Easy Access Regular Savings Plans
Planning for your future is a key part of life – whether it is saving for your children’s education, supplementing your lifestyle, or planning your retirement.
However, with interest rates at historic lows, the returns you are getting from savings held on deposit are probably not delivering the long-term returns you need. Over the last number of years, earnings from investments such as equities and bonds have far outstripped that of cash. That’s why we see more investors once again looking at alternatives to holding money on deposit.
We know that taking the first step into investment markets can be daunting, so it makes sense to seek professional financial advice. Saving for the future is essential if you want your goals to be achieved and it is important that you make use of all the options available to you.
Unit cost averaging
During times of market uncertainty, investors can spread their investment over time through Unit Cost Averaging.
Unit Cost Averaging is the term used to describe the strategy of making regular investments over a period of time as opposed to lump sum investment. While the amount of money you put in at each interval will be the same, the number of shares that money buys will not. That’s because market fluctuations dictate share prices, causing them to rise and fall. With this approach, you end up buying more shares when prices are low and fewer shares when prices are high.
It's Just like putting fuel in your car
Unit Cost Averaging works on the same principle as putting fuel in car by spending the same amount of money each week. The price of car fuel varies from day to day and so the price you pay at the pump varies accordingly. If you put aside say €100 a week then on some weeks when prices increase you will not get the same amount of fuel as say the previous week when prices were lower. Each and every month your savings contribution will be used to buy units in a particular fund or a portfolio of funds.
If in January the average unit price is €1.00 then a monthly contribution of €1,000 will buy 1,000 units. If in February the unit price increases to €1.05 then your €1,000 will buy 952.38 units. Of course if in March the unit price falls to 90 cents then your €1,000 will buy 1,111.11 units. The value of your investment will be based on the unit price on the day the units are encashed so, the more units you accumulate over your investment time frame the better.
By following this simple strategy, you can reduce the impact of market fluctuations and downside risk. By buying a fixed euro amount on a regular basis, your focus is on accumulating assets on a regular basis, instead of trying to time the market.
This strategy allows you to take emotion out of investing. Stick to your plan and stay invested especially when markets are in turmoil. In fact, If a recession hits the economy and your investment falls in value, then this is the time to increase your investment. This may seem counterintuitive and even risky but historically dips or even troughs in the markets have been followed by bouncebacks. If you stay invested you will take advantage of these returns.
Cash may not be the answer
Holding your money in cash or on deposit may make sense for people who are risk averse and/or have short-term goals. However over the last number of years holding too much of your savings in cash has been costly. Generally, people are rewarded for taking some risk with their investment and assets such as equities and bonds have the potential to earn you higher returns than cash.
Explore the alternatives
Returns on cash have struggled to keep up with inflation over the last 10 years and this is why investors may need to consider the benefits of additional investments such as bonds and equities.
Diversify, diversify, diversify
There is an old saying ‘don’t put all your eggs in one basket’, and the same can be said to your investments. However, when we talk about it in terms of your money we call it diversification. Multi-asset funds, which are very popular with Irish investors, allow you to invest in a diversified mix of assets (for example equities, bonds and property) which helps to spread the riskiness of your investment.
Generally there are four main types of investment, which we call ‘asset classes’ and a multi-asset investment fund will usually hold some or all of these different asset classes. Each asset class works in a different way and carries its own particular rewards and risks. It is important to understand how they work.
- Cash: money on deposit (e.g. cash in a bank).
- Property: bricks and mortar, or property shares.
- Equities: shares in individual companies.
- Alternatives: Includes the likes of gold, oil and other ‘non-traditional‘ investments.
A Multi-Asset investment fund will generally hold some or all of these different asset classes. The fund manager will buy and sell the different asset classes hoping that their value will increase over time.
For more information on “how funds work?” check out our video
Invest for the long-term
Your savings goals are probably balanced between short-term needs such as saving for a holiday or a new car – and longer term needs such as your retirement or saving for your children’s education. A key determinant of where you should save is how long you can afford to tie up the money.
Find out what type of investor you are
You may have to accept some level of risk when you make an investment but how much depends on what you want to achieve. Only you know what your goals are and how much risk you are prepared to accept to reach them.
Deciding what you want to achieve with your investment is important because it will help you make decisions about where to put your money. Usually, your decision will be based on three things:
- What do you want to achieve with your money?
- What levels of investment risk are you comfortable with?
- For how long would you be happy to invest your money?
It's time in the market not trying to time the market
Stay invested for the long term and you will outstay any short-term corrections.
Warning: The value of your investment may go down as well as up.
Warning: Past performance is not a reliable guide to future performance.
Warning: If you invest in this fund you may lose some or all of the money you invest. Warning: Benefits may be affected by changes in currency exchange rates.