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Ellis Financial | Why should you invest your money?

Ellis Financial | Why should you invest your money?

Why should you invest your money?

Why Invest?

Ireland is now firmly established as one of the European Union's most vibrant economies. Rapid growth in our economy has given the Irish investor substantial new found wealth. The significant increase in property prices, continued low interest rate environment and economic confidence has led to more Irish people enjoying the benefits of the Celtic Tiger.

Investing money is an important part of your financial security planning. All too often people adopt a product-led approach to investing rather than seeking and adopting a ‘best advice’ approach to investment decisions. Where and how you choose to invest will have an impact on the return generated.

In the current environment, the return on deposit accounts is barely beating inflation so they are not an ideal vehicle for long-term investment or wealth accumulation - to maximise returns you need to consider other investment options.

Your financial goals, current financial situation, investment experience, time horizon and attitude towards risk all determine your investment “personality” and the investment option that is best for you. The process of establishing attitude to risk can be fairly subjective, but an investment recommendation cannot be appropriate or robust without some attempt at assessing risk tolerance. Investment advisors go through a process called a ‘fact-find’ before advising clients, which is important in defining the investment characteristics of a person and relating this to an investment proposal.

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Some things to consider before you invest.

There are a few things you should consider when choosing how and where to invest your capital:

Risk

What level of risk are you comfortable with? Risk is linked to return and generally the more risk with a particular investment, the greater the possible return. Some people are very uncomfortable with sudden, short-term fluctuations in the value of their investments. Others are more willing to accept short-term fluctuations with the expectation that long-term returns may be higher.

Return Expectation

Investors will generally expect to get the best returns they can, for a given level of risk. The key is to be realistic. On the basis of long-term historic performance figures, the returns for each asset class will differ.

Time Horizon

What length of time do you want to invest for? Whether you have a short, medium or long-term investment horizon will impact on the option you choose. Often the investment objective will determine the duration e.g. investing for education on behalf of young children is long-term, whereas investing for a deposit on a house would typically be more short-term.

Access

What access do you require to your funds? A requirement for short-term access to funds will also impact on your choice. Some products are best suited to investors who do not require access to their funds, who can afford to leave their funds invested for 5 years or more.

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What options are available to you as an investor?

As an investor there are numerous investment options open to you.

Direct Investments

You can choose to invest directly in stocks, currencies, bonds, property and cash. However, to do this you need a good understanding of how investment markets operate. You will also need to conduct in-depth research to gain an understanding of the risk profile of each individual security in which you choose to invest. In addition, you will need to track your portfolio’s performance, track your gains for tax purposes and provide all the necessary documentation related to trading. The taxation of gains may also be less efficient than investing through a unit-linked investment.

Deposit Accounts

Deposit accounts offer a guaranteed return over a set term, ensuring the security of your investment. Lately, however, deposit returns are barely the same as inflation. This means your investment is not growing in real terms.

Guaranteed Investments

Guaranteed investments generally take the form of tracker funds, guaranteed funds or with profit funds.

Tracker Funds

These offer returns associated with assets such as indices, commodities or individual shares, but don’t invest directly in them. They are a good choice if you wish to have a high level of capital protection over a set term but still wish to participate in the market upside. However, the cost of guaranteeing your capital is generally reflected in a cap on the potential return offered and foregone dividends which do not accrue to the tracker investor.

Guaranteed Funds

These operate in much the same way as tracker funds, guaranteeing your investment over a certain term. However, unlike trackers, guaranteed funds generally hold assets directly. This means the funds can be more actively managed and can benefit from any dividends paid by the assets held.

With Profits

Unitised With Profits funds typically invest directly in equities, fixed interest, property and cash. These funds generally provide guarantees plus regular bonuses.

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Unit-Linked Investments

Unit-linked investments offer you one of the easiest and most tax-efficient ways to invest. Such funds hold pools of assets, the ownership of which is pro-rata among the unit holders. Unit-linked funds are pooled investments (covering many types of asset) held by an investment manager. Unit-linked funds offer you:

Ensuring diversification through unit-linking.

The key benefit behind unit-linked investments is the ability to create sophisticated diversified portfolios, specific to your individual needs. Whether you are a cautious investor or you prefer the volatilities of returns associated with pure equity investments, you can develop a portfolio with a range of funds suitable for you. This will ensure you maximise your potential returns whilst meeting your investment objectives.

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