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  • FIRST POST
    • El Selb
    • By El Selb 19th Apr 17, 10:17 AM
    • 72Posts
    • 17Thanks
    El Selb
    Cash:stock ratio
    • #1
    • 19th Apr 17, 10:17 AM
    Cash:stock ratio 19th Apr 17 at 10:17 AM
    I am looking to buy a house in perhaps 2-3 years time.

    I would like to grow my funds as much as possible whilst protecting what I've got. Okay stating the obvious!!

    I've got around 50:50 in cash:funds/trackers (VLS80, S&P, FTSE250 and a few other bits).

    I'm happy to accept a 10-15% loss on my pot (about £17k currently) in the quest for higher returns, but would be disappointed with much more.

    Wondering if it's worth increasing the stock:cash ratio or should I resist temptation?
Page 1
    • AndyT678
    • By AndyT678 19th Apr 17, 10:47 AM
    • 692 Posts
    • 921 Thanks
    AndyT678
    • #2
    • 19th Apr 17, 10:47 AM
    • #2
    • 19th Apr 17, 10:47 AM
    I'd say you're already risking taking about 20% - 25% losses and you need to be thinking more cash less stock.
    • AlanP
    • By AlanP 19th Apr 17, 10:49 AM
    • 807 Posts
    • 554 Thanks
    AlanP
    • #3
    • 19th Apr 17, 10:49 AM
    • #3
    • 19th Apr 17, 10:49 AM
    If it were me I would ditch the stock and keep it all in cash for a 2-3 year time frame rather than risk a substantial drop delaying my house purchase.

    Sounds like you have ~£34k to date. What about a HTB ISA fof some of it and then spread the rest around Current / Regular Savers at 3-5%?
    • Ray Singh-Blue
    • By Ray Singh-Blue 19th Apr 17, 11:01 AM
    • 317 Posts
    • 413 Thanks
    Ray Singh-Blue
    • #4
    • 19th Apr 17, 11:01 AM
    • #4
    • 19th Apr 17, 11:01 AM
    I'm with 1990 Nobel Prize for Economics winner Harry Markowitz on this one:

    "I visualized my grief if the stock market went way up and I wasn't in it - or if it went way down and I was completely in it. So I split my contributions 50/50 between stocks and bonds."
    • kidmugsy
    • By kidmugsy 19th Apr 17, 11:13 AM
    • 9,368 Posts
    • 6,143 Thanks
    kidmugsy
    • #5
    • 19th Apr 17, 11:13 AM
    • #5
    • 19th Apr 17, 11:13 AM
    I'm with 1990 Nobel Prize for Economics winner Harry Markowitz on this one:

    "I visualized my grief if the stock market went way up and I wasn't in it - or if it went way down and I was completely in it. So I split my contributions 50/50 between stocks and bonds."
    Originally posted by Ray Singh-Blue
    Bet he wasn't saving to buy a house.
    • chockydavid1983
    • By chockydavid1983 19th Apr 17, 11:25 AM
    • 395 Posts
    • 224 Thanks
    chockydavid1983
    • #6
    • 19th Apr 17, 11:25 AM
    • #6
    • 19th Apr 17, 11:25 AM
    If I was looking to buy in 2-3 years' time, I would be much more in cash.
    If it's a more flexible time period, perhaps more stocks could be OK, minimum 5 years, ideally 10 or more.
    • Malthusian
    • By Malthusian 19th Apr 17, 11:37 AM
    • 2,405 Posts
    • 3,343 Thanks
    Malthusian
    • #7
    • 19th Apr 17, 11:37 AM
    • #7
    • 19th Apr 17, 11:37 AM
    If you're currently 2-3 years' savings away from being able to afford the kind of house you want, then investing in the stockmarket might trim that to 2 years if there are a few more good years to come, or extend it to 5-6 years if there's a crash coming. If you're that close to reaching your target then the risk / reward outcomes are skewed against you.

    If it was me I would probably keep what I had in the stockmarket and direct further savings into cash.
    • Ray Singh-Blue
    • By Ray Singh-Blue 19th Apr 17, 12:08 PM
    • 317 Posts
    • 413 Thanks
    Ray Singh-Blue
    • #8
    • 19th Apr 17, 12:08 PM
    • #8
    • 19th Apr 17, 12:08 PM
    Bet he wasn't saving to buy a house.
    Originally posted by kidmugsy
    If Harry Markowitz was saving to buy a house (a guy ha to live somewhere after all), I wonder what characteristics he would want in his savings vehicle?

    Perhaps a good correlation with house prices would be important. After all, imagine his grief if house prices went way up but his savings stood still.

