no goals - wtd?

I want to invest in an ISA. I have mortgage which is almost fully offset with cash.

how would you calculate which is riskier?

A high risk investment with a small amount of money not from the offset i.e. emerging market fund?

Or

A medium risk investment funded with money from the offset i.e. a FTSE tracker?

Or

A low risk investment with all of the mortgage offset used i.e. a bond/equity income fund ?


In terms of the eventual outcome, are they all the same?
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  • dunstonh
    dunstonh Posts: 116,040
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    edited 10 October 2016 at 11:02AM
    A high risk investment with a small amount of money not from the offset i.e. emerging market fund?

    Or

    A medium risk investment funded with money from the offset i.e. a FTSE tracker?

    Or

    A low risk investment with all of the mortgage offset used i.e. a bond/equity income fund ?

    All different risks

    1 - borrowing to invest is higher risk due to gearing.
    2 - Investing in emerging markets is higher risk due to currency, volatility expectation and the nature of the investment
    3 - Investing in a FTSE tracker (noting you dont say which but lets assume UK equity) is not medium risk. It is high risk. Not as high as emerging markets but it as at the higher end of the scale.
    4 - Single sector investing is higher risk (and generally regarded as bad investing). it pushes the risk up itself just by being single sector.
    5 - Multi asset funds are available across most risk profiles. So, a bond/equity fund can be cautious or adventurous.
    In terms of the eventual outcome, are they all the same?

    No. They all have different risks. Emerging markets can lose 80% in 12 months. UK equity 50%. A low risk multi-asset fund more like 15%.

    The degree you use the offset money changes the risks but it would be difficult to level them out the way you have. Also context is also needed. If you have a further £200k in cash savings then that would reduce the risk. If you had £2k in savings, then the risk is increased. If you are little or no excess income then the risk would be increased compared to having significantly more excess income (ability to replace losses). There is also behaviour risk as well. Can you stomach seeing the value fall by 50%?
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • Linton
    Linton Posts: 17,064
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    What risks are you concerned about?
    -The only sure/sensible way to avoid the risk that you wont be able to pay off your mortgage is to use the offset to pay it off now.
    -The only way to avoid the risk that you wont make the maximum gain from your offset is to invest it.

    The outcomes of your options are very different. Option 1 is just avoiding the question, you could do it no matter what you do with your offset. By investing the offset you could end up with a significant amount of extra wealth assuming your investment return is higher than your mortage interest rate. There is no point in investing the offset if it isnt. What is best depends very much on your timescale. The benefits of investing the offset only come from medium to high risk investing. To avoid the risks of major short term fluctuations leaving you with less money than you would have if you hadnt invested you need to be thinking long term - say 10+ years.

    As with all investment questions as to which one of a number of options is optimal, the answer is probably a mixture of everything. Keep some and invest the rest.
  • kidmugsy
    kidmugsy Posts: 12,709
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    What is the interest rate on your mortgage?
    Free the dunston one next time too.
  • kidmugsy wrote: »
    What is the interest rate on your mortgage?

    The interest rate is lifetime tracker currently 2.14%
  • dunstonh wrote: »

    No. They all have different risks. Emerging markets can lose 80% in 12 months. UK equity 50%. A low risk multi-asset fund more like 15%.

    The degree you use the offset money changes the risks but it would be difficult to level them out the way you have. Also context is also needed.

    But is the level of risk (not the risk type) the same?
    losing 80% of 10,000 is no better or worse than losing 8% of 100,000...

    ..if that 100,000 is using the offset though, I suppose that increases the risk...
  • principa
    principa Posts: 67 Forumite
    edited 10 October 2016 at 11:53AM
    Linton wrote: »
    What risks are you concerned about?
    -The only sure/sensible way to avoid the risk that you wont be able to pay off your mortgage is to use the offset to pay it off now.
    -The only way to avoid the risk that you wont make the maximum gain from your offset is to invest it.

    The outcomes of your options are very different. Option 1 is just avoiding the question, you could do it no matter what you do with your offset. By investing the offset you could end up with a significant amount of extra wealth assuming your investment return is higher than your mortage interest rate. There is no point in investing the offset if it isnt. What is best depends very much on your timescale. The benefits of investing the offset only come from medium to high risk investing. To avoid the risks of major short term fluctuations leaving you with less money than you would have if you hadnt invested you need to be thinking long term - say 10+ years.

    As with all investment questions as to which one of a number of options is optimal, the answer is probably a mixture of everything. Keep some and invest the rest.

    very useful thanks. What do you think of:

    50% LTV mortgage comprising
    ....50% cash offset.
    ....50% ISA investments. comprising:
    ........50% active (managed global equity)
    ........50% passive (passive global equity)

    Money over and above offset (not spent on living!):
    ....50% equity / 50% bond (split 50/50 Active/Passive)

    How about that for fence sitting :-)
  • Linton
    Linton Posts: 17,064
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    The type of risk is affected by the type of investment. Assuming that your portfolio is well diversified equity's risk is short term fluctuations, perhaps over a small number of years. In the very long term you will gain, well its not guaranteed but if equity falls in the long term your mortgage is probably the least of your, and the world's, problems. If you just invest in cash you are safe short term but in the long term you will probably lose out to inflation.

    The concern with long term equity investments isnt the risk itself so much as your attitude to it. If a short term fluctuation spooks you into selling everything you make a loss.
  • Linton
    Linton Posts: 17,064
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    How many years remaining on the mortgage?
  • bowlhead99
    bowlhead99 Posts: 12,295
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    edited 10 October 2016 at 12:18PM
    principa wrote: »
    very useful thanks. What do you think of:

    50% LTV mortgage comprising
    ....50% cash offset.
    ....50% ISA investments. comprising:
    ........50% active (managed global equity)
    ........50% passive (passive global equity)

    How about that for fence sitting :-)

    Sounds pretty terrible to me. Basically taking a secured loan against your house to allow:

    - an investment in cash (deposited in an account that won't return any more than the mortgage interest amount, but presumably very safe and secure - if you are within FSCS limits for the cash deposit or have right of set off with the mortgage debt in the case of provider failure)

    - an investment in global equities (passive, active, who cares, it is the content of the ISA - i.e. global equities - that sets the risk, which is high)

    So well done, you have a portfolio that's half very low risk and half very high risk. That doesn't sound much like what someone of sound mind would put together, whether or not they were financing it with borrowed money like you.

    Thinking to yourself, "hmm, do I want really low risk or really high risk... ooh, I have no idea, how about I just get half of each so that I don't have to deal with the question, I'll just sit here on the fence", sounds like a total cop-out.

    You are not a child being asked his favorite colour and needing an instant answer off the top of your head. Give it some thought, like a grown-up.
  • jimjames
    jimjames Posts: 17,532
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    My mortgage is at a similar rate and I've avoided overpaying and invested the money instead. I started about 10 years ago and now have enough to pay off the original mortgage 4x over. I'm still not paying it off as I think it's better (for me personally) to have investments growing rather than paying mortgage off at 2% or so. Beating that sort of mortgage rate with investment returns should be fairly easy long term and I'm prepared to take that risk as I'm aware it could be volatile.
    Remember the saying: if it looks too good to be true it almost certainly is.
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