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

Linton

OldMusicGuy wrote: »

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!

A rather risky strategy as cash will steadily lose value to inflation. Inflation is low at the moment but has been much higher in the past and could be again. If you plan to draw down for the rest of your life a significant part of your pot wont be touched for 15-20 years. It is foolish in my view not to invest this money in equity.

Glen_Clark

OldMusicGuy wrote: »

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!

With Government borrowing still increasing, and now Brexit, how can you be sure your (Sterling?) cash won't fall in value more than, say, a cheap tracker of the world's 3,000 biggest companies?

kidmugsy

Linton wrote: »

A rather risky strategy as cash will steadily lose value to inflation.

At the moment, yes. But there have been long stretches since 2000 when the personal investor who actively managed cash could beat inflation comfortably. It's professional investment managers who find it hard to beat inflation with the cash investments available to them.

kidmugsy

Glen_Clark wrote: »

... how can you be sure...

Saving and investing isn't a matter of certainty.

Stubod

...another interesting thread...

We to are fairly new in coming to terms with S&S's after years (decades) of "savings", (ie as opposed to investments). For a good few years most savings accounts seemed to offer a slightly better rate than the current inflation rate and if this were still the case I would still not go the SS route as technically I am happy that we have "enough" and all I want is something that "guarantees" keeping pace with inflation...but what? (We have a few NSI index liked, but these are no longer available).

So a few years ago we transferred our Cash ISA's into SS ISA's, but only in the "low risk" category. (Currently averaging about 5% return)

It would be useful to know what the "worst case" scenario is likely to be but I guess you won't know until it happens.

Firecalc can give some indication regarding risk analysis and various worst case / best case scenarios, but again only based on past performance.

Linton

kidmugsy wrote: »

At the moment, yes. But there have been long stretches since 2000 when the personal investor who actively managed cash could beat inflation comfortably. It's professional investment managers who find it hard to beat inflation with the cash investments available to them.

How do you actively manage cash in "a large DC pot" in a SIPP?

AnotherJoe

OldMusicGuy wrote: »

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!

Over 20-30 years of holding it in cash its most likely to lose half its value by you doing exactly that. Far more likely than holding a widespread set of investments which will at worst keep pace with inflation and almost certainly outpace it by some margin.

steampowered

Here is a graph showing what has happened to the FTSE 100 since 1984. This is hopefully the graph you are looking for.

As a new investor, low cost FTSE 100 tracker funds are a reasonable place to start.

Note that the graph shows capital return only. If you leave dividends to be reinvested, they will compound over time. The average dividend in the FTSE 100 is currently 3.9% per year.

As you will see from the graph, there is really only one point in the last 30 years at which your investment would have halved - which would have been if you invested just before the dot com crash. Even then, if you had kept your investment for a year or two rather than panic selling at the bottom of the market, you would have recovered all of your losses. I therefore think that the suggestion of being prepared to lose 50% of your money is much too pessimistic.

Of course if you choose to select a small number of individual shares rather than investing in a balanced fund, the possibility of losing money is much greater.

Of course you also need to remember that you are losing money at the moment. Inflation is eating away the value of your savings. You can't avoid risk - if you don't take investment risk you'll be taking inflation risk instead.

AnotherJoe

steampowered wrote: »

Here is a graph showing what has happened to the FTSE 100 since 1984. This is hopefully the graph you are looking for.

As a new investor, low cost FTSE 100 tracker funds are a reasonable place to start.

I would say that a global tracker would be a far better place to start. With Brexit there are arguably far better growth prospects and certainly its much less risky than having everything in one country only, and just a handful of business sectors, only 3 really - mining of one sort or another, finance and drugs of one sort or another.

Note that the graph shows capital return only. If you leave dividends to be reinvested, they will compound over time. The average dividend in the FTSE 100 is currently 3.9% per year.

True but the FTSE has still been a miserable place to be invested the last 20 years.

Of course you also need to remember that you are losing money at the moment. Inflation is eating away the value of your savings. You can't avoid risk - if you don't take investment risk you'll be taking inflation risk instead.

Very true and something that escapes all those who say "I dont want to take any risk with my money" as they set themselves up to lose a large chunk of it to inflation. Asides the inevitable ups and downs, market indexes long term are bound to at least match inflation.

OldMusicGuy

AnotherJoe wrote: »

Over 20-30 years of holding it in cash its most likely to lose half its value by you doing exactly that. Far more likely than holding a widespread set of investments which will at worst keep pace with inflation and almost certainly outpace it by some margin.

Indeed, I will be restructuring my portfolio once I am retired and I have a clearer picture of our spending requirements. I won't be holding a large amount of cash in a SIPP for 20 to 30 years, that would be silly. But right now the impact of inflation will be minimal over the next 2 to 3 years (especially as we will be "deflating" our lifestyle when I retire) so I am happier to hold a large amount of cash in the short term in my SIPP to reduce the risk of pound cost ravaging. Also, if I decide to take a 25% tax free lump next year, I don't want to run the risk of the total value of my pot going down significantly in the short term if there is a downward correction.