The current economic downturn, both domestically and worldwide, has led to a perception in this country that all the wealth, which has been created over the last 15 years, has suddenly disappeared. This impression has been further compounded by the “doomsayer” attitude of certain financial commentators, who seem to revel in giving the impression that all this wealth has suddenly been erased.
There is no doubt that each individual’s “wealth index”, has been dramatically affected by the downturn in the property market, erosion of pension values, along with the decline in equity and investment markets.
Considerable wealth still exists in Ireland, which will bolster and drive the economic recovery as it happens. As a nation, we became immune to the fact that markets operate in cycles. The most outstanding example of this has been our love affair with property, where our attitude seems to have been “if you can touch it, look at it and live in it”, and then a property can only increase in value. Unfortunately some people are finding out that kind of attitude has come at a cost.
So what action, if any, should you be taking with regard to your assets?
It is important to look realistically and sensibly at the different asset categories on a practical basis.
Property
For homeowners the idea of negative equity is a disturbing thought. However, if you are able to meet your mortgage repayments, then negative equity does not have a practical impact on you. It only becomes an issue if your circumstances dictate that you need to dispose of your house, or you fall into arrears with your mortgage. In another 10 years or so people will look back on this period of “negative equity”, and realise that it did not have a long-term impact on them.
Investment/Equity Markets
The drop in investment values has been particularly felt by individuals through savings policies, pensions, lump sum investments and equities. In many cases the fall has been quite dramatic. But in considering what action, if any, you should take it is important to remember a few relevant issues.
The vast majority of investments have little exposure to the Irish Market. They are reliant on the performance of the international scene and this should be taken as a very positive factor, when looking for hope in respect of recovery in values. Whilst predictions are a dangerous business, I feel that the international scene would be a very different place, in positive terms, in 2 years time.
So where has all the wealth gone?
Well obviously, our wealth has been adversely affected by the drop in the market values of the assets we have outlined above. But that is not the full picture. A substantial amount of funds have been moved into deposit with the Irish Banks. It is true to say that the Banks are “awash” with customer deposits. This has been caused by the nervousness that people have felt about the general economic situation, along with the attractiveness, previously, of high deposit rates.
What should Bank Depositors consider?
For the last 18 months or so returns on bank deposits have been exceptional. However, over the last 3 months this situation has changed dramatically. Two factors have brought this about. Firstly, the ECB rate has now dropped to 1%. Secondly, Irish Banks have been paying unusually high deposit rates due to the shortage of money supply in financial markets. There has been a radical improvement in this situation and as a result Banks do not need to pay retail depositors more, than is absolutely necessary for their funds.
The situation is now fast reproaching, whereby keeping money on deposit is something that you need to do for convenience, rather than as an investment decision. Interest rates are likely to remain low for the next couple of years in order to stimulate Western Economies. Any hope of an increase in rates within this time frame is virtually nil.
What should you do with monies held on deposit?
We all need to retain some funds on deposit for the unexpected events which may occur. However if you wish to maximise the funds you hold on deposit then it will be necessary to consider, moving these monies into a term investment over 3, 4 or 5 years. The obvious factor that most people need to take account of is one of risk. It is possible to avail of a long-term investment, which provides the likelihood of outstripping deposit rates, without exposing yourself to unnecessary risk. A number of Capital Guaranteed Investments are available which will appeal to the cautious investor.
To conclude, there is no doubt that there is plenty of evidence that considerable wealth still exists in this country, unlike periods in our economic history when downturns occurred. As individuals we need to focus on the positive signs that are evident at the moment, pointing to a recovery in values.
A simple rule of thumb in this environment is, not to dispose of any asset unless you are forced to do so and ensure that you maximise any unproductive assets you hold.