Is this too good to be true?

FireWyrm

Hi All

I'm starting to get into a position where I would like to invest some money. I understand about ISAs but flicking through potential ideas on GoCompare, I came across something called a Protected Housa by people called Castle Trust. Reading through the literature on the site, they say that you will get back 100% of your capital. This seems a bit anathema to trading, surely it is possible to lose money as well as make it. I'm a total newbie to investments but I would like to try and make money a little more quickly than the pathetic returns offered by a standard cash ISA.

As I said, I'm absolutely no expert, but returns like those quoted below seem far too good to be true.

The average simulated Protected Housa return over all 5 year periods since the inception of the Index (in 1983) is +41.9%.1

If the final Index level is lower at the end of the five year period than the initial Index level, your capital is protected2 and your original investment will be returned to you.

If I'm reading this correctly, even if the index falls, you dont lose you initial investment and if it rises, you could make 7% per year for each year of the investment. How is that possible?

Archi_Bald

Massively risky since you are investing 100% of your money in a tiny piece of the market. All eggs in same basket etc etc - - though if that suits your risk profile, it obviously would be for you.

Lots of places talk about it, e.g.


http://www.theguardian.com/money/2014/feb/22/housa-invest-residential-property-market-fund-halifax

http://www.mindfulmoney.co.uk/investment-insight/investing-strategy/test15264/

Personally, I would never buy any "packaged" ISA such as the Housa. The charges (which are probably hidden) are way higher than what I would be prepared to pay, and I would never invest in just UK residential property.

FireWyrm

Archi_Bald wrote: »

Massively risky since you are investing 100% of your money in a tiny piece of the market. All eggs in same basket etc etc - - though if that suits your risk profile, it obviously would be for you.

No, a fair supposition, but incorrect. I was just looking around at the moment. I have no intention of jumping in so quickly and certainly not with all I had to invest. I'm actually looking for a vehicle for about £15K (which I dont have yet, but will do within a year or so) to provide a safety net should I lose my job. A get out of jail free card - self insurance if you like but no way was I going to put it all in one place.

Archi_Bald wrote: »

http://www.theguardian.com/money/2014/feb/22/housa-invest-residential-property-market-fund-halifax

http://www.mindfulmoney.co.uk/investment-insight/investing-strategy/test15264/

Read those, but still sounds too good to be true. It is apparently a new 'product' but then, so were those artificial debt/mortgage packaging vehicles the Americans so loved and we know how those all went up in smoke.

Archi_Bald wrote: »

Personally, I would never buy any "packaged" ISA such as the Housa. The charges (which are probably hidden) are way higher than what I would be prepared to pay,

That's the bit I dont understand. The literature clearly says, no fees and return of 100% of your investment after 5 years with the possibility of an extremely tantilizing return.

Archi_Bald wrote: »

and I would never invest in just UK residential property.

Really...why?

somethingcorporate

FireWyrm wrote: »

Really...why?

All eggs one basket as previously stated.

Plus, politics plays a huge part in determining the value of the UK housing market, political risk is always a huge unknown.

jimjames

FireWyrm wrote: »

That's the bit I dont understand. The literature clearly says, no fees and return of 100% of your investment after 5 years with the possibility of an extremely tantilizing return.

Possibility but no guarantee - what if house prices stagnate or drop? You get money back but no growth. Also bear in mind that any guarantee of 100% return of capital is only worth the paper it is written on and who it is backed by. As was found out during the financial crisis some guarantees didn't actually mean very much. Having savings backed by FSCS is a bit more reliable.

I did look at it but the biggest issue for me was that the redemptions were very fixed at 5 and 10 years I seem to recall. I wouldn't want an investment where I can only access money at set points. I use S&S ISAs and can get my money at any time.

Have you compared the return on a FTSE tracker inside a S&S ISA for example? You get 3.5% income per year plus growth. Short term periods are not a good extrapolation but over the last 12 months the average ISA return was 9.4% and previous year 13.7%. Those beat this product and with lower charges and no lock-in.

http://www.bbc.co.uk/news/business-27210764

FireWyrm wrote: »

Really...why?

