VLS 20 in S&S ISA to use up allowance with H2B ISA

sv600

I'm planning to buy a house within 3-5 years time period when my professional and financial situation will be stronger.

Having total around £50k including £3.4k in H2B ISA with interest rates on savings accounts lower than ever I think about investing cautiously in funds.

Having educated myself a bit about financial instruments and stock market, I would like to invest in low risk fund so that I could use my money within my planned time-span.

I want to invest passively and at first I thought about index trackers, but I understand they are not low risk. They just make me passive instead of active investor and are made of 100% shares, correct?

Then I read about Vanguard Lifestrategy, which seems to be quite popular, especially 60-80. I think that something like Vanguard Lifestrategy 20 would suit me my needs in terms of period of investment and risk levels.

My plan at the moment is to fill remaining 2016/2017 allowance with this fund and possibly next year do the same + convert H2B ISA to LISA and keep rest in cash, but am I not missing anything? I couldn't find much competitors for product like Vanguard 20 for off-the-shelf low cost low risk funds.

And as VLS20 is a fund of funds, this is already diversified, right?

bowlhead99

sv600 wrote: »

I want to invest passively and at first I thought about index trackers, but I understand they are not low risk. They just make me passive instead of active investor and are made of 100% shares, correct?

"Tracker" is just a name for a type of fund that tracks a market index. It could be a shares index or a bonds index or a commodities index like orange juice futures or barrels of oil for delivery in 180 days time. The point is they track specific things up and down. It is passive in that there are no real judgements to be made by a fund manager day to day so he is pretty 'hands off' rather than 'hands on' and doesn't need to charge high fees.

If you tracked an equities index you have a choice of loads and could track a very broad global one. But most of the shares in a broad global index are outside the UK and within the last decade we have seen a global equities index like FTSE All-World or FTSE Global All-Cap suffer 60% drops in the credit crunch.

You are right to say that this sort of thing is not what you want when trying to build capital for a property deposit over a relatively short timescale.

I'm planning to buy a house within 3-5 years

Having total around £50k

Then I read about Vanguard Lifestrategy, which seems to be quite popular, especially 60-80. I think that something like Vanguard Lifestrategy 20 would suit me my needs in terms of period of investment and risk levels.

To be honest (and I am a fan of investing), 3 years is too short to be investing. You generally hear that the absolute bare minimum you should hold a high-equities fund would be 10-15 years because you have to go through a whole economic cycle or more for the 'typical long term returns' to start to reveal themselves, you can get wild fluctuations in short spaces of time which can take ages to recover from.

A 20% equities fund is much less volatile, and if you are risking only more moderate ups and downs, you probably don't have to wait so long for them to recover to only a mild level of loss which might be acceptable. So you might not need 10-15 years. Maybe 5+ is OK.

But your projected 3-5 years for the house purchase is basically going up to and not beyond 5 years, which is quite different to having 5 years as a minimum. The lower end of your range, 3 years is probably half the length of time you'd really want to be investing over for something approaching reasonable results in low risk products, because investing comes with 'up' years and 'down' years and 'nothing' years and you could easily get 3 flat-or-down years in a row.

I couldn't find much competitors for product like Vanguard 20 for off-the-shelf low cost low risk funds.

There is not much demand for really 'low risk' funds from retail investors (as opposed to big institutional investors) because low risks pay very low rewards at present, and consumers such as ourselves have the ability to extract higher rewards from completely safe products such as high interest current accounts paying 5% on a couple of thousand here or 2% on five thousand there with current account perks etc etc, and 'regular saver' products paying 5% on deposits of £400 or £500 a month with several major banks. New 'challenger' banks will pay 2% or more on a two year fixed deposit.

My plan at the moment is to fill remaining 2016/2017 allowance with this fund and possibly next year do the same + convert H2B ISA to LISA and keep rest in cash, but am I not missing anything?

Let's say you invest £10k now and £20k in the new tax year (£4k of it within an S&S LISA) into this product.

Of the £30k, 20% will be in equities, which is £6k. That piece will have a long term return profile of maybe 7% total return, so assume you get that for three years compounded it's 22.5% on your £6k which is £1350 profit. The downside risk over a three year period you could call it 50%, so £3000 potential loss.

The remaining £24k would be in a blend of bond indexes with an annual average coupon of 2-3% and downside loss potential of [something quite a bit less than the equities loss potential]. Maybe 20% loss over the 3 years if interest rates go up significantly around the world (the US Fed is forecast to have two to three rate rises this year alone). So, the compound return of let's say 2.5% for three years will get you around 7.7% on your £24k which is £1850 profit, or there's the potential loss of 20% or £4800.

So, when you buy a 20:80 equity index to bond index portfolio with £30k in it, you are looking at an 'expectation' of £1350 profit (but perhaps £3000 loss) on the equity side, and an 'expectation' of £1850 profit (but perhaps £4800 loss) on the bond side. That does not seem at all attractive when the goal is to be in a position to buy a property ASAP and you could stick the lot in a 2% account and get £1800 of interest over the three years.

Obviously, there's a chance that the markets which are currently close to all time highs could still deliver comfortably above expectations, but if you are 'expecting' a fund to deliver 'above expectations' your expectations are unrealistic and you are are setting yourself up for an uncomfortable result.

So personally, although it is great to see people put a 'toe in the water' and look into investment opportunities for a small part of their capital, I wouldn't really be looking at trying to find a packaged 'low risk' fund such as this. If low risk just means 15-25% risk of loss instead of 50% risk of loss over the short timescale, that still seems like a risk of losing £6000 on £30k, and if that happens you have to save another £500pm for a year to get the money back and buy the house.

If you don't mind that sort of 'gamble' in the pursuit of perhaps getting the house sooner than if you had just used straight boring savings, but with the risk of putting your plans back if the markets are poor, consider this alternative option.

1) Keep saving in cash accounts until you are £5k short of your deposit target in about 3.5 years time

2) Take £5k of your savings to a casino and put it all on one hand of roulette or blackjack, something with close to a 50% chance of doubling it.

3) After one minute, you will either have £10k in your hand, and have completed your deposit build several months early. Or you will have £0 in your hand and have put yourself a good chunk further back from being ready to buy.

That sounds reckless, doesn't it. But it is not actually too different to what you would like to do, which is to use investments to help build your deposit in the full knowledge that investments can go down as well as up and could cause you to need to delay your property purchase while you rebuild more deposit due to unfavourable markets.

And as VLS20 is a fund of funds, this is already diversified, right?

Yes to that bit. I still wouldn't bother though.

Hutchch0920

Can I suggest you go have a listen to this podcast https://meaningfulmoney.tv it is excellent and may help you consider your attitude to risk and how to plan your investments.

dunstonh

Risk is not on/off. It is a sliding scale. Risk needs to be looked at with potential reward. i.e. if the level of risk you are taking worth it for the level of potential reward.

The problem with the very low risk end (of which VLS20 falls into), is that the reward potential is very very low but the risk potential is quite high. So, even though on a typical 1-10 scale, VLS20 may be 2 or 3, it is probably more likely to suffer losses than risk scales 4 or 5 just because of the way things are at the moment. Ironically, slightly higher risk may result in a lower chance of loss than the lower risk.