    So maybe he would look for a residential property REIT, except they don't really exist in a meaningful way. So back to the drawing board, I wonder if house prices would correlate better with a 50:50 stock:bond portfolio than with cash? Perhaps this would cut the mustard after all.

    I like his quote so much I'm going to borrow it for my sig
    • Malthusian
    • By Malthusian 19th Apr 17, 12:41 PM
    • 2,405 Posts
    • 3,343 Thanks
    Malthusian
    • #9
    • 19th Apr 17, 12:41 PM
    • #9
    • 19th Apr 17, 12:41 PM
    The point of that off-repeated Harry Markowitz quote is that Markowitz was the inventor of modern portfolio theory, which very briefly says that investors should hold equities and bonds in some specific ratio X/Y determined by their risk profile. However, when Markowitz had to calculate the equity/bond ratio that was appropriate for his own risk profile, he was unable to do so, so he went with the arbitrary 50/50. Economist, model thyself.

    This either illustrates that economic theory is impractical in the real world or it illustrates that there's a difference between applying a model to a population and applying it to a single individual, depending on your outlook.

    It is of limited relevance to the OP because his main concern is the risk that a major stockmarket crash arrives just as he reaches his deposit target and wants to buy a house. When a major crash happens, both stocks and bonds become correlated downwards. So the split between cash and risky investments is what matters most, not the split between shares and bonds within his risky investments.
    • Ray Singh-Blue
    • By Ray Singh-Blue 19th Apr 17, 2:04 PM
    • 317 Posts
    • 413 Thanks
    Ray Singh-Blue
    Malthusian, I take your point that cash and bonds are not quite identical for the purposes of portfolio modelling.

    My main concern for El Selb is that house prices may advance or retreat, and so their "deposit target" is likely to be a moving goalpost.

    There is not necessarily safety in cash. If s/he gets 1% per year on £17K of savings, then when s/he comes to buy the house will have £17.5K. If in three years time house prices have also risen by 1% per year, then the balance stands equal. But if in three years house prices have risen by 10% per year, then s/he has to spend more or buy a more modest house. Conversely, If in three years time prices have fallen by 10% per year, then s/he can spend less, or buy something a tad more flashy.

    A mix of bonds (or cash, if you rather) and equities might provide some insurance against scenario (A), at the cost of some gain in the event of scenario (B).

    I personally think that half and half is a great default position. So it seems did Dirty Harry, There may be reasons to lean away from this position - perhaps reasons of conviction or timescale- perhaps El Selb wants to shoot for a palace but wouldn't mind a phone box.
    • AndyT678
    • By AndyT678 19th Apr 17, 2:24 PM
    • 692 Posts
    • 921 Thanks
    AndyT678
    Without knowing the exact situation I think it's more likely that avoiding the worst outcome is the most important consideration.

    I'm going to assume that the 2 - 3 years is to allow additional time for saving so if OP has £17k and needs say £35k in 3 years then the most important considerations are adding £500/month and preserving the £17k. Whether the £17k generates 0.5%, 1%, 5% or even 10% growth per year is actually fairly irrelevant.

    What would be much more problematic IMO would be to diligently save an additional £18k but find that your £17k is suddenly only worth £10k because of some market downturn and you're £7k short of where you need to be.
    • kidmugsy
    • By kidmugsy 19th Apr 17, 3:45 PM
    • 9,368 Posts
    • 6,143 Thanks
    kidmugsy
    How about this? Does it have any competitors?


    The TM Hearthstone UK Residential Property Fund is purely focused on providing access to the UK’s largest and most familiar asset class – residential property.

    The fund is Regulated and Authorised by the UK Financial Conduct Authority (FCA) for retail investors.

    Hearthstone allows you to invest in the UK housing market – without having to purchase and manage the property yourself.

    The fund is eligible for ISA, SIPP, Offshore Bonds or direct investments and you can also transfer your existing ISA. Start today from as little as £1,000 or £50 per month.
    • AnotherJoe
    • By AnotherJoe 19th Apr 17, 4:29 PM
    • 6,883 Posts
    • 7,324 Thanks
    AnotherJoe
    That would seem on the face of it to be a good alternative to being a landlord.

    The issue if you held it as a general investment, might be that as a fund its underlying assets are illiquid, if there is a house price crash and you wanted to get your money out would you be stuck? So might be a poor choice for the OP?
    • bowlhead99
    • By bowlhead99 19th Apr 17, 5:48 PM
    • 6,491 Posts
    • 11,465 Thanks
    bowlhead99
    That would seem on the face of it to be a good alternative to being a landlord.

