Balancing Savings v Investments

baldbloke_2

I should appreciate any comments on the following strategy. Based on £100k to save/invest are there any merits in the following ... ?

NS&I Index-Linked Certs - to hedge against unforseen increases in inflation - 40%

High Interest savings Accounts - to benefit from increases in Base Rate & savings rates - 40%

Investment Funds - long term growth in value of equities funds - 20%

With 'only' 20% in investments one can afford to be a little more adventurous. Equity Income and tracker funds might be acceptable.

It's the percentages that interest me because as a very cautious investor I feel comfortable with this balance but readily accept it may be next to useless as a long term plan. any comments or criticisms are welcomed.

dunstonh

What about property and european bonds? Not quite into equity stage risk there but above savings on risk and potential. Certainly below Equity income and tracker funds. You also have UK bond and equity income funds inbetween those as well. They can hedge the bets a bit as well and often worth looking at in a portfolio.

baldbloke_2

dunstonh wrote:

What about property and european bonds? Not quite into equity stage risk there but above savings on risk and potential. Certainly below Equity income and tracker funds. You also have UK bond and equity income funds inbetween those as well. They can hedge the bets a bit as well and often worth looking at in a portfolio.

Thank you - as always.

I had thought that with only 20% (for arguement's sake) in Investments as such there would not be the need to be over-cautious in the choice of funds. You rightly look at the concept of a balanced portfolio whereas I was thinking that with 80% of capital in lower risk (savings) areas one would not need to consider funds that also played 'safe'. Do you believe that even with a modest portion of one's capital in investments it is still important to balance one's investment portfolio? If my thinking makes sense ...!

EdInvestor

Can't see the need to bother with bonds if he has so much in cash. I would put all the 20% in equities - half in equity income as mentioned (look no further than the UK's biggest fund) and for the other half I might look for a good Special Situations fund - more chance of a really good return than with a tracker.The two should be complementary.

Use a discount broker to rebate the charges of course.

baldbloke_2

EdInvestor wrote:

Can't see the need to bother with bonds if he has so much in cash. I would put all the 20% in equities - half in equity income as mentioned (look no further than the UK's biggest fund) and for the other half I might look for a good Special Situations fund - more chance of a really good return than with a tracker.The two should be complementary.

Use a discount broker to rebate the charges of course.

Thank you. Your comments tend to support my initial idea - with such a large proportion in cash it seems unnecessary to invest in bonds/gilts/fixed interest etc etc.
But I am sincerely interested in understanding the thinking behind all of this. Firstly I have to say that £10k invested directly into any single fund in a lump sum is 'adventurous' investing in my opinion - that's my caution outweighing my desire to speculate! I am trying to recall how many funds Dunstonh said he would invest in to split 50k - for me it might be possibly 5k max per fund and then possibly spread over 4 quarters.

The idea that the funds should be 'complementary' is useful and interesting. Can you explain that in simple terms for me? Are you referring to both a geographical spread and a sectors spread? Or have I misunderstood?

gt94sss2

baldbloke wrote:

With 'only' 20% in investments one can afford to be a little more adventurous. Equity Income and tracker funds might be acceptable.

It's the percentages that interest me because as a very cautious investor I feel comfortable with this balance but readily accept it may be next to useless as a long term plan. any comments or criticisms are welcomed.

What timeframe are you thinking of for these investments and are you after income or capital growth? i.e. what are your objectives?

I suspect its 5 years+, in which case I would be putting a lot more in equities and a lot less in NS&I and high interest savings accounts.

I note that you state you are a very cautious investor and your percentages show this(!) but tracker funds are one of the least adventrous investments out there (over the longer term) - some banks have charges as low as 0.3%/year for these or look at exchange traded funds(ETF's) which are very similar.

Income funds or non trackers would be higher risk, as you are then relying on someone's judgement to beat the market - something a lot of fund managers are very bad at doing in the long term.

I fear that if you were to follow your %'s, your savings would only just beat inflation...

Regards
Sunil

dunstonh

Thank you. Your comments tend to support my initial idea - with such a large proportion in cash it seems unnecessary to invest in bonds/gilts/fixed interest etc etc.

