Invest a lump sum - should I just jump in?

raymondred

dunstonh wrote: »

That suggests you are not ready to invest yet as you don't really understand it. Also, investing in a manner that is above your understanding is not a good idea either.

Can you explain what you think I have not understood? Including some commodities funds or ETFs in the portfolio was a way to diversify and spread risk by holding some asset classes that are not strongly correlated to equities. So if equities decline dramatically, the other assets classes in the portfolio may be less affected and may even move up in value if they are more in demand.

I know it may be more complex than this, but at a simple level what makes you say it's not a good idea for me to be investing?

innovate

raymondred wrote: »

I know it may be more complex than this, but at a simple level what makes you say it's not a good idea for me to be investing?

Don't take this the wrong way, but asking the Q you originally asked on the MSE forum suggests you are probably not ready for investing.

Having said this, you got to start somewhere. My recommendation is that you should read a lot more - books, other independent websites, other independent forums, particularly those that specialise in investing (which MSE does not).

atush

innovate wrote: »

Don't take this the wrong way, but asking the Q you originally asked on the MSE forum suggests you are probably not ready for investing.

Having said this, you got to start somewhere. My recommendation is that you should read a lot more - books, other independent websites, other independent forums, particularly those that specialise in investing (which MSE does not).

I agree, you just need to read a bit more. And if you start in the mean time, do so with a tracker or 3.

bowlhead99

raymondred wrote: »

I know it may be more complex than this, but at a simple level what makes you say it's not a good idea for me to be investing?

I think the general observation is that you are new to investing, you have only read one book on it, and when you looking at the markets you are not sure what to do or what to make of the signals, and you are nervous about clicking a 'buy' button to acquire a stake in a fund which is now cheaper than it was month ago. This probably doesn't come across to someone like a Dunstonh (seasoned veteran) as someone who is entirely comfortable, or knows entirely what he's getting into.

The advice from IFAs is generally not to invest above your understanding and capacity for risk, while you are investing 75% in equities, zero in gilts and you are being concerned that some of the asset prices you are looking to get into, are getting cheaper. So frankly that doesn't come across as a guy who really understands what he has read. For example, I have a copy of the only book you've mentioned reading, and it doesn't say avoid government bonds, and it doesn't say to try and follow 'trends' in prices, and it doesn't say to be concerned if an asset class you want to spend £1000 on has generally got cheaper since you first decided to spend £1000 on it and you will therefore hold more underlying assets for the same 10% of your portfolio.

There is a lot of knowledge out there to acquire. The problem for novice investors is that some of the guidance might have been written in different economic times, and the sheer quantity of ideas out there leads you into temptation - overlaying different approaches on top of each other to try and get a better result. Maybe dropping some bonds because they are on real negative yields is sensible. Maybe avoiding some equities because they've doubled since 2009 is sensible. If both were right, you would be 100% in cash, which is the only guaranteed wrong place to be for the long long term.

You can play with the allocations until you find something that is right for you, but if you are risk averse and therefore nervous about taking the plunge AND you are investing 75% in equities and 10% in commodity trackers, you are sending out some mixed signals. Therefore DH thinks you might be investing above your real level of understanding.

I sympathise, as investment choices are not easy and a lot of people get the chance of starting off small rather than having a whole windfall worth of investing all at once. But while it's admirable to seek enlightenment by asking questions on an investment forum, you can't be surprised by people hearing those newbie questions and then questioning if you really know what you're getting into.

For example, in one post you asked:

whether I am right to jump in and buy 10% bonds and 10% commodities in my new portfolio now, even though bonds maybe in a bubble and commodities are on a down trend.

So you're saying one asset class seems overpriced, and so you don't know if you want it, and another asset class is getting cheaper, so you don't know if you want it. You haven't really given any indication of your risk tolerance, timescale or goals, other than general nervousness and saying if something dropped you would be disappointed in the loss and disappointed you missed a better buying price.

You haven't said why you think speculative non-income producing commodities such oil, gold, corn etc. are worth having for some particular fundamental reason:
-demand from emerging markets growth?
-withdrawal of government stimulus that's kept the bond and equity markets high and cause people to exit into commodities?
-or perhaps the exact opposite, continuation of government money printing which will create inflation and pump up the value of real assets like food, trees and metals for industrial use or precious metals as a store of value?

