What would you do?

TakeCareOfThePennies_2

jimjames wrote: »

Fair enough. So why make unsubstantiated claims about fees and cgt that aren't true if you know that?

Not sure I'd use the word unsubstantiated, I might have pushed the fees and cgt aspect further than it needed to be.

My underlying argument still stands in that sales are to be avoided unless :
(a) Unavoidable
(b) You are cutting losses
(c) You trimming to taking profits

Selling to cover day-to-day expenses or to cover a period of emergency expenses is not what investing is for. That's what your cash balance is for.

If you sell in avoidable circumstances, then all you are doing is eroding your capital, leaving you liable to enter a period of stagnation where your portfolio doesn't really grow because you are constantly chasing your tail selling, then putting cash back in, then selling etc.

Investing is a bit like gardening. You mow the lawn, trim the hedges, prune the flowers. But you don't go chopping large chunks off the tree at the end of the garden that's been there since who knows when unless you need to.

paramaniac1

Were you to put £50,000 into a spread betting account and then purchased shares, you would be holding positions worth approx. £400,000. If you managed to achieve a 10% return that year your investment you would have made £40,000. Tax Free.

jimjames

paramaniac1 wrote: »

Were you to put £50,000 into a spread betting account and then purchased shares, you would be holding positions worth approx. £400,000. If you managed to achieve a 10% return that year your investment you would have made £40,000. Tax Free.

Operative word being IF.

You could also have nothing after a year.

brasso

TakeCareOfThePennies wrote: »

Selling to cover day-to-day expenses or to cover a period of emergency expenses is not what investing is for. That's what your cash balance is for......

Your point would be rational if there were people here arguing that one should have no cash reserves whatsoever. No one is saying that.

TakeCareOfThePennies wrote: »

If you sell in avoidable circumstances, then all you are doing is eroding your capital, leaving you liable to enter a period of stagnation

Indeed, but my point (I won't speak for anyone else) is that keeping too much in cash is another form of "eroding your capital". So it's the amount of cash reserves that's in question. Originally you suggested an amount that, for me at least, would be far too high and, if unused over a period of years, would represent a massive lost opportunity in terms of investment and future financial security.

I acknowledge that your personal circumstances and, crucially, your attitude to risk, may well be different so it would be better if you made your points in a more anecdotal way ('here is my situation and this is what has worked for me') which I'm sure most would find interesting and convincing, given your individual circumstances. It's the tendency to strongly advocate certain rules and principles as if these are universal truths, that has irked a few people here.

paramaniac1

If is the middle word in life! Investing in an ordinary index will get you about 8% a year for a few minutes of your time and effort. A bit more time and effort investing directly in shares could get you to the 10-20% return. I have managed to make 31% per annum in US shares since 2008 so it’s by no means impossible. Remember that you WILL, definitely, have a 0% return if you do not invest.

jimjames

paramaniac1 wrote: »

IRemember that you WILL, definitely, have a 0% return if you do not invest.

Not sure how you work that out.

You can get a guaranteed 5% on cash at the moment with limited amounts but more than most people need.

jimjames

brasso wrote: »

Your point would be rational if there were people here arguing that one should have no cash reserves whatsoever. No one is saying that.

It's interesting that investment has been raised as being too inflexible and risky for using as emergency funds yet no mention that it might be more difficult to access cash in a fixed term account. Lock cash up for 5 years and I've got far easier access than that by cashing in investments. So based on the comments here I'd say fixed term accounts are unsuitable for cash savings too.

bowlhead99

TakeCareOfThePennies wrote: »

Selling to cover day-to-day expenses or to cover a period of emergency expenses is not what investing is for. That's what your cash balance is for.

I'd disagree with some of your views (or at least the way you've phrased them) but that paragraph does come across broadly OK and difficult to dispute. At least as a high-level headline.

You are absolutely right that I should not be investing now to cover my day to day expenses which I expect to incur in the next year or few. Similarly, I am not investing now with the goal of providing emergency funds this year or next. This is because investments are volatile, and that approach could be reckless.

However, the reason I am investing in my 30s is ultimately to provide for 'expenses' a long time down the line - perhaps covering the costs of living while an OAP, or making gifts to heirs, or to charities, or whatever I want to do with what I have accumulated other than to generate income for income's sake.

It is also to grow my overall wealth to the extent that I have no concerns about 'emergencies' because any £5k, £10, £20k, £30k chunk of unplanned expenditure (or period of no earnings) can be brushed off, because I will have a net worth of several hundred thousands of pounds.