Any portfolio should have balance across different types of asset or classes. Just exposure to UK housing when you already have exposure via your own home isn't a good way to spread risk. Having some housing exposure as well as UK shares, bonds and overseas would be reasonable.

If you are looking to invest then a balanced portfolio of those kind of things would be far more sensible.

innovate

FireWyrm wrote: »

I'm actually looking for a vehicle for about £15K (which I dont have yet, but will do within a year or so) to provide a safety net should I lose my job. A get out of jail free card - self insurance if you like but no way was I going to put it all in one place.

If this is your objective, then you are talking about an emergency fund that you want to have readily accessible, i.e. in instant access, and perhaps very short term notice, cash. You definitely don't want to lock your money up in any 5-year plan, and you don't want it in any other investment either because you might have to liquidate your investments at a time the market tanked.

You shouldn't even think about investing until you have your emergency fund sorted. Luckily, there are plenty of good interest paying current accounts and regular savers about just now, so your best plan of action would be to stick your first £10K to £15K into these. In parallel, get yourself up to speed with investments by reading a few books, websites, papers and forums. There's no magic to investing, it's just something that is different to what you have done before, so getting a basic understanding of the subject before you pick a product is essential. I suppose you are sort of doing this but you can do it better if you read Smarter Investing by Tim Hales, and/or the passive investing pages on monevator.com.

jimjames

innovate wrote: »

If this is your objective, then you are talking about an emergency fund that you want to have readily accessible, i.e. in instant access, and perhaps very short term notice, cash. You definitely don't want to lock your money up in any 5-year plan, and you don't want it in any other investment either because you might have to liquidate your investments at a time the market tanked.

I'd not spotted that bit in the OP's post. It would be absolutely crazy to use such a fund for an emergency pot. If you lose your job or need to replace the boiler then waiting 5 years to get your money is just not feasible.

When you can get 5% on part of that money £6500) in a current account with instant access and complete guarantee then that is the ideal place for an emergency fund and not a massive difference compared to the estimated return.

FireWyrm

Thank you so much Innovate and JimJames. Extremely helpful posts.

My problem is that betting on anything gives me the heeby jeebies. I mean, it is literally almost painful for me to actually place a bet on anything and even more so when it comes to hard earned money. I have just spent the last year hauling us out of the deep dark and it has become apparent that we are woefully exposed in many ways. I wanted to rectify this, but savings and investments are entirely alien territory. I have been reading some books, but I am having trouble understanding it all. I'm not even sure yet, what questions to ask in order to get sensible advice. Do you have any further suggestions for reading materials? I have plenty of time and aim to research the subject thoroughly before committing. I made moderate gains on gold a few years ago but I know this is unlikely to happen again in the near future. Static savings accounts offer (currently) pathetic returns and I am just scared of going for stocks ISAs yet. I was exploring options when I came across our friends at Castle Trust and wondered if I might not have understood something fundamental.

I take your point about emergency fund and needing to be relatively liquid in nature. I guess a good high interest savings current account will do for that pot, but I need to start acruing other investements in the longer term. With my new found stability and budget skills, I have freed up large amounts of money going forwards and I have no clear idea what to do with it yet. I've gone from scratching for pennies weeks before payday, to literally having no idea what to do with the money other than put it in a bank - something I am aware is not the best options given less than impressive returns available. It is my birthday on Friday. I will have lived over half my generally acknowledged lifespan and I have nothing to show for two decades of employment. I need to sort this out right now and start understanding where and how to make the money work better for us.

jimjames

Just seen your sig, if you still have debt and it isn't at 0% then that's normally a priority to pay off first.

Once that's done you can get £6500 in current accounts at 5% that is better than any ISA rate. Other accounts available at 4% beyond that. Once you have enough money for 3-6 months living expenses then I'd look at investments.

