Idiot's guide to how money is lost using S&S investments

stoozie1

if this is already on the internet, sorry but Google is not helping!

In an attempt to force myself out of savings and into investments (I *think* it is the right thing to do but my procrastination shows I am nervous) I wondered if the following modelling tool (in the form of bar graphs etc) exists or if I can build it.

In the key statement that investments can go down as well as up and you may not get back all you pay in, I think I am over-catastrophising to what extent this could be true and picturing a whole pot of life savings eradicated.

The more I learn, the more optimistic it looks (If I invested everything I have right now, and made v few gains before the market went down a chunk, and then was forced by personal circumstances to sell in a year's time, even this may only have lost 10% total capital invested) but I am still very new and naive as I'm sure is apparent.

Rather than play around with all the bar graphs and investment planning tools in a 'look what you could gain!' way, I wonder if I can breakthrough my barrier if I model it for myself as 'look how little even worst-case scenario you would lose!' way.

If ayone has followed this:

a) well done
b) does such a pictorial tool exist?

masonic

If you get yourself a copy of Smarter Investing by Tim Hale, then this is discussed at length, with details of past 'worst case' scenarios and their effect on actual investment portfolios of varying risk levels.

AnotherJoe

stoozie1 wrote: »

if this is already on the internet, sorry but Google is not helping!

In an attempt to force myself out of savings and into investments (I *think* it is the right thing to do but my procrastination shows I am nervous) I wondered if the following modelling tool (in the form of bar graphs etc) exists or if I can build it.

IMO that would give you a false assurance.

In the key statement that investments can go down as well as up and you may not get back all you pay in, I think I am over-catastrophising to what extent this could be true and picturing a whole pot of life savings eradicated.

Yes, you are, thats seriously unlikely unless you put all your money into a very few companies (not funds, companies) and also are nervous enough you wait until markets are seen as high, jump in, as soon as they drop you sell, rinse and repeat.

The more I learn, the more optimistic it looks (If I invested everything I have right now,

Dont do that !!!! I wouldnt even do that as a theoretical exercise.

and made v few gains before the market went down a chunk, and then was forced by personal circumstances to sell in a year's time, even this may only have lost 10% total capital invested) but I am still very new and naive as I'm sure is apparent.

Dont invest money you may ever conceivably need in the short term. I lost a complete holding of $10k US a couple years ago overnight ( class action lawsuit proceeding but thats another story) point being that was not money i needed short term. But it does make the point about not investing in single companies.


Rather than play around with all the bar graphs and investment planning tools in a 'look what you could gain!' way, I wonder if I can breakthrough my barrier if I model it for myself as 'look how little even worst-case scenario you would lose!' way.

Well for a start, dont invest more than your risk tolerance will let you lose half of (since a global crash of 50% would be just about unprecedented )and only invest in funds with a wide spread of countries and sectors (eg finance, oil, pharma, tech etc) . eg if you have £10k and couldn't under any circumstances stomach losing more than say £3k, only invest £6k in a global fund and put your £4k in premium bonds or something similar. that way even with a 50% drop ypur £10k becomes £7k.

If anyone has followed this:

a) well done
b) does such a pictorial tool exist?

Not that I know but its not needed. Dont invest more than you can stomach losing more than half of (not what you can afford to, what you could psychologically tolerate, what you could be sanguine about) (with above proviso of global funds) and dont invest anything you'll need in less than 5 years (absolute minimum and 10 much better)

Linton

The past 7 years have been very lucrative for investors. Dont rely on this happening n the next 7.

Someone who invested 100% in a global equity tracker in May 2008 would have seen the value of their portfolio drop over 40% in 10 months to March 2009. OK, a year later if they simply held they would be back to where they were. But they werent to know that. Would your nerves have held or would you have sold out to limit your losses? Or perhaps switched into bonds. Either way you would have lost the rebound.

And that is with someone investing sensibly. Start investing foolishly and you could lose a lot more without the chance of a rebound..

stoozie1

masonic wrote: »

If you get yourself a copy of Smarter Investing by Tim Hale, then this is discussed at length, with details of past 'worst case' scenarios and their effect on actual investment portfolios of varying risk levels.

Thank you. I have requested this from my local library and will read the chapter as suggested.

AnotherJoe wrote: »

Not that I know but its not needed. Dont invest more than you can stomach losing more than half of (not what you can afford to, what you could psychologically tolerate, what you could be sanguine about) (with above proviso of global funds) and dont invest anything you'll need in less than 5 years (absolute minimum and 10 much better)

I think I'm being dense here, but surely most pension holders who are de facto investors couldn't stomach losing half the pot and remain sanguine? Are there not diversification buffers I can build to avoid it ever being as bad as 50%? Would a % commodities go anywhere towards this?

Linton wrote: »

The past 7 years have been very lucrative for investors. Dont rely on this happening n the next 7.