So, money invested is a method of future-proofing my financial position, and only by accessing the growth in wealth that it creates - relative to cash - can I be satisfied that I will be able to cover any day to day expenses or emergencies without having to work myself to the bone. If I can embark upon that 'investing journey' earlier, rather than building up a stash of cash which can't be expected to keep pace with inflation: I should - mathematically - do better than if I started later because I'd preferred to have enough cash in the bank to handle 97% of all possible emergencies instead of 80% of all possible emergencies.

If you sell in avoidable circumstances, then all you are doing is eroding your capital, leaving you liable to enter a period of stagnation where your portfolio doesn't really grow because you are constantly chasing your tail selling, then putting cash back in, then selling etc.

Effectively, if your money is not in investments, but has been taken out to put into the form of cash, and the cash is then spent (on an emergency or day to day living etc), your wealth will not be growing. Agreed.

What you are doing is cautioning against taking money out of the 'growing' pot and putting it back into cash to spend it, because that puts a halt to your growth and is undesirable. We can see how that is common sense.

However, what you are proposing as the alternative to taking money out of the 'growing' pot to cover spending or emergencies, is not putting money into the growing pot in the first place, and instead deferring investing until one has £x in a non-growing cash pot. We all do that, except our values of £x are smaller than yours, because you are more cautious. Excessively so IMHO, but risk tolerance is personal to everyone.

If a person is earning £30k and able to 'put away' £3k a year, living their comfortable lifestyle with holidays and toys and fun - then after about 3 years of saving they have got £9k. This is a bit less than a third of their salary in cash, although it is a full third (i.e. 4 months) of their 'comfortable/luxury' expense levels and is presumably a lot more (8 months? 12 months plus?) of their "bare minimum to get by if I was unemployed" expense levels.

It is also perhaps two or three or four times the value of a common 'emergency' such as needing a new boiler or surprise car repairs or fixing broken-down white goods or a few thousand pound bill that was generally unexpected and not being separately saved up for. Obviously, new cars and home improvements and special events have their own savings pots.

So at that point, after building up the £9k (and these are just dummy numbers to express the principle of it), the person could IMHO look to 'investing' to start putting away their future yearly £3ks.

Meanwhile in your situation you would keep on going with the 'saving' to build up that cash pot to make it better able to withstand a barrage of major emergencies which occur during a period of low/nil income, without needing to 'dip in' to the investments pot or use bank finance facilities.

So you might leave it another 5 years before you started 'investing', in order to have 80% of an annual income in cash before moving onto the next phase. Because, you feel that only 3 months' income or 4 months' very comfortable lifestyle spending in cash is, as you mentioned, "a joke", and that 6 months' income is the "absolute bare minimum any half sensible person should have". So, you'll do it that way, and then after the extra few years of saving, you'll finally be ready to start putting those annual £3ks into investments.

Then we go on living our lives, both investing our spare cash, and an emergency happens. Both of us have our emergency funds and both of us are OK. Then another and another. Generally we are still both OK to cover life's little problems and a lot of life's larger problems out of our respective cash stash.

However, there will come a point when there is a perfect storm of unplanned events when the required 'emergency funds' is £15k and the cash pot for the less cautious person is only £9-10k.

With £24-25k in cash, you are able to weather the storm from cash with £10k left over, and your portfolio of investments is preserved untouched. The other person needs to go and liquidate £5-6k of their investments to make up the shortfall. They will then need to take three years off investing to build up their emergency funds back to their desired £9k level and then another couple of years replacing the investments. You will take five years off making new investments to build up your emergency fund back from £10k to £25k.

Although your portfolio is able to grow, untouched, while waiting for you to start investing again, it is probably still a smaller portfolio than the other person's who had a head start anyway and had growth on those early deposits. They were already five years' contributions ahead of you and have received growth on that, and are only taking a couple of year's contributions back out, so can afford the following 3 years off. Meanwhile you only had a small pile of investments, which is intact, but you are now going to take another five years off, to focus on your cash again.

What matters for total wealth is how much money you have invested for how long, and at what risk level. If you defer investing in anything above a risk level of 0 for a long time, to get yourself a 'strong base' of cash, you will likely have lower overall wealth at the end of it, as a result of the extra caution. That might be perfect for you and your goals. But to castigate someone for being a 'joke' because they only want 6 months expenses -worth of assets at risk level zero, seems unnecessarily intolerant.

As investment portfolios are inherently volatile, sometimes they have negative periods and sometimes strongly positive periods ahead of the 'average' positive return. If you need to pull money out of investments for spending, you might be doing it at a very bad time, or you might be doing it at a very good time. On average you will be doing it at an average time and missing average growth while the money is replaced. If you defer investing in the first place to build up a monster cash stash, you are instead missing average growth (but maybe massive growth or maybe losses) while you do that.