You are just buying some because people have told you it can be less correlated with debt and equities and it diversifies your portfolio. Which is true, but you should never invest blindly based on an author or a forum user's "advice". The only person with a real vested interest in your success is you, and so it's you that needs to understand your motivations for every decision you make. Feel free to ask around for support, as we're a supportive bunch, but Dunstonh's observation that you might be outside your comfort zone and don't have a clear strategy, seems bang on, and also Innovate's comment that there are other books, forums and websites out there, is worth listening to.

So you have the windfall cash right now. Presumably you didn't have it, pre windfall, so having it in cash earning some interest is still better than having nothing. Presumably, being a pessimist and recognising the risk of loss on any portfolio, you'd accept a return of only 1% over the next 6 months, even though you'd prefer more. I would say, take some more time to think about it and invest significantly less than 100% of it at first.

Not because of trying to time the market, which as others have said is difficult/impossible - but because most of your investment should wait until you have got fully comfortable with an investment strategy that really works for you. Some time invested in reading (or even professional advice if the lump sum is large) could deliver a great return, whether that return is a financial outcome or simply a lower level of stress by being more comfortable with your successes and failures.

If you don't think you want to 'miss out' on the market by leaving it 6 months for a known return on cash while you 'train up', take a look at the graph below of the last 15 years on the US, UK and Japanese indexes. While they are just the raw index prices and exclude dividends which add 2-3% a year, it's clear you can lose 40% quite easily and so if you are at all unsure, feel free to hold off. 6 months probaby won't have a major impact on the rest of your life's return from investing.

I am not trying to scaremonger or put you off forever, as I'm a big fan of investing myself. Just some food for thought.

dunstonh

I know it may be more complex than this, but at a simple level what makes you say it's not a good idea for me to be investing?

It isnt that you shouldn't be investing. It is just that you have some ideas at the moment that make you think you are able to time the market and are using investment types that are typically more suitable for experienced investors. I was also concerned about you questioning investing in something because it has gone down. Yet also questioning whether you should invest in something that has gone up. Contradictions.

You are showing signs of eagerness and jumping ahead of your knowledge and understanding.

You need to look at your risk profile, objectives, timescale, ability to continue researching and willingness to monitor and rebalance going forward as well as deciding what investment strategy you wish to use rather than a bit of hit and hope in a few areas.

The signs are you are not there yet in that. First look at risk. 90% equities is high volatility risk as a spread and way above the typical UK consumer risk profile. Do you feel you can accept that level of risk and volatility that WILL happen? Two of the most common mistake a new investor makes are to invest above their risk profile and to fashion invest (invest only in areas they have seen marketed or appearing top in performance tables). Both can lead to volatility levels they were not expecting and frequently ends up in a loss situation. You can often spot people that have been through this as the ones that say they lost money on the stockmarket and would never invest that way again.

raymondred

bowlhead99 wrote: »

I think the general observation is that you are new to investing, you have only read one book on it, and when you looking at the markets you are not sure what to do or what to make of the signals, and you are nervous about clicking a 'buy' button to acquire a stake in a fund which is now cheaper than it was month ago. This probably doesn't come across to someone like a Dunstonh (seasoned veteran) as someone who is entirely comfortable, or knows entirely what he's getting into.

The advice from IFAs is generally not to invest above your understanding and capacity for risk, while you are investing 75% in equities, zero in gilts and you are being concerned that some of the asset prices you are looking to get into, are getting cheaper. So frankly that doesn't come across as a guy who really understands what he has read. For example, I have a copy of the only book you've mentioned reading, and it doesn't say avoid government bonds, and it doesn't say to try and follow 'trends' in prices, and it doesn't say to be concerned if an asset class you want to spend £1000 on has generally got cheaper since you first decided to spend £1000 on it and you will therefore hold more underlying assets for the same 10% of your portfolio.

There is a lot of knowledge out there to acquire. The problem for novice investors is that some of the guidance might have been written in different economic times, and the sheer quantity of ideas out there leads you into temptation - overlaying different approaches on top of each other to try and get a better result. Maybe dropping some bonds because they are on real negative yields is sensible. Maybe avoiding some equities because they've doubled since 2009 is sensible. If both were right, you would be 100% in cash, which is the only guaranteed wrong place to be for the long long term.

You can play with the allocations until you find something that is right for you, but if you are risk averse and therefore nervous about taking the plunge AND you are investing 75% in equities and 10% in commodity trackers, you are sending out some mixed signals. Therefore DH thinks you might be investing above your real level of understanding.

I sympathise, as investment choices are not easy and a lot of people get the chance of starting off small rather than having a whole windfall worth of investing all at once. But while it's admirable to seek enlightenment by asking questions on an investment forum, you can't be surprised by people hearing those newbie questions and then questioning if you really know what you're getting into.

