In response to the question ‘why did Ireland go bust’ many argue that it was the banks and/or the government. Yes, the banks were incompetant, egged on by easy access to bank funding from Europe following the introduction of the Euro in 2000. And, yes, the government failed miserably in so many ways from having in place the wrong incentives to buy property to having no effective banking regulation to overloading the nation with too many overheads with the aggressive expansion of the public sector from 2001 to 2007.
But for every seller of an investment product or property there is a buyer, and one could just as easily argue that Ireland got itself into a financial mess because, as a nation, we did not know HOW TO INVEST.
My new book 3 Steps to Investment Success is Ireland’s first comprehensive guide to practical investing. I have enclosed (at the end of the article) a promotional PDF on the book for you to review outlining the testimonials the book has received from domestic and international commentators as well as outlining the contents and providing you with some extracts from the book.
Two Majors Obstacles to Investing
In my view, the two major obstacles to individuals knowing how to save and invest for the long-term are a lack of understanding and the selling nature of the financial services industry. Let me explain.
No where in our educational system are we thought anything about investing. This, in itself, is not fatal if we had a financial services industry that could assist the ordinary person in this critical area. But we do not. What we have is a financial services industry structured only to sell to you.
The banks can look right into your deposit account and, as they can earn high commissions on investment products they sell to you, they are thus incentivised to do exactly that. Your welfare is not their issue. Their issue is commission.
Private client stockbroking companies are similarly incentivised to get you to trade regularly in markets as this boosts the commissions they earn.
But most disappointing of all, the independent financial and investment advisors around the country are also incentivised to sell you a product rather than to provide you with propert impartial advice. The IFAs, too, earn commission from selling you an investment product.
Where is the Regulator?
It continues to mystify me that the financial regulator cannot see that the consumer in Ireland is not being educated about how to invest in anything other than fee-generating products that encourages herd-like behaviour among both product sellers and their customers.
In my recently published book, I argue that there are just 3 steps required to make a success of investing, whether you are a novice investor just getting started or someone near retirement age with a lump-sum to protect.
As Warren Buffett said all the way back in 1973, you need a plan. That plan can be as simple as buying a globally diversified equity or property fund. Funds quoted on the stock markets – like exchange-traded funds and investment companies – are the cheapest as they pay no commissions to any advisors. What is important when you buy such a fund is that you obtain value, for it is the value you buy that largely determines your subsequent returns. At present, it is easy enough to buy several alternative such funds providing an initial dividend yield of circa 5%. Growth in that dividend yield of just 2-3% annually will deliver an annual total return of 7-8% from here, not on a straight line basis of course. Over the medium-term, returns from such funds have a very high probability of significantly outpacing both inflation and bank deposit returns.
Of course, the massive bear market in 2008 has scared investors away from risk assets. But in next week’s email to you, I’ll explain clearly why dealing with the volatility that is part and parcel of stock market investing is the second critical step of a successful long-term investment plan. As I will outline to you next week, temporary declines in prices associated with bear markets are not remotely the same things as the dangers posed by the risks of a permanent loss of capital. Few understand the difference at the outset.