Either way, both strategies require you missing out on 'average growth' at some point. The person with the 'invest more' approach does not find themselves with a problem, because investments are liquid. He just may find that when getting the money back from the investment, it is worth less than he hoped. On average it will be worth more than if he'd kept it in cash. The cautious approach that ensures you never touch investments after making them, requires you to hold enough cash for lots and lots of eventualities which may never happen, and miss out on the returns.

Investing is a bit like gardening. You mow the lawn, trim the hedges, prune the flowers. But you don't go chopping large chunks off the tree at the end of the garden that's been there since who knows when unless you need to.

This sounds profound, but is actually a poor analogy for the point you're trying to make.

The ongoing 'returns' that the tree makes to the household are the provision of some natural beauty and privacy from neighbours - or maybe it blocks out something unsightly, like the view of a building site or some commoners.

It can probably serve that role whether it is 60ft tall or 80ft tall or 100 ft tall, but it will not serve that role at all while it does not exist. So, if a 50ft+ trunk is what you want, plant it as early as you can, rather than spending half a decade waiting for your lawn to be 97% pretty instead of 80% pretty before you start planting the tree.

Once it is growing, if absolute maximum size is the goal, it is preferable to let it keep growing rather than hacking off a branch to use for firewood. However, if you had left it five more years before you started growing it, you would not have ten branches coming out of it that you could hack off for firewood.

You will not kill the tree and prevent it growing the other 9 branches if you take one away; sure, it will take a while to grow back but you are in no worse position than if your tree was still a relative sapling because you planted it so late. An investment funds portfolio is a special type of tree which can be swiftly liquidated and replaced (swap a deciduous for an evergreen or a pine for a spruce) and if you slice 10% off it you won't kill the other 90%, which will just keep on growing keenly and exponentially.

At the end of your days you will have absolutely no use for a large tree at the end of your garden, because you're dead, so planting it with the objective of taking firewood from it is fine. So there are various things that trees have in common with investment portfolios.

What they don't really have in common with portfolios is that trees do not fluctuate in size in a volatile fashion; they may go up 5% a year but they don't go up by 20-30% in some years and down by 25% in others. Therefore when you are looking to push large cash savings as a priority ahead of investments principally because investments are volatile, selecting a tree as analogous to an investment is a poor choice for your argument.

KGriff

I see there are a number of people here in this thread, who are really in favour of stocks and shares (mainly managed funds), preferably held within an ISA wrapper, rather than choosing to save a majority of their money in cash ISA's, but this strategy is not for everyone.

Particularly for someone in their mid to late 50’s, who may want far less risk to their retirement capital.

Let me present a real-life situation... (sorry this is a bit lengthy, but it is broadly based on someone I know well):

A man and his wife are in good health, in their mid 50’s, married with two children (in their early 30’s) and have the following:

A modest three bedroom freehold house worth £300,000+ owned outright. The home is in good repair. There are no plans to sell the property and it will likely be inherited by the two children.

A holiday home bungalow in the UK at a quiet sea resort.. also owned outright, but shared with another relative ... value £175,000. The couple rarely use the property and are looking at gifting their share of this property to their children now. The children use it more often for their own family holidays.

The couple hold a total of £170,000 in cash ISA' s at this years interest rates approx. 2.1% fixed for two years.

The couple hold approx £40,000 in stocks and shares isa's (primarily, managed funds)

The man holds £25,000 (book cost) in stocks and shares trading account. (Primarily company equities which are regularly bought and sold at small profits after fees and CGT). The reason they are not in an isa wrapper, is because the annual ISA allocation over the years has not allowed them to shelter it at this stage, but eventually it will all transfer inside an ISA wrapper.

The wife also has a stocks and shares trading account, but it is mainly dormant (trading-wise) with minimum funds totalling £10,000 (book cost).

The couple hold a total of £50,000 in premium bonds with continuing 'small' investment of £100 per month (standing order).

The couple hold numerous different bank accounts, but the main three are £60,000 in three Santander 123 current accounts earning 3% (variety of standing orders to fund the accounts and keep them topped up)... direct debits paid from them to take advantage of cash back etc.

Assets include a new car value £15,000 and a medium sized Motorhome value £30,000

Both have private medical insurance which has been in place for over 35 years.

All major assets (homes etc) are fully insured.

The man has £180,000 of life insurance cover. His wife has £150,000 of life insurance cover

Both have made a 'will' leaving their entire estate to each other and in the event of both deaths, everything passes equally to their two children.