For example, in one post you asked:So you're saying one asset class seems overpriced, and so you don't know if you want it, and another asset class is getting cheaper, so you don't know if you want it. You haven't really given any indication of your risk tolerance, timescale or goals, other than general nervousness and saying if something dropped you would be disappointed in the loss and disappointed you missed a better buying price.

You haven't said why you think speculative non-income producing commodities such oil, gold, corn etc. are worth having for some particular fundamental reason:
-demand from emerging markets growth?
-withdrawal of government stimulus that's kept the bond and equity markets high and cause people to exit into commodities?
-or perhaps the exact opposite, continuation of government money printing which will create inflation and pump up the value of real assets like food, trees and metals for industrial use or precious metals as a store of value?

You are just buying some because people have told you it can be less correlated with debt and equities and it diversifies your portfolio. Which is true, but you should never invest blindly based on an author or a forum user's "advice". The only person with a real vested interest in your success is you, and so it's you that needs to understand your motivations for every decision you make. Feel free to ask around for support, as we're a supportive bunch, but Dunstonh's observation that you might be outside your comfort zone and don't have a clear strategy, seems bang on, and also Innovate's comment that there are other books, forums and websites out there, is worth listening to.

So you have the windfall cash right now. Presumably you didn't have it, pre windfall, so having it in cash earning some interest is still better than having nothing. Presumably, being a pessimist and recognising the risk of loss on any portfolio, you'd accept a return of only 1% over the next 6 months, even though you'd prefer more. I would say, take some more time to think about it and invest significantly less than 100% of it at first.

Not because of trying to time the market, which as others have said is difficult/impossible - but because most of your investment should wait until you have got fully comfortable with an investment strategy that really works for you. Some time invested in reading (or even professional advice if the lump sum is large) could deliver a great return, whether that return is a financial outcome or simply a lower level of stress by being more comfortable with your successes and failures.

If you don't think you want to 'miss out' on the market by leaving it 6 months for a known return on cash while you 'train up', take a look at the graph below of the last 15 years on the US, UK and Japanese indexes. While they are just the raw index prices and exclude dividends which add 2-3% a year, it's clear you can lose 40% quite easily and so if you are at all unsure, feel free to hold off. 6 months probaby won't have a major impact on the rest of your life's return from investing.

I am not trying to scaremonger or put you off forever, as I'm a big fan of investing myself. Just some food for thought.
[/IMG]

Thank you for taking the time to give such a detailed and thought out reply. Your points make sense. I think my OP may have failed to confirm I am also capable of taking a longer view and as such I think commodities will be back in favour given time, demand from China and other developing economies will see to that and demand from industry and construction, developed and emerging markets, will pick up again in time. Also I am not trying to time the markets, it doesn't work, I have understood that much. Also most equities will be low cost trackers. Everything will be buy and hold, and rebalance as necessary.

raymondred

dunstonh wrote: »

It isnt that you shouldn't be investing. It is just that you have some ideas at the moment that make you think you are able to time the market and are using investment types that are typically more suitable for experienced investors. I was also concerned about you questioning investing in something because it has gone down. Yet also questioning whether you should invest in something that has gone up. Contradictions.

You are showing signs of eagerness and jumping ahead of your knowledge and understanding.

You need to look at your risk profile, objectives, timescale, ability to continue researching and willingness to monitor and rebalance going forward as well as deciding what investment strategy you wish to use rather than a bit of hit and hope in a few areas.

The signs are you are not there yet in that. First look at risk. 90% equities is high volatility risk as a spread and way above the typical UK consumer risk profile. Do you feel you can accept that level of risk and volatility that WILL happen? Two of the most common mistake a new investor makes are to invest above their risk profile and to fashion invest (invest only in areas they have seen marketed or appearing top in performance tables). Both can lead to volatility levels they were not expecting and frequently ends up in a loss situation. You can often spot people that have been through this as the ones that say they lost money on the stockmarket and would never invest that way again.

I see what you mean. My questions do suggest some contradiction. If commodities are falling, then that is a chance to buy more at a lower price, so it should not be a concern. As you say, all the asset classes will rise and fall, some with more volatility than others. To invest for the longterm means accepting this and rebalancing when this happens. I feel OK with this.

I am not too risk averse (but not 90% equities as you said here - but as I aid in the OP 75% in equities and 25% split between Commercial Property, Commodities, and Corporate Bonds.) Thanks for taking the time to give your feedback.