Lots of info on https://www.monevator.com with different strategies.

It really isn't like betting at all. With a bet you have a very high chance of losing all your stake and a small chance of winning big. With investing, as long as you choose broadly based funds, then you have no chance of losing everything and a good chance of getting a decent return. Even with the recent market crash in 2009, the market dropped nearly 50% but had recovered within 2 years.

Also remember that if you are investing for the next 20 years or so then market drops are not a bad thing but a bonus. When there are drops you get more for your money so it is better value. Stock markets seem to be the only area of life where when the price drops everyone panics and sells. In any other situation if the price drops 50% everyone would pile in and buy!

innovate

FireWyrm, it sounds like you are in a quite good position already, compared with the majority of people out there. So even if the 'investment' stuff sounds quite daunting for now, keep ploughing on - it's not too hard even if it appears a complete mystery to start with. Lots of suggested reading in this thread, but as jimjames already mentioned, monevator.com might be all you need to get a good foundation. Fabulous site (I have no affiliation at all with it, I just think it's brilliant).

You should be in no hurry - you won't lose much if anything by keeping your first £15K or so in good interest paying current/reg savings accounts. You have oodles of time over the next year or so to read up about investing and to settle on something you are comfortable with. Don't ignore pensions, either, if you are employed - good chance your employer would contribute to it, and you'd be silly to decline that money. Whether S&S ISAs or pensions, the underlying principle is investments, so getting to grips with investments will provide a solid foundation for your financial plans.

FireWyrm

jimjames wrote: »

Just seen your sig, if you still have debt and it isn't at 0% then that's normally a priority to pay off first.

It is an 0% and it is actually much lower than in the Sig. :rotfl:
I know what I am doing with that. What I am asking though is longer and more general terms. I have an extremely well paid job and that debt is easy to deal with. Going forwards, I have no intention of returning to our old ways and it is apparent from my calculations that I will have nearly £20K a year to do with as we please. I have no idea what to do with it yet and that's the problem. I am also getting elderly (by the terms of the market I am in) and at the moment, make good money, but I am not foolish enough to believe that the good times will roll on indefinitely. I need an escape plan and one that is water tight, real soon. Yes, this is a light bulb moment, but more so. I've had my eye on this goal since 2011 and I'm starting to see the light at the end of the tunnel. The amount in that signature is the last of what we owe anywhere other than the mortgage.

jimjames wrote: »

Once that's done you can get £6500 in current accounts at 5% that is better than any ISA rate. Other accounts available at 4% beyond that. Once you have enough money for 3-6 months living expenses then I'd look at investments.

Projecting such savings my Christmas next year. It gives me some time to get to understand and perhaps play a little with relatively small lots of money to get the hang of it.

jimjames wrote: »

Lots of info on www.monevator.com with different strategies.

I didnt know this site. I'll be heading over there shortly.

jimjames wrote: »

It really isn't like betting at all. With a bet you have a very high chance of losing all your stake and a small chance of winning big. With investing, as long as you choose broadly based funds, then you have no chance of losing everything and a good chance of getting a decent return. Even with the recent market crash in 2009, the market dropped nearly 50% but had recovered within 2 years.

But how do you chose your funds? How do you know what is going to go up and what is going to go down?

jimjames wrote: »

Also remember that if you are investing for the next 20 years or so then market drops are not a bad thing but a bonus. When there are drops you get more for your money so it is better value.

Yes, this was what happened with the Gold investments. It worked out in our favour that time, but I still really didnt know what I was doing exactly. I just invested and left it there...gold happened to be roll at the time and we made good profits.

jimjames wrote: »

Stock markets seem to be the only area of life where when the price drops everyone panics and sells. In any other situation if the price drops 50% everyone would pile in and buy!

Yes. I noticed that. I'm not sure how you pick what you want to buy though. I know next to nothing about most commodities, how would I know what to buy and what to sell.