The couple have funeral policies in place to help cover their eventual funeral costs

The man (aged 56), took early retirement at 49yrs with a final salary pension bringing in £1500 per month (after tax). This is index linked.

His wife is about to retire (she will be aged 58) with a final salary pension bringing in £1300 per month (after tax)... index linked.

Both have worked since they were 16 years old and will each receive a full state pension at the age of 66yrs. (More than 35 years of full time work for the woman and the man has purchased back his 'stamp' for his 35th year).

The man holds a 'rolling' set of twenty lots of 10 year investment plans, each of which are based on stock market funds and they have begun mature every 6 months with a guaranteed minimum payout of £6000 each (tax free) ... But with bonuses produce lump sums 'more likely' in the region of between £7000 to £8000 ... As they are 'rolling' 10 year investments these will continue to mature until the point where the couple receive their state pension at 66 years.

The two children who are aged early 30’s are married, living in their own mortgaged homes here in the UK.

The couple have no outstanding debts or loans and use a 123 credit card to pay other household bills, fuel, shopping etc which is paid off in full, by standing order each month.

I think I have covered most things and obviously the couple are people I know personally and the stated values and the totals above, have been slightly rounded down for simplicity.

Now I completely understand the position that these two people find themselves in and of course they are on the cusp of their retirement. I can add, that they see their cash ISA money (£170,000) as being completely safe and despite them having a good income from their two final salary pensions and 10 year plans etc. they would never ever consider moving any part of that cash to their stocks and shares ISA and to be brutally honest, I don't blame them.

They have some minimal risk with their 10 year plans, but even those have a safety net of £6,000 each guaranteed.

Their £75,000 (total) in stocks and shares are their biggest risk investment wise, but their plan is to neither increase or reduce the investment in that area, but to eventually move all those funds to a tax sheltered area (converting equities to more 'managed funds' in a diverse portfolio), using future years annual ISA allowance, but first they are aiming to get their cash ISA's to total £200,000 (£100,000 each) in the next couple of years, so it may take 5 or 6 years to fully shelter those assets based on the current amount allowed of annual allocation.

The premium bonds came about because they wanted a 'different' investment that may produce a tax free return should their numbers be lucky enough to be drawn, and because their annual ISA allocation has not allowed them to get their cash tax sheltered at this moment in time.

The couple think the premium bonds and the share investments will eventually go to the grand-children (yet to be born) to help fund their education.

The two homes and remaining 'surviving' assets will pass to the two children.

They were advised independently, that if they live past state pension age, it was unlikely inheritance tax (currently £650,000 joint) will become an issue for their children... It may even be abolished completely before that becomes an issue, if the Conservatives retain political control.

The couple have no plans to buy further property and they enjoy touring UK and France in their motorhome, occasional cruises and short stays abroad.

I'm not saying this couple have an ideal scenario, but I really appreciate why they both now decline to move any more of their cash ISA money to stocks and share ISA's ... Which I think is the point that TakeCareOfThePennies has been trying to get across to people in this thread and other areas of the MSE forum.

In truth they do not wish to risk their 'almost complete' retirement plans, for the sake of seeing their entire investments rise or fall with the stock market. If they did invest it all in shares etc. they would see that as an 'unnecessary' risk to their best laid plans.

Sorry it is a long post I just thought showing this 'true-life' scenario may help show why some people have a difference of opinion, when it comes to cash ISA's and why I do not think that cash ISA's are dead for everyone. I fully understand the point of view that TakeCareOfThePennies is attempting to get across to others here.

People need to be able to choose what they think is best for their future.

brasso

The people you describe sound as if they have total financial security for the present and for the future. Presuming that is/was their financial goal, why would they need to invest in anything at all that carried any risk? They have already reached their destination, I presume.

What seems to set this couple apart from most of us is that they have (I'm presuming) had relatively very large disposable incomes through their working lives. I'll presume they deserved their incomes and did everything legally so good luck to them. They've had enough disposable income over a long enough period to be able simply to stack up cash piles without incurring much risk. Most of us are not in that position, either because our earnings are low or (my case) it took me a while to realise that I needed to think about my retirement. It was only when I got to the age of about 40 and my salary allowed me to start putting money aside, that I got interested in investment because I calculated that simple cash savings wasn't going to cut it.

All that said, the original question was "What would you do with 40-50K with the view of making some income/investment?" which, to be honest, is not really relevant to your long description of this enviable couple's position. The "advice" given to the OP from 'TCOTP' was not, in my opinion, ideal, or certainly not without knowing much more about their circumstances.