    The issue if you held it as a general investment, might be that as a fund its underlying assets are illiquid, if there is a house price crash and you wanted to get your money out would you be stuck? So might be a poor choice for the OP?
    Originally posted by AnotherJoe
    If you were really being a landlord, you'd very likely want to use mortgage finance to gear up your returns in line with what most of your competitor landlords do. Then when your void periods and property related costs hammer your gross yield down to 3% (as this fund achieves) you are at least getting that 3% and any capital gains on a larger pool of assets.

    The problem with doing it via a fund such as this, you have to pay the find management fees and rest of the OCF out of your net property yield which further consumes the income from the properties. The yield remaining for you to take then ends up being lower than current CPi, CPIH and RPI levels. So really you are just left with an ungeared capital gain which attempts to mirror national house prices.

    You are right of course that liquidity is a problem in an open ended fund such as this. The fund targets 85% of its assets to be tied up in the properties at a point in time (though may of course be higher or lower depending where they are in a buying or selling spree. So if in a couple of years you want to cash in and buy your own property, but that summer the owners of a quarter of the fund also want to exit at the same time, there is only enough cash and liquid assets available to meet 15/25ths of that demand. So they will have to restrict redemptions while they try to sell 10/85ths (~12%) of the houses and flats they own around the country. You could be waiting a long time.
    • AnotherJoe
    • By AnotherJoe 19th Apr 17, 7:40 PM
    • 6,883 Posts
    • 7,324 Thanks
    AnotherJoe
    Does this fund not use mortgages to gear its purchases? I haven't looked into it.
    And many LLs will use an agent who might take 10-20% so possibly not much different to a fund ?
    • Thrugelmir
    • By Thrugelmir 19th Apr 17, 7:43 PM
    • 54,345 Posts
    • 47,160 Thanks
    Thrugelmir
    Open a cash LISA. Why take the risk? Skipton BS will have such an account open from June.
    “ “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” Sir John Marks Templeton
    • bowlhead99
    • By bowlhead99 19th Apr 17, 8:29 PM
    • 6,491 Posts
    • 11,465 Thanks
    bowlhead99
    Does this fund not use mortgages to gear its purchases? I haven't looked into it.
    Originally posted by AnotherJoe
    Gearing is tricky and systemically risky on an open ended fund. You would tend to see that more on closed-ended investment companies and REITs with stable portfolios. An open-ended fund only has that stability if it has a massive cornerstone investor who is definitely definitely in it for the long haul.

    And many LLs will use an agent who might take 10-20% so possibly not much different to a fund ?
    The fund will use agents as well, they are investing across the country and the fund manager isn't going to go around vetting tenants and arranging for the leaky taps to be fixed. So the agency / property management company costs still exist.

    The additional costs include a 0.9 percent fee for the fund manager for selecting the portfolio's holdings and arranging what to buy and sell (which is a quarter to a third of the net rental yield after property costs) and then the costs of actually running the fund - admin, accounting, audit, investor reporting, legal fees etc etc - the usual components of OCF.

    And those elements of OCF will inherently be quite high per pound of NAV on a smallish fund like this which is only £50m in size (e.g., a £30-40k running cost would be nearer a whole percent than half a percent of the NAV of the investment portfolio -which in itself is lower than the £50k fund size because of the need to keep a large cash buffer due to the illiquidity of the assets).

    Clearly the 1-2% of OCF is buying something you couldn't do for yourself, as few of us have the means to go and construct a diversified portfolio of 160 residential properties up and down the country. But it doesn't leave much yield for the investor.

    Thrugelmir is right that if both you and the prospective property qualify for the LISA, that would be a no-brainer for some of your savings as the returns can't be beat.
    • AnotherJoe
    • By AnotherJoe 19th Apr 17, 8:37 PM
    • 6,883 Posts
    • 7,324 Thanks
    AnotherJoe
    Thanks BH very instructive as usual.
    • kidmugsy
    • By kidmugsy 19th Apr 17, 9:17 PM
    • 9,368 Posts
    • 6,143 Thanks
    kidmugsy
    The issue if you held it as a general investment, might be that as a fund its underlying assets are illiquid, if there is a house price crash and you wanted to get your money out would you be stuck? So might be a poor choice for the OP?
    Originally posted by AnotherJoe
    That's a very powerful objection.
    • Cogs44
    • By Cogs44 19th Apr 17, 9:58 PM
    • 14 Posts
    • 8 Thanks
    Cogs44
    Playing devils advocate to the general consensus (I probably agree with Malthusian's 2 versus 5/6 year arguement above):

    If you put it 100% in stocks, and there is a massive crash, then would you really want to buy a house straight away after? Or would you want to wait a couple of extra years for house prices to bottom out?
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