PIBS vs Ratesetter?

caronoel

Mrs Caronoel and I have come into a bit of a windfall recently, and are now sitting on a six figure sum and wondering g where to invest it for the next 3 to 5 years.

We are happy to take a modicum of risk, so I was considering either a crowd funding site like Zopa or Rates ether (offering rate of 5% and up) or sticking it all in PIBS (with rates of 6%)

We have already maxed out on ISAs, and premium bonds and have a couple of BTLs

Thoughts?

caronoel

Any ideas?

PeacefulWaters

Why restrict yourself to a choice of two things?

caronoel

Not restricting myself to these options, but would be in treated in the views of experienced contributors

bigadaj

Not sure if you mean cash or stocks and shares isas but investment funds of some sort would be an option.

There's obviously risk but better return over longer periods than for most asset classes, and the new dividends allowance from next tax year means there's possibly more sense in higher rate taxpayers owning a modest portfolio of income producing shares than there has been before.

This would normally require a longer time frame than that suggested by the OP but is all the money required at that point. Oeics or investment trusts may make sense for some of the money at least, but the answer depends on the entirety of the OPs financial position and income.

The OP may benefit from a visit to an IFA but they will only be able to advise on a. Limited range of options.

bowlhead99

I have some pibs or bank prefs. One thing to be aware of is if a bank bond / share / security is currently giving you 6%, but the risk-free interest rates go up by a couple of percent so that investors demand an 8% return from pibs/prefs instead of 6%, the value of the security will fall.

So for example a bank or building society security is paying ninepence a year and is currently priced at 140p, that's a yield of 6.4% a year (5.9% above base rate). If interest rates generally rise so that the investors in the market decided they need to receive 8.4% a year after considering the risk profile of the financial institution and all the other alternatives out there... then they would only want to pay 107p for something paying them 9p a year.

That would be a 24% loss on your principal. While with the p2p loan, the interest yield is fixed at the start of the contract and all the borrower can do is pay you off early (which he wouldn't do if interest rates rise and he didn't have cheaper alternatives to move to) or default (which he might do if the costs of other debts in his life rose unaffordably).

So, the risks are quite different for bank securities versus p2p.

masonic

caronoel wrote: »

where to invest it for the next 3 to 5 years.

This timeframe rules out most investment options. I would suggest it would be unwise to put a six figure sum (which presumably represents considerably more than 10% of your total assets) into P2P, although that might be a good place for some of the money. The rest, if you are going to need the money within 5 years, would be best placed in high interest current accounts (e.g. Santander 123 sole and joint accounts) and fixed rate accounts. Other options would leave you at too great a risk of losing money when you come to liquidate your holdings in 3-5 years.

grey_gym_sock

corporate bonds with a maturity date similar to your timeframe (of 3-5 years) are possible. either a portfolio of individual bonds, or a fund/ETF of short-duration bonds.

individual bonds will give you a fixed amount of capital back if you hold until the maturity date - unless the company can't pay and so defaults: there is always that risk. and if you sell them a year or 2 before the maturity date, the capital value is usually quite close to the maturity value.

a short-term bond fund is similar, except that it won't gradually unwind and pay the capital back to you as bonds mature: it will instead automatically reinvest the proceeds of maturing bonds in new bonds.

could have some in corporate bonds, some in P2P. note there are some P2P platforms paying a lot more (i.e. 10-12%) than zopa and ratesetter, and on secured loans - see (recent posts in) the P2P thread.

masonic

grey_gym_sock wrote: »

corporate bonds with a maturity date similar to your timeframe (of 3-5 years) are possible. either a portfolio of individual bonds, or a fund/ETF of short-duration bonds.

individual bonds will give you a fixed amount of capital back if you hold until the maturity date - unless the company can't pay and so defaults: there is always that risk. and if you sell them a year or 2 before the maturity date, the capital value is usually quite close to the maturity value.

Corporate bonds are of course an option, but with the shorter dated ones having gross redemption yields of around 2% to 5% (presumably commensurate with risk), it would be possible to buy up a diversified set to yield perhaps 3.5%. If one in ten of these defaulted over a 5 year period, then your 3.5% return would be reduced to just 1.7%. A short dated corporate bond fund is going to yield somewhat less than that, perhaps 3%, but would have some sensitivity to interest rate rises, but of course might be subject to some further capital gains in the mean time, so perhaps you would end up with about 3% if these effects largely cancelled each other out, but you could do better or worse.

Compare those options with a FSCS protected 5 year fixed rate savings account, where you could get 3% and I'd suggest the former options aren't looking so attractive unless I'm missing something.

grey_gym_sock

masonic wrote: »

Corporate bonds are of course an option, but with the shorter dated ones having gross redemption yields of around 2% to 5% (presumably commensurate with risk), it would be possible to buy up a diversified set to yield perhaps 3.5%. If one in ten of these defaulted over a 5 year period, then your 3.5% return would be reduced to just 1.7%. A short dated corporate bond fund is going to yield somewhat less than that, perhaps 3%, but would have some sensitivity to interest rate rises, but of course might be subject to some further capital gains in the mean time, so perhaps you would end up with about 3% if these effects largely cancelled each other out, but you could do better or worse.

Compare those options with a FSCS protected 5 year fixed rate savings account, where you could get 3% and I'd suggest the former options aren't looking so attractive unless I'm missing something.

fair points. i think there's less point in buying the corporate bonds paying 2%, because you could get a similar, safer return from fixed-rate deposit accounts. (though if you don't know exactly when you'll need the money, the deposit accounts may have penalties for early access, or even no early access. corporate bonds can be sold, though for an unknown price.)

i think there's more point in the corporate bonds paying around 5%, of which there are a fair number. as you say, you should allow for some defaults, to get a realistic expected return. (though note that you usually don't lose all your capital in a default.) OTOH, you may (on average) expect to gain a little extra by buying (for instance) a 5-year bond and selling it after 4 years, when it's become a 1-year bond, because the rates on 1-year bonds are usually less than on 5-year bonds.

short-term bond funds seem to pay under 3%, which is less worthwhile. high-yield bond funds pay more, and are usually are pretty short-term (because high-yield debt tends to be issued for shorter terms), but of course have more risk. perhaps the latter is more comparable to a portfolio of bonds paying around 5%.

there's nothing wrong with using fixed-rate deposit accounts, though. at least for some of the capital.

Reaper

It sounds like you are aware PIBS carry some risk, which is just as well as many early investors thought they were virtually risk free. Since then however it has turned out it doesn't take the bank going bust for your investment to get devalued as when banks get short of cash they have tried to alter the terms of PIBS to make them a lot worse. Bank of Ireland were particularly bad on this and more recently Co-Op.

I would say they are similar in risk to a company bond, but lower down the pecking order if the company goes to the wall, so be sure you get a decent yield to compensate.