Stay in cash or where to invest it?

saverted

I hope some helpful people can help me. I was self employed and a change in circumstances means I will have to live off savings and investments. I have enough cash outside investments to cover living costs for a year and have no debts.

When I knew I would need to start drawing down on my investments I de-risked and sold 35% - all low cost equity tracker funds. But I now have £150K cash sitting in my ISA and SIPP and my unwrapped investment trading account. I wanted to limit the damage if markets took a nose dive and also wanted to have some cash to re-balance and buy equities if that did happen. But the price for being cautious is £150K in cash losing 2-3% p.a. to inflation so I am throwing away a proportion of any gains my invested funds may return. I would like to be able to buy more equities if there was a major correction so don’t want to tie up in long term savings accounts.

Less risk than equities
At least keeping value with inflation
Accessible

Where would you put the cash?

Linton

Put most of the cash back into equities. And dont wait for a correction. Trying to time the market, especially with £150K is difficult and risky. There is a chance that your correction when it happens will be to a value higher than when you sold, and how will you know when the correction has reached its lowest point? In the meantime you are losing out to inflation.

You are living off savings and investments. You dont give your age, but I assume you are still below State Pension Age. So the majority of your resources wont be needed for 10+ years, average life expectancy being in the mid 80's. Plenty of time for equity investment.

What I would do is what I actually do:

1) Create a cash flow plan for income and spending from now until death at a ripe old age allowing for inflation.

2) Ensure that the needs for the next 2-3 years are in cash. The interest rate doesnt matter too much.

3) have a tranche in relatively safe but lower return investments to cover perhaps 5 further years.

4) Put the rest into higher risk investments,as high a risk and hopefully as high a return as your risk acceptance permits.

5) Review the plan and rebalance every year

In this way you are safe for at least 8 years, long enough to be not too worried about the occasional temporary major fall.

saverted

Linton wrote: »

Put most of the cash back into equities. And dont wait for a correction. Trying to time the market, especially with £150K is difficult and risky. There is a chance that your correction when it happens will be to a value higher than when you sold, and how will you know when the correction has reached its lowest point? In the meantime you are losing out to inflation.

You are living off savings and investments. You dont give your age, but I assume you are still below State Pension Age. So the majority of your resources wont be needed for 10+ years, average life expectancy being in the mid 80's. Plenty of time for equity investment.

What I would do is what I actually do:

1) Create a cash flow plan for income and spending from now until death at a ripe old age allowing for inflation.

2) Ensure that the needs for the next 2-3 years are in cash. The interest rate doesnt matter too much.

3) have a tranche in relatively safe but lower return investments to cover perhaps 5 further years.

4) Put the rest into higher risk investments,as high a risk and hopefully as high a return as your risk acceptance permits.

5) Review the plan and rebalance every year

In this way you are safe for at least 8 years, long enough to be not too worried about the occasional temporary major fall.

I understand not timing the market. But now that I need to live off my savings I wanted to reduce the downside risk a bit. I think I could accept seeing my pot shrink maximum 30% if we enter a long term bear market next week but bigger losses than that would keep me awake at night.

Can you give any examples of funds you would use for 3)?

Totton

Probably look at investing into something paying dividends, you could opt for the likes of Luniversals' Basket of 7 over here http://boards.fool.co.uk/basket-of-seven-annual-review-2014-13039271.aspx

If you do a general search for B7 and tick the discussions box on the search page you'll get lots of hits.

My own preference though is for more growth orientated holdings. Either way I would be looking to invest.

Linton

saverted wrote: »

Can you give any examples of funds you would use for 3)?

Example lower risk funds sectors - I hold most of these.....

- Bond funds - "Strategic bond" funds are perhaps preferable in these days of low interest rates and possible falls in the bond market
- a good absolute return fund that has a history of meeting its objectives. There are some which havent.
- Prudential with profits bonds have been pretty successful in providing a moderate return in good and bad times.
- A lower % Vanguard lifestyle fund
- There are investment trusts that focus on wealth preservation, Ruffer for example.
- Infrastructure funds/ITs with guaranteed PFI derived income
- Defensive shares or funds that invest in them

You will need to research, and make sure you have a wide range of funds that adopt different strategies.

kidmugsy

You could always reinvest some of the cash into equities and "short the market" to protect yourself from short-term loss. But I say this without having any experience of doing it myself: if I wanted to do it I might look for an investment trust or oeic that did it for me.

Another possibility is to reinvest, but into investment trusts that explicitly do try to time the market in such a way as to attenuate the downs and amplify the ups. Two obvious possibilities are Personal Assets Trust and Ruffer Investment Company. (P.S. Their websites will give you a remarkable free financial education, too.)

saverted

Thank you for the suggestions.

I can see that maybe bonds is worth consideration. But will bonds de-risk my savings if there is a bear market in equities? Interest rates are more likely to rise than fall so won't the value of my bond holding fall as the yield becomes less attractive? I want to de-disk my 100% equities portfolio, but 75% equities in a bear market and 25% in bonds losing their value doesn't appeal either! Or are there certain types of bonds (or bonds funds) that are appropriate for de-risking my equities pot?

kidmugsy

I think your problem is that most assets are expensive at the moment. You could do worse than google for the Harry Browne Permanent Portfolio and consider whether you'd be prepared to adopt it.

ruinen

How old are you? What percentage does this £150k cash make up of your portfolio? Are you going to have to live off savings/investments for the rest of your life or will you return to work?

Glen_Clark

With £100k+ you can go direct to Vanguard for their life strategy fund, giving very low charges, safety, and simplification - which may be very useful if you start to lose your faculties as you get older.

C_Mababejive

With a lump of that size, is it worth drip feeding it back into the system?