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14th August 2023
Today I share some thoughts on holding cash, some saucy Central Bank of Ireland research on Irish households, and a warning about going all-in!
Aside from their regulatory role over financial services, Central Bank of Ireland share some really interesting research and reports. One such recent report was their ‘Quarterly Financial Accounts‘ for Ireland.
For me, one of the greatest signals of our financial health as a nation is our ‘Household Debt’. This rate hit a high in 2007 when it stood at €203BN. Working on the basis that there are c3.6m adults in Ireland this was around €60k debt for every man and woman over 18 years of age in the country!
That €203BN debt figure has fallen steadily since 2007, to €131BN in 2020, (€36k per adult) and now sits at c€120BN (€33k per adult).
Probably more significantly is the ‘Household Debt To Income’ ratio. This probably is a more important barometer of financial health – income versus debt. If we boil financial planning down to the basic concept of saving as high a % of your disposable income as possible, this ratio is critical!
The Debt to Income ratio incredibly fell from a lofty 210% in 2011 to 107% in Quarter 2 2020. This is an awesome improvement in our financial health as a nation of households. This is said to be driven by increasing salaries and a significant reduction in our desire for debt!
And ultimately, as of Q1 2023, Household Net Wealth in Ireland stood at over €1,000BN, up c20% on where it was 3 years ago in Q1 2020! Massive growth in wealth.
As a nation of households, our liabilities have decreased, and our assets have increased. The main driver of asset growth in our households has been an accumulation of financial investments & deposits. What does take the shine off that for many is the fact that depositors are still getting little or literally nothing in return for keeping their money on deposit with the various institutions. And yes there are ‘challenger banks’ offering better rates, but the uptake on that appears slow. A lot of people seemingly slow to entrust their savings to an unknown bank, and one can empathise with that entirely.
Back in 2008 you could get 5% per year deposit interest in Ireland – just for putting your money on deposit! That was back when ECB interest rate was in and around 4%. I recall working in a bank at the time, and there were accounts over 4 years offering a staggering 20% interest at the end of the term! Today with the ECB deposit facility rate at 3.75% (up from -0.5% 18 months ago!), we are still seeing depositors being offered 0 to 0.3% in return for leaving their money on deposit. The banks are coining it, lending your deposits to mortgage holders at 4% and giving you practically zero in return!
You can view this in two ways; one, as an outrage; the bank use my money to make money so they are ripping us off if they don’t pay us a coupon for that!? Another way it might be viewed is that being charged is totally logical – that deposit accounts and the safe keeping of your capital is a service that you pay for. That same view would suggest that deposit accounts were never intended for anything other than safe-keeping of your capital. Same as a safe deposit box – your valuables don’t grow and appreciate in the safe deposit box do they – and you pay a fee for the service with no hesitancy! I’ll not suggest that one view is right or wrong – but you can see the arguments for both! What do you think??
As we saw from the CBI research this zero return on deposits doesn’t seem to be stopping people from saving into deposit accounts! However, I fear that we are at a tipping-point of sorts. When one thing is delivering zero or poor returns and another is delivering great returns it is all too tempting for the ‘rate-chaser’ to make short-sighted decisions. Let me explain.
As of 14th August 2023, a well diversified Global Equity portfolio has delivered c97% growth since 23rd March 2020. Yes I’m cherry-picking the start date to coincide with the bottom of the covid market panic! And in that same space of time, a deposit account has delivered somewhere around 1% total return. If you didn’t have FOMO then, you do now!?
If we assume there is a tidal wave of pent-up demand combined with the potential kick that equities may continue to get as consumers across the world emerge, could drive people who might otherwise stay in deposit to jump into volatile assets.
As more and more people come to realise that equities are a superb long term home for investments, and that deposits will be slow to improve, they will potentially jump in – forgetting the fact that temporary declines in values have frequently and sometimes violently visit us equity investors.
Another inconvenient truth of all of this is that when equities are in a period of temporary declines is the absolute best time to buy them – however at such times the rush to deposits and other ‘safe’ assets is even more pronounced than it usually is!
I’m all for volatile assets – particularly the quality passive equity fund variety. However that is where it relates to non-essential lump sums of cash that a client is flexible about when and how they might access them in the future. Deposits, relative to inflation are not, and never have been a consistently decent way to achieve growth. That is not what they are for.
But deposits (and indeed Bonds) do serve a very real and important purpose. It is easy to forget that purpose when equity markets are on an unrelenting upwards curve for 10+ years. There will come a time in the not-too distant future when Equity values will fall sharply, and stay in a temporary state of decline for a prolonged period of time – longer than we experienced in 2020 and 2022. In times like these our deposit account or indeed Bonds or other secure assets may be a very useful reserve to have.
There are a couple of areas where I see people exposing their cash to volatility where there is no need to do so – and where it is potentially detrimental to their future life priorities. What I suggest is to really consider if you NEED to expose cash you may need in the coming 5-10 years for the following purposes to volatility:
The idea of having cash on deposit/bonds versus volatile assets is an interesting debate. Ultimately over the long term you stand an immeasurably higher probability of getting better returns if invested in quality and diversified equity. However, if you have them ear-marked for something that could arise in the coming few years then why would you expose them to volatility?
Worst case scenario here is that you are forced to sell the equity at the same time as the equity values are in a temporary state of decline – you have then just cost yourself potentially far more than the 5/6% annual return you were hoping to achieve in the first place!
It can be a fine line when it comes to cash/deposits of that you might hold in your business. Is it better to send it to pensions? This option is now more appealing than ever thanks to recent pension changes (read Blog 215 here for more on that). Or is to better to keep cash reserves (and pay the Corporation Tax/Withholding Tax)? Better to send it to a Holding Company? Better to stock-pile the cash and invest it (benefitting from 25% tax on gains when its a company investment)? Better to invest it In the business to improve promotion, product or service?
If you are nearing departure potentially better to ensure sufficient cash in the business to maximise any severance payment you can get? Better to try maximise any Entrepreneur Relief you can get on disposal? Within 5 years of Normal Retirement Age? Heck, that throws up a whole new occupational pension scheme funding opportunity! There are so many options to consider. Deposit or Bonds or Other is only a tiny part of the bigger and more important puzzle for many of us – so don’t rush in, is my advice.
I wrote about optimism in investing in the past – the merits of taking a fact-based long term optimistic view of the world. I came across something recently from an interesting US-based Investor/Entrepreneur, Naval Navikant, that really resonated with me – about Pessimism!
There’s a completely rational frame on why you should be an optimist. Historically, if you go back 2,000 years, 5,000 years, 10,000 years, two people are wandering through a jungle, they hear a tiger. One’s an optimist, and says, “Oh, it’s not headed our way.” The other one says, “I’m a pessimist, I’m out of here.” And the pessimist runs and survives, and the optimist gets eaten.
So, we’re descended from pessimists. We’re genetically hardwired to be pessimists. But modern society is far, far safer. There are no tigers wandering around the street. So, adapting for modern society means overriding your pessimism, and taking slightly irrationally optimistic bets because the upside is unlimited.
Naval Ravikant
I hope it resonates with you too – if it does, Naval has books and podcasts and countless videos freely available to hear more.
Thanks,
Paddy Delaney
Informed Decisions are one of Ireland’s only remaining independent financial advice firms. We specialise in retirement & investment planning for successful individuals, so that our clients only have to retire once.
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