OK. I disagree. At different points, different areas will perform differently (any more differents!!!). Spreading the investments over the areas gives you diversification rather than hoping for the best in just a few areas.

Firstly I have to say that £10k invested directly into any single fund in a lump sum is 'adventurous' investing in my opinion

Obviously it depends on the amounts involved but in your case I agree.

I am trying to recall how many funds Dunstonh said he would invest in to split 50k - for me it might be possibly 5k max per fund and then possibly spread over 4 quarters.

10-13 funds spread across the sectors with a weighting to match the risk profile. Even a low risk portfolio would see 1-3% in areas such as Japan, Asia, Global Specialist with 5% in Europe etc. These would be offset with property, global bonds and fixed interest.

In theory, with 50k, you would do 50 funds. However, that is pushing it. But seeing as it costs no more to do 1 fund or 10 funds or whatever, then it does make sense to spread it around.

I note that you state you are a very cautious investor and your percentages show this(!) but tracker funds are one of the least adventrous investments out there (over the longer term) - some banks have charges as low as 0.3%/year for these or look at exchange traded funds(ETF's) which are very similar.

Income funds or non trackers would be higher risk, as you are then relying on someone's judgement to beat the market - something a lot of fund managers are very bad at doing in the long term.

Trackers are generally higher risk than the managed funds in the same sector due to lack of downside protection. We arent talking large differences here but enough. If you take a like for like managed fund against tracker and assume active managed and not passive, then the tracker will usually beat the managed fund when things go up but go down by more when things go bad.

baldbloke_2

dunstonh wrote:

10-13 funds spread across the sectors with a weighting to match the risk profile. Even a low risk portfolio would see 1-3% in areas such as Japan, Asia, Global Specialist with 5% in Europe etc. These would be offset with property, global bonds and fixed interest.

In theory, with 50k, you would do 50 funds. However, that is pushing it. But seeing as it costs no more to do 1 fund or 10 funds or whatever, then it does make sense to spread it around.

Thank you for your comments.

Where the minimum lump sum investment is usually £500 and monthly investments £50 I have found it difficult to work out how to obtain the spread you rightly suggest. It will work where a very large amount is to be invested but even a simple suggestion like '5% in Europe' seems unobtainable where the overall investment is modest.
Where the total investment is to be say £300 to £500 pm or £3k to £5k as an occasional lump sum the breakdown you outline is a tall order for someone like me to follow through on - and 1-3% may well work for an lump sum of £100k but I don't see it working for the smaller sums I have .

oldfella

if this is your major retirement fund I would worry about your percentages - you are not going to be able to withdraw very much each year without depleting capital

Mike

baldbloke_2

oldfella wrote:

if this is your major retirement fund I would worry about your percentages - you are not going to be able to withdraw very much each year without depleting capital

Mike

Thank you. I shall have pensions that will cover my basic needs. I am looking to conserve capital to ensure it is safe and available at an as yet undetermined time for an as yet undefined purpose. I am fortunate in that I am looking for growth over a ten-year period without needing to take any measurable risk.

It has become very frustrating over the past couple of years - primarily since using this site - to realize the potential for growth that is offered by sensible investments as contrasted with the lesser returns on savings. Even I understand that the suggestions made by those recommending a broad range of complementary investment funds are to be considered and acted upon.

But the balance is important to me.

cheerfulcat

Hi baldbloke,

I am looking to conserve capital to ensure it is safe and available at an as yet undetermined time for an as yet undefined purpose.

It is more important than people seem to realise to define your goals before you put together your portfolio. If preserving capital in real terms is really all you want to do then one of the big global investment trusts would provide a good vehicle, with the added attraction of providing an entire portfolio in one share ( several of them invest across a spread of asset classes including property and bonds ). If you want market-beating returns you need to be more adventurous and look at things like special situations and smaller companies funds, or do the research and hold a portfolio of shares directly.

BTW, don't be seduced by the idea that holding cash is safe, because it isn't. At current rates cash is only just beating headline inflation after tax, and if you consider that real inflation is considerably higher than headline, cash in the bank is currently losing buying power. The index-linked certs aren't much better. I think that at 80% your proposed cash holding is way too high.