Risk Versus reward isn't as straightforward as it seems

You've probably heard it many times: there is no reward without risk. Usually, what people mean by this, in the case of their personal finances, is that they are not willing to countenance losing even a small amount of their savings or capital, and so are unlikely to do anything with their money other than deposit it in a bank, building society, post office, credit union account or in prize bonds. For some slightly more sophisticated people (and I used the term 'sophisticated' very loosely) they might consider, as risk free, a government bond or the ubiquitous capital guaranteed 'tracker bond', so popular with bank and life assurance companies over the past two decades. (This, even though few tracker bonds offered any annual, locked in return, as do government bonds.) Of course, thousands of people also believed for many years that Irish bank stocks were risk-free. And then there were the tens of thousands who believed from the 1990s until 2008 that buying a home (or even a second home or investment property) was somehow risk-free. Perceptions of property and stock market risk have certainly changed, but it is still difficult for many people to accept that what they believed is a risk-free destination for their money, is anything but, and that the hidden risks of a bank deposit can be just as dangerous as a badly chosen fund of stocks and shares. Let's take the risks associated with a deposit return first: depending on the rate of official inflation - and more importantly - unofficial or group specific inflation (such as for pensioners), leaving one's savings in a deposit account can have a devastating effect, especially for a taxpayer living on a fixed income. For example, if you put €100,000 in a fixed deposit account yielding a generous 4% per annum, but have to pay 27% DIRT on that yield, you would be left with less than 3% growth. If official inflation is running at 3% - as it currently is - this growth would be cancelled out. The most vulnerable group to the real rate of inflation are pensioners living on fixed incomes that have not been rising by even the official cost of living increase over the past few years. The pensioner, whose income is static or falling and has not benefited from the sharp fall in rent and mortgage interest (up to about a year ago) or in the falling price for footwear, furniture or certain electronics, but has instead taken the full brunt of high double-digit increases in the cost of energy, electricity, transport, health care and even some food, is perhaps losing spending power on their savings/income in the double digits per annum. Year after year, DIRT and inflationary losses like this will eat away at a lump sum on deposit. Also the opposite deflationary effect on their biggest asset - the price of their home - means that that asset, if sold, will not result in the capital they may need for long term care, for example. Inflation and deflation are both at play here. Unfortunately, deposits now carry other risks that not enough people take into account - of bank failure, of currency devaluation and outright currency failure and it isn't just the already retired who need to reconsider their risk/reward profile. If you believe, as I do, that there is a risk of significant price inflation in the future, as a result of the massive increase in the world's money supply by central banks - trillions have been added to try and prevent mass bankruptcy of financial companies and now countries - then leaving all your money in the so-called 'guaranteed' options like bank accounts, expensive and opaque tracker bonds, and even in ordinary government bonds needs reconsidering. Tracker bonds are nothing more than expensive, non-transparent bets by fund managers on future movements on stock markets and the security of the banks in which the bulk of your money rests. Government bonds are only as safe as the countries that issue them; the capital value of your money could be inflated away by the time you are ready to redeem it if price inflation becomes a reality. So is there any way to earn a return both of and on your capital that not only matches a deposit rate, but also beats the current inflation rate, let alone a potentially higher one? Some investment advisors think so. Next week, we look at inflation beating bonds and a unique investment based on some of the 'safest' shares in the world. jill@jillkerby.ie