Any point in cash ISAs atm?

LannieDuck

I have £20k in a cash ISA with the rate due to drop to 1% at the end of the month. I've had a look around the cash ISAs available atm, and they're all lower than inflation. Savings accounts are worse.

I've stuck my toe into S&S ISAs in the last year, and am wondering whether to transfer the cash ISA balance into S&S in order to diversify my portfolio (I currently have 5 shares, with the aim of buying another 5 in the coming financial year). However, being a relative newbie to S&S, and relatively averse to risk (I'm out of my comfort zone in S&S, but it seems to make the most sense financially), I was pleased to have a chunk of cash safely squirreled away.

My question for those who've got established portfolios: do you think it's important to keep some money outside S&Ss, even if that means it's earning less than inflation? Or would you be happy to put it all in one basket, as long as you have good diversity in your holdings?

Context: I'm 30s, managing money for my husband and myself, mortgage almost entirely paid off, one child who has a junior ISA courtesy of the grandparents. I have some money in a savings account at a miserable rate of interest that I was planning to use to fill my husband's S&S ISA for next year. I'd be happy to lock the cash ISA money away for a year, but might need access to it within 3 years.

Any advice gratefully received.

Porcupine

Question is: how much are you willing to lose?

S&S is a spectrum of risk - for example government bonds are relatively low risk (historically speaking - we live in 'interesting times'). You say you have '5 shares'. That sounds pretty risky to me. Individual shares can easily be completely wiped out (think about what happened to Railtrack or Enron, for example, or Jessops or Lehmans). That's why spreading the risk is a good idea, by spreading over multiple shares (eg a collective investment like a unit trust) or multiple asset classes.

So: should you keep all your money in S&S? I wouldn't! You have money in less risky things than shares (for example, bonds) within a S&S ISA which will spread the risk a bit. Having cash means you aren't as vulnerable if the market takes a tumble. And you can pounce if a bargain comes up.

Plus you'll probably need a fund you can raid if the roof falls in, the wheels fall off the car or you lose your job. That doesn't /have/ to be in cash, but you just know that the job loss will come just after the stock market has plunged, which is a really bad time to cash up (having lost half your money).

Personally I think most bonds are over-valued at the moment, so a split between shares (more risky) and cash (minimal risk) is a useful strategy rather than having most of your money in bonds (conventional wisdom for reducing risk). But everything in shares - I'm not that brave!

innovate

LannieDuck wrote: »

I'd be happy to lock the cash ISA money away for a year, but might need access to it within 3 years.

If that is your maximum timeframe, S&S ISA is a bad choice. You'd need 5-7 years upwards to make it acceptable risk.

If you need your money in the next three years, you are pretty much stuck with the mediocre savings rates.

kidmugsy

If you keep it in a Cash ISA on instant access you may be lucky and find that ns&i produces a new issue of its index-linked savings certificates in the new tax year. Then you could split your money between them and cash. Otherwise cross your fingers for higher interest rates.

LannieDuck

Porcupine wrote: »

Question is: how much are you willing to lose?

S&S is a spectrum of risk - for example government bonds are relatively low risk (historically speaking - we live in 'interesting times'). You say you have '5 shares'. That sounds pretty risky to me. Individual shares can easily be completely wiped out (think about what happened to Railtrack or Enron, for example, or Jessops or Lehmans). That's why spreading the risk is a good idea, by spreading over multiple shares (eg a collective investment like a unit trust) or multiple asset classes.

So: should you keep all your money in S&S? I wouldn't! You have money in less risky things than shares (for example, bonds) within a S&S ISA which will spread the risk a bit. Having cash means you aren't as vulnerable if the market takes a tumble. And you can pounce if a bargain comes up.

Plus you'll probably need a fund you can raid if the roof falls in, the wheels fall off the car or you lose your job. That doesn't /have/ to be in cash, but you just know that the job loss will come just after the stock market has plunged, which is a really bad time to cash up (having lost half your money).

Personally I think most bonds are over-valued at the moment, so a split between shares (more risky) and cash (minimal risk) is a useful strategy rather than having most of your money in bonds (conventional wisdom for reducing risk). But everything in shares - I'm not that brave!

