never really understand what they are investing in and defer to their so-called expert. Just remember if you can’t explain an account to your partner or a friend, then don’t invest in it. Always ask yourself or your advisor two questions (a) what’s the worst that could happen with your money and (b) how much of their money have they invested in the product they are recommending. Do they want you to risk your money because they will get paid a commission if you do?
It’s always a great exercise, before you invest in any type of account, to carry out a risk questionnaire on yourself which analyses what your risk-profile exactly is. It’s an excellent exercise because you may find it’s much lower than you think.
The second investment mistake people make is following the herd.
They listen to a family member, a work colleague or what some financial pundit said on a paper or radio – people who talk about an amazing account they have heard of and one they have invested in themselves. The account is a sure thing, easy money, double your return in a short space of time etc.
I met two pharmacists in Cork last week, terrifically nice and smart people, who fell into this trap.
They got their “inside information” from a family member whose financial advisor told them about this “incredible” account. From the outset, the projected returns looked impressive, the risk very small, so they invested €80,000 – their life savings into this account, even the money they had saved for the past 10 years they received from their children’s allowance.
The €80,000 invested, they told me, now wasn’t worth €8,000. And I will never forget the tears streaming down the woman’s face in particular when she was telling me their story, because what made the loss all the worse was that they used their kids’ money as well.
They said, “How could we have been so stupid and so greedy to follow this advice? Just because other people we knew invested didn’t mean we had to.”
The final most common investment mistake I come across is when people make things too complicated.
Two weeks ago, for example, a reader called to my office because he wanted me to review his investments.
He took out a sheet where he had written all of his accounts and he had 14 in total.
He had accounts with An Post, Standard Life, Irish Life, PTSB, KBC, BOI and New Ireland. But he really didn’t know for sure what was in each account, when it was opened, whether he had to give notice to withdraw funds and so on. He admitted that he was finding it hard to keep track of them all. And God only knows what would happen, if anything happened to him, because his wife wouldn’t have a clue where to start looking for these accounts. Because they were all in his own name it would be a nightmare to try and track them all down. But this gentleman wasn’t unusual – I come across this scenario all of the time.
My advice to people who are very worried about how low rates are and how poor their returns have become is not to succumb to the temptation of investing in riskier accounts in order to try and increase your returns.
Look at other ways of increasing your income by cutting back in other areas. If you can, sell some things you don’t use, get a part-time job or whatever it takes. Interest rates will eventually go up but probably not for another 18 to 24 months. Your goal must be in the interim to preserve your capital. And the only and best way to do this is to keep it in safe accounts, even if the rates they pay are low.