Someone who invested 100% in a global equity tracker in May 2008 would have seen the value of their portfolio drop over 40% in 10 months to March 2009. OK, a year later if they simply held they would be back to where they were. But they werent to know that. Would your nerves have held or would you have sold out to limit your losses? Or perhaps switched into bonds. Either way you would have lost the rebound.

And that is with someone investing sensibly. Start investing foolishly and you could lose a lot more without the chance of a rebound..

If you always hold on for a minimum of a year, has it always corrected itself to that level? (Barring the late 1920s)

stoozie1

@anotherjoe, sorry another question, you say not to invest everything I have. Thank you.

I was imagining keeping a 3 month buffer, (but OH is on a 6 months full pay 6 months half pay contract in the event of his ill health, so I feel this is conservative)

I discharged my mortgage 14 years early due to MSE, so whilst I hold no physical reserves, I/we do own the house outright which must count for something?

We both have DB pensions.

Do any of those factors change the advice in favour of now investing all (not tied up in house, pensions or emergency cash) pots in S&S?

Linton

stoozie1 wrote: »

If you always hold on for a minimum of a year, has it always corrected itself to that level? (Barring the late 1920s)

No: For the FTSE World Index: May 2008-March 2010 is 1 year 10 months. Jun2001-Dec2005 is 4.5 years.

AnotherJoe

stoozie1 wrote: »

I think I'm being dense here, but surely most pension holders who are de facto investors couldn't stomach losing half the pot and remain sanguine? Are there not diversification buffers I can build to avoid it ever being as bad as 50%? Would a % commodities go anywhere towards this?
)

Hence my example where your pot is £10k and you only invest £6k so you cannot lose half your pot. Putting the rest in PB's in that example was the "diversification buffer" . In a crash commodities are likely to do far worse than equities (and vice versa)

stoozie1 wrote: »

If you always hold on for a minimum of a year, has it always corrected itself to that level? (Barring the late 1920s)

No. There are no rules.

And to answer your last question, if you have good DB pensions that lets you take a higher risk for a longer time period all other things being equal, but even so I'd still urge you to only invest what you are comfortable with, you shouldn't just go for higher risk just because you can.

DiggerUK

stoozie1 wrote: »

.......I think I'm being dense here, but surely most pension holders who are de facto investors couldn't stomach losing half the pot and remain sanguine? Are there not diversification buffers I can build to avoid it ever being as bad as 50%? Would a % commodities go anywhere towards this?.......

No, you're not being dense.....nobody wants to lose anything, let alone 50%

Gold is the only commodity that fits the role of diversification you seek. Even the most anti gold advisers begrudgingly acknowledge that 10% of savings is acceptable.
Digger Mansions has a much greater percentage in our 'easy access' than that, but we understand what we are investing our retirement savings in. Research if it interests you.

Like you we are mortgage free, with final salary pensions..._

bowlhead99

DiggerUK wrote: »

Gold is the only commodity that fits the role of diversification you seek. Even the most anti gold advisers begrudgingly acknowledge that 10% of savings is acceptable.
Digger Mansions has a much greater percentage in our 'easy access' than that, but we understand what we are investing our retirement savings in.

Yes, gold price moves up and down wherever it likes whenever it wants and doesn't care what equities are doing.

So when it goes down by 50% your equities might not necessarily have gone down by as much and you could sell some of them to buy more gold and peculate that gold would recover faster. Similarly when gold goes up by 50% the equities and bonds in your portfolio might have also gone up by the same amount, or more, or less, or might even be down. So if the equities are down relative to equities you could sell some gold at a relatively high valuation to buy some more equities at a relatively cheap valuation.

As such, gold can be a diversifier to an equity and bond portfolio and as a commodity it potentially has some inflation-protection characteristics, particularly when interest rates are low and none of the other safe assets are producing an income either.

A problem of using it as a diversifier in your portfolio and being able to benefit from its periodic relative high valuations by rebalancing back into cheaper equities, is that you might get the "gold bug" and find it psychologically difficult to ever sell, preferring instead to use it to build Digger Mansions Then you are not benefiting from the diversification benefits in terms of taking advantage of relative valuation changes at different times, just maintaining a separate and distinct holding and hoping that long term it does as well as the other stuff.

If you are already have a house paid off and DB pensions providing guaranteed income and are not looking for any growth because you already have enough, something like gold that sits there and doesn't grow is probably fine. It tends to feature more in defensive portfolios for people looking to try to protect existing capital with no real-terms growth requirement, than ones where people are looking to build assets first and foremost.

OldMusicGuy

stoozie1 wrote: »

I think I'm being dense here, but surely most pension holders who are de facto investors couldn't stomach losing half the pot and remain sanguine?

I have built up a large DC pot with no DB pensions to fall back on and am retiring next year. The only way I can sleep at night is to hold a large chunk of my pot as cash to avoid just such a circumstance!