Need a nudge to take the plunge

noggin1980

I've opened the Charles Stanley account and invested in 4 funds the equity ones, just £500 in each which was the minimum initial investment, I'll move to having the correct balance in each fund when I deposit more at the end of the month.

I've realised though that perhaps I shouldn't invest in bonds. We currently have lent 21k to my Sister in Law who pays about 4.5% interest to us. Am I right in thinking this is kinda equivalent to investing in a bond? am I also right in thinking that any savings I have in my santander account paying 3% are also kinda like a bond?

So if I want say 80% equities I should invest 100% into equities until such a time that there is 4 times more invested in equities than I have lent out + saved money earning interest.

JohnRo

noggin1980 wrote: »

..Am I right in thinking this is kinda equivalent to investing in a bond?

It is, when you see the 21K capital returned. As with bonds there is a risk that you won't though.

bowlhead99

noggin1980 wrote: »

I've realised though that perhaps I shouldn't invest in bonds. We currently have lent 21k to my Sister in Law who pays about 4.5% interest to us. Am I right in thinking this is kinda equivalent to investing in a bond? am I also right in thinking that any savings I have in my santander account paying 3% are also kinda like a bond?

So if I want say 80% equities I should invest 100% into equities until such a time that there is 4 times more invested in equities than I have lent out + saved money earning interest.

The money you lent out to S-i-L is 'kinda like a bond' because it is a fixed amount coming back to you.

But- unlike a bond it can't be sold to someone else which means you don't have to worry what it's "worth" from day to day if the market interest rates go up and down. You just sit there and collect. That's a positive thing. Having that stable income is good. The lack of 'marketability' does mean that unlike a bond it can't ever increase in value, but not many bonds are expected to be increasing in value a huge amount with the interest rates already very low.

However unlike a bond from a AAA-rated bank or wealthy company, it may not be paid on time or you may face emotional pressure to accept it being paid late or never. You may feel that despite S-i-L's best intentions the money coming back is a bit uncertain which would lead you to take on less risky equity investments rather than more.

The 3% cash rate from Santander is good and is better than most government bonds without any real extra risk. It is a lower amount than some corporate bonds though. So, the fact you have cash earning a decent wedge doesn't mean you should definitely ignore the opportunities to invest in, say, high yield bonds that pay more than 3% while being less risky than shares which can drop in value by 50% in a year. For a start, bonds can be held in an ISA or pension and so if you got 3% on a bond portfolio it would be worth more to you than 3% unwrapped and taxable at Santander.

However overall it's true to say that if you have a safe stable source of income that's beating inflation and the returns on bonds are not appreciably better without taking on unacceptable risk, then you could ignore most bond opportunities and simply hold your cash, loans and equities. P2P is another 'bond-like' investment though comes with risk and can't go in ISAs.

noggin1980

JohnRo wrote: »

It is, when you see the 21K capital returned. As with bonds there is a risk that you won't though.

Sure, I can't really see a scenario where we wouldn't get it back but there is of course a non zero risk, it will be the safest investment we ever make though.

InvestInPoker

noggin1980 wrote: »

am I also right in thinking that any savings I have in my santander account paying 3% are also kinda like a bond?
.

Cash is the ultimate defensive holding (no risk to capital as long as you are under the 85k protection scheme). Assuming Santander don't suddenly decide to drop the rate your 3% will keep coming just fine even if there is another huge crash and your equities tumble, which is what you want from a defensive holding.

Linton

noggin1980 wrote: »

I've opened the Charles Stanley account and invested in 4 funds the equity ones, just £500 in each which was the minimum initial investment, I'll move to having the correct balance in each fund when I deposit more at the end of the month.

I've realised though that perhaps I shouldn't invest in bonds. We currently have lent 21k to my Sister in Law who pays about 4.5% interest to us. Am I right in thinking this is kinda equivalent to investing in a bond? am I also right in thinking that any savings I have in my santander account paying 3% are also kinda like a bond?


So if I want say 80% equities I should invest 100% into equities until such a time that there is 4 times more invested in equities than I have lent out + saved money earning interest.

A bond is a sort of loan but there is a major difference. You can always sell a bond on the open market. So you dont have to wait until maturity date to get your money back. Though of course being on the open market prices will rise and fall so before maturity date any selling could be at a loss.

At the moment when safe bond prices are high and returns low regarding a cash account as being equivalent to a very safe bond may be reasonable. However this should be an account which you cant or dont access for day to day spending. Its no good as a balance against equity volatility if you have spent it all! A downside is that with a real bond held alongside your equity investments you can easily swap between the two for rebalancing. Rather more of an effort if the cash account is elsewhere.

I would regard your SiL loan as different. From an investment point of view it's very risky as she could renege on the deal (eg go bankrupt) at any time and if she does I guess you have no security and could lose a large amount of money. Also you couldnt easily rebalance the tied-up money against your equity funds.

Bonds would be much less riskier held in funds covering a wide range, so one "loan" going sour wouldnt leave a serious hole. Risk isnt a serious problem for a cash account either as that is guaranteed up to £85K, a guarantee effectively backed by the government.

noggin1980

Thanks again everyone you rock.

noggin1980

We own half of 2 flats with the Sister in Law, both flats have a significant ammount of equity as does her home. If she hasn't paid us back by the time we sell the first flat we'll get it then. We've never fallen out, nore do I feel she is the sort of person who wouldn't pay us back if we did fall out and then there is their Dad who just wouldn't let it happen. I'm sure if she didn't pay us he would from her inheritance. So while there is some risk, I'm confident its very low.

It is the case we couldn't sell the loan and cash out whenever we wanted like a bond though.

Thanks for everyones thoughts, it's all been very useful, I will invest just in equities to start with.