Every year comes with a new set of big money issues or trends. 2011 is no different except that our ongoing debt problem continues to loom over everyone and will play an unwelcome part in the way you try to address your big money issues.
Young people, for example, will have to cope with higher education costs, lower family earnings and the shortage of part and full-time jobs. Young families with big debts are now looking at bigger taxes and a higher cost of living. The country’s deep financial difficulties will also impact on people who were envied once for their secure employment, generous pensions and savings: the public service worker and middle aged and older higher earners and professionals.
Higher income taxes, benefit cuts and loss of tax credits announced in December’s budget are now in play. Tax incentivised property and pension contributions are also being rolled back and private pension returns are volatile. Terms and conditions for long standing government investment schemes, like Section 23 property, have been welched upon by the state leaving many with potentially huge, unexpected tax liabilities.
No one is immune either from the spending cutbacks and new state debt obligations forced upon us by our international creditors in the EU and IMF. Unfortunately, the on going structural and banking weakness in Europe (and America) are not improving and 2011 will be a tough year to work out how to protect what remaining wealth you have and where it can be saved or invested.
In earlier columns I suggested how you might get a clear view of your assets and liabilities: do a budget; minimise your taxes; adjust your spending; prioritise your debt repayments; start reading good financial newsletters; take an investment course and use the services of good, fee-based financial advisors.
Everyone has their own personal bias when it comes to what to do with money and national stereotypes suggest that the Irish put all their money into land and bricks and mortar (no, really!); the Americans into stocks and shares; the Germans into good safe Deutsch bonds and the Indians - gold.
There’s a little truth in all of this, but the real story is far more mundane: most people, if they are lucky enough not to live from paycheque to paycheque and already have a family home, leave any spare cash they have in the bank. As a result, their retirement is often grossly underfunded.
Yet the risks that an all cash position poses – from taxation, currency devaluation and the impact of price inflation – means that all those stereotyped assets – property, stocks and shares, bond and gold are exactly what should be in everyone’s pension fund or wealth portfolio.
The fate of the euro, the dollar, pound and yen will continue to be a big theme for 2011. So is the price of commodities, partly being driven by rising demand (and a rising global population); weather and climate changes and the face that many big, institutional investors prefer to invest in tangible goods these days, like oil and coal, precious metals, food commodities – however volatile in price – than in the currencies or shares of indebted countries.
Which leads to another big trend to consider – very gingerly in 2011 – emerging markets.
Irish fund managers are adding more and more of the stocks and shares of developing countries in Asia and South America to their investment funds but that doesn’t mean they aren’t worried about whether they are ‘bubble’ territory. Will their red-hot economies burn out this year, everyone is asking?
Yet certain fundamentals haven’t changed: these are countries with large, increasingly educated populations and decreasing state interference. There isn’t as much state or personal debt; people have high savings rates and a growing taste for western style consumer and luxury goods and a huge desire to start their own businesses. A well placed fund of emerging market companies (or suppliers to those companies) that service this market will be money well spent, but you need to keep your nerve.
(That said, health care industries and pharmaceutical technology sectors that target the needs of the great aging populations of the west, are being seen as trend setting opportunities with ageing Japan in the forefront of some of the technological advances.)
Only a fool would write off the US and Europe, but it is oil and energy, precious metals, agrifood commodities, water technology, health care and pharma-tech stocks that still bear watching for long term investment purposes. (Property, say some is the perfect contrarian call if you can pinpoint the best undervalued but strong property shares and funds.) Irish property is still a downward trend.
You may be determined to put what money you have to better use this year, but it has to be with an eye always peeled on the wider picture: how safe is your income? How much higher can your taxes potentially go up this year and the next few years – especially once property tax is introduced?
If you work in the public service do you have an alternative or top up retirement plan in place that involves a much higher contribution rate than you are currently making? You should. And what would happen to your assets/debts if Ireland left the euro, the eurozone broke up or there was a period of high inflation?
Finally, the saddest, trend that will affect many readers in 2011, says the ESRI, is Does it have to be only for the young?
We’ll explore that question in another column.
(The new TAB Guide to Money Pensions & Tax in the Recession 2011 is available to purchase on Jill’s website www.jillkerby.ie)