At the same time, I was doing my usual research on markets and looking for new investing ideas for clients. I came across a thought-provoking article by Alexander Green on scripbox.com outlining his seven key habits that generate wealth for people. The article has a more international leaning, so I’ve given the concept local context. Before we scold ourselves into not having done all of the intelligent and sensible things below, there are some things that we should remember, to make ourselves feel somewhat better for not all being multi-millionaires by the time we are 40. Ireland is still very much in its youth in terms of standing on its own two feet and being economically independent. As a country, we are too young to have much inter-generational wealth. The 1950s saw great foresight by our economic leaders in opening our economy to international trade and subsequent membership of the European Economic Community (EEC) in the early 70s. The struggles and unemployment hardships of the 1980s continued to force the emigration of our best people. It is really only in the last 30 years that we can see the creation of wealth that can be sustained between generations through inheritance. Here are some ideas that might help us make the most of what we have:
1 Living within our means
This is more often said than done. The secret to this is often education, because it can enhance people’s means for them to live within. Certainly, more extensive education can make it easier to manage through recessions and difficult times. As the economic environment improves, people are in a stronger position to benefit financially and increase their means significantly. Getting into a good savings routine from an early age is a great habit; putting 10% of net income away each month is a perfect start.
2 Don’t be a renter: own your own home
Only one person is winning when you are renting and that is your landlord. During early years post qualifying, it can be impossible to purchase a home because you may be moving around and you haven’t enough savings. If you can manage to build up your savings for a deposit you begin to give yourself valuable equity, which will grow significantly over time. Paying rent is paying someone else’s mortgage: better to pay your own as early as you can.
3 Take calculated risks
Saving money means making sacrifices, so measuring the risk that you take with investing is very important. Interest rates and Government bonds are showing no return at present, so an element of risk for return in required. There’s a difference between gambling and investing, and stock tips received at dinner parties or golf clubs tend to be gambling, not investing. It is very easy to research stock prices these days and investor magazines giving ideas are plentiful. Research volatility and know that you may be in for a bumpy ride but that it will be worth it over time.
4 Invest tax efficiently
The most tax-efficient method of investing funds is through your pension. Quite simply, you can get up to 40% tax relief on contributions (up to your relevant ceiling), which is an enormous gain to begin with. If you wish to save €1m in your pension fund, you could do so while getting €400k back in tax through your career. Add in a good investment return and you could have much more than €1m at retirement. Investors in their twenties and thirties may feel that it is too far away, but creating wealth in your retirement fund at an early age has exponential benefits. Some of you will have heard me talk about my client who began saving €500 per month into her pension at age 25. The premium increased a little each year and by age 42, we discovered she had amassed €1.2m in her fund! We then had to bring down her premium substantially for fear of overfunding.
5 The importance of diversification
There are a number of different asset classes to invest in including shares, Government and corporate bonds, property (commercial and residential), gold and cash. Within each of these assets are regions and sectors, and these also have different risk levels. Diversify your portfolio across assets to give yourself balance against market falls. Don’t forget that market falls can be good news, as you have the chance to buy assets for less.
6 Watch your costs
Nowadays, transaction fees on share purchases can be kept to a minimum with the many online platforms available. You won’t get any advice with these platforms – they will just be for trading. Advice-led fees should be around 1% per annum, with more technical funds attracting higher fees due to higher hedging costs, etc. Keep costs as close to that as possible.
7 Make a plan and be disciplined
The likelihood is that unless you are close to retirement, you will be able to ride out any market fall without it hurting you in the short term. Therefore, don’t sell when markets take a dive; if you can, be brave and buy cheaply. A price correction should mean opportunity for you. An alternative and more favourable method in my opinion is to invest monthly in a disciplined manner. This will give you the benefit of 12 investment prices during a year rather than just one at the end.
Self-employed dentists also have the challenge of paying their tax annually, which takes considerable discipline in preparation. All of the above suggestions are of course in an ideal world. Unexpected expenses, living life to the full and the normal costs of family life and living all make sticking to a rigid plan difficult.