Cash alternative safest investment

2010

bigadaj wrote: »

Several people have now explained this to you, live on in your ignorance and be happy.

Just remember every investment or goods is only worth what someone will give you cash for on a particular day.

Be happy, I am.:)

bigadaj

2010 wrote: »

Just remember every investment or goods is only worth what someone will give you cash for on a particular day.

Be happy, I am.:)

Though you are aware of the difference between paper and crystallised profits and losses presumably.

It's important to have a base level of liquidity to avoid becoming a forced seller, beyond this then large amounts of cash are a drag on performance.

jimjames

bigadaj wrote: »

Though you are aware of the difference between paper and crystallised profits and losses presumably.

It's important to have a base level of liquidity to avoid becoming a forced seller, beyond this then large amounts of cash are a drag on performance.

As someone who has called the stock market a "gambling den" before I think it unlikely they've done much investing so claiming to be a seller now seems a bit odd. There seemed a similar pattern of ignoring info previously as well
https://forums.moneysavingexpert.com/discussion/5431213

hutman

bowlhead99 wrote: »

Government gilts are safer than company bonds because the government can print money to be able to pay you off, whereas a company cannot.

Short-dated bonds which mature soon are safer than long dated bonds. There is less time for the company to go bust before they pay you off, and also in the current low interest environment it may be relatively easy for them to refinance by issuing new debt to some other investor and get the cash together to pay you off.

Long dated bonds are all priced at way more than their face value, e.g. in the market you have to pay £152 for a £100 bond in Glaxo Smithkline which matures at the end of 2033. Along the way it pays you a headline rate of 5.25% on the £100, but that is much less than 5.25% on the £152 you actually paid, and at the end of the term they don't pay you back the £152 you bought it at, you just get the £100. So for letting them have your money for 17 years, you got an effective yield to maturity of less than 2%.

And even if the 2% sounds OK now, the issue with paying a lot over face value is that the value might drop significantly when the interest rates in the market change. For example, in a few years time when rates have risen, and people demand a return of 5% or more for an investment in a company with Glaxo's credit rating, people will no longer be willing to take it off your hands at a crazy high price which only gets them an effective 2% return. So they may only want to pay you £100 or less for a bond which pays 5.25% a year and returns £100 of capital in the year 2033. In that situation you would have lost a third of your capital (£152 invested, only £100 or less back), if you wanted to get out.

So, short dated (a couple of years or less) is much safer than long dated as you are probably not buying at a price massively over the nominal value and there is minimal time for the borrower to go bust or for the market rates to change and you be forced to cash out because you need the money. And government gilts are safer than company bonds. So this leads you to short dated gilts as the safest option other than FSCS insured cash.

One other option is short to medium dated index linked gilts whose prices are driven not just by interest rates but also expectations of future inflation rates. You receive the declared annual coupon yield on the original nominal value (which as with 'normal' bonds in the current market, will be less than what you pay for it) but the annual coupon increases with inflation. However, current expectations of how inflation (and coupon) will likely rise, are already forecast by the market and worked into the price. As index-linked gilts are popular, the effective yield to maturity with current inflation expectations is negative.

Nice safe index linked gilts maturing in less than about 8 years have an implied annualised NEGATIVE yield of 2% or more. If you get the ones maturing in 2062, you have to pay over £250 per £100 of bond and wait 45 years with payouts of 0.375% of the £100 along the way. So that's an implied negative yield of 'only' negative 1.65%. The gamble is that inflation goes through the roof rather than merely going up to the level the market expects, and then you would enjoy a payout of quite a bit more more than 0.375% on the £100 each year, and not lose so much money even when buying in at over £250.

Tks for clear explanation - one of the best posts I've read!