I agree 5 shares is risky. But it's only for a short period - I'm diversifying to 10 in April. (And the shares I've picked are reasonably low-risk... although I understand there's not really any such thing as 'no risk' with shares).

I considered bonds, but reading around, it seems like a pretty bad time to buy. Seems like you've come to the same conclusion

I agree that everything in shares would be very brave, and I'm not sure I want to do that. I'm considering a tracker perhaps, as a less riskier alternative to individual S&S.

LannieDuck

innovate wrote: »

If that is your maximum timeframe, S&S ISA is a bad choice. You'd need 5-7 years upwards to make it acceptable risk.

If you need your money in the next three years, you are pretty much stuck with the mediocre savings rates.

Yes, I do appreciate that time in the market is very important. I can definitely lock the money away for a year, and probably longer. I'm hedging because I may need it if we move house in the next 3-5 years. I'm thinking about putting it into S&S and then if I don't need it, great... if I do need it, I've only lost the transaction fee (but possibly recouped that through dividends). Ok, so i won't have made any money on it, and may be worse off than inflation... but so are savings rates atm.

LannieDuck

kidmugsy wrote: »

If you keep it in a Cash ISA on instant access you may be lucky and find that ns&i produces a new issue of its index-linked savings certificates in the new tax year. Then you could split your money between them and cash. Otherwise cross your fingers for higher interest rates.

I actually have some money locked away in NS&I savings certificates from back when the rates were good. But now they're pretty poor when they're issued at all.

I appreciate all the advice. Thank you everyone. Lots of food for thought

innovate

LannieDuck wrote: »

if I do need it, I've only lost the transaction fee (but possibly recouped that through dividends). Ok, so i won't have made any money on it, and may be worse off than inflation... but so are savings rates atm.

I wish it was that easy. Shares and funds can, and do, dip, sometimes dramatically

Porcupine

LannieDuck wrote: »

I agree 5 shares is risky. But it's only for a short period - I'm diversifying to 10 in April. (And the shares I've picked are reasonably low-risk... although I understand there's not really any such thing as 'no risk' with shares).

So... with your 5 or 10 shares, how are you spreading your investment:
UK
US
Europe
Japan
Asia
Emerging markets

Commodities
Energy
Technology
Banks
Insurance
Consumer products
Gold
Real estate
etc etc


While there's ways you can combine some of these themes in a single share, I'd be willing to bet there's a very strong UK bias in your investment, and it's also focused on a just a few sectors. While some shares are better than others, it only takes one incident to take out a share (eg BP's Deepwater Horizon disaster) while if you tracked the sector as a whole it wouldn't matter so much.

I considered bonds, but reading around, it seems like a pretty bad time to buy. Seems like you've come to the same conclusion

There's gilts, investment-grade corporates and high-yield corporates. Some people seem to be keen on high-yield corporates at the moment... I'm in two minds.

I agree that everything in shares would be very brave, and I'm not sure I want to do that. I'm considering a tracker perhaps, as a less riskier alternative to individual S&S.

Tracker might be a sensible way to start - still fairly risky, but not as white-knuckle as individual shares. Possibly cheaper too.

LannieDuck

innovate wrote: »

I wish it was that easy. Shares and funds can, and do, dip, sometimes dramatically

Yes, certainly. I'm aware there's always going to be risk there, but it seems if I keep my money in a cash ISA atm I'm certain to lose a %.

LannieDuck

Porcupine wrote: »

So... with your 5 or 10 shares, how are you spreading your investment:

While there's ways you can combine some of these themes in a single share, I'd be willing to bet there's a very strong UK bias in your investment, and it's also focused on a just a few sectors. While some shares are better than others, it only takes one incident to take out a share (eg BP's Deepwater Horizon disaster) while if you tracked the sector as a whole it wouldn't matter so much.



There's gilts, investment-grade corporates and high-yield corporates. Some people seem to be keen on high-yield corporates at the moment... I'm in two minds.



Tracker might be a sensible way to start - still fairly risky, but not as white-knuckle as individual shares. Possibly cheaper too.

You're correct that there's a strong UK bias in my portfolio at the moment, but I've tried to spread across a couple of sectors. Maybe I should attempt to invest my next 5 shares in non-UK markets for some breadth.

I haven't looked into high-yield corporates. I'll have a look at that next. Thanks.