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

BLB53

The biggest decision imho is asset allocation - selecting the mix of equities/bonds/property/gold etc which meshes with your personality and threshold for risk/volatility. The key is obviously a trade off between maximising return yet providing a sufficiently lower level of volatility to help you not to panic when markets enter a bear phase.

Drip feeding on a monthly basis should help and also regular rebalancing - sell off the assets which have done well in the boom periods eg currently equities, and reinvest in sectors which have lagged behind.

AnotherJoe

Perhaps too late for you OMG but the best time to sort out your day to day spending needs in retirement is in the year or two before you retire (otherwise how do you know you can afford to, or when you can retire? Maybe you could retire a year or three earlier than you guess?)

Knowing that will also give you a guide as to what you need as a cash buffer for a couple of years spending.

Agree with you that if your plans are dependent on the 25% TFLS initially, then just as in the "old days" when people bought an annuity, that moving into very stable investments or just cash makes sense as long as that isn't your 30 year plan.

OldMusicGuy

AnotherJoe wrote: »

Perhaps too late for you OMG but the best time to sort out your day to day spending needs in retirement is in the year or two before you retire (otherwise how do you know you can afford to, or when you can retire? Maybe you could retire a year or three earlier than you guess?)

Already done it. Was planning to retire aged 62/63 to allow 2 to 3 years of max saving once our son has finished university and only have to worry about funding a few years until SP kicks in at 66. But a near breakdown last year due to work pressure and also the fact that I can only contribute 10K pa into my SIPP without getting dinged for tax (nice problem to have, I know) mean I have bought the date forward by two years. I reckon 25 to 30K pa should be enough for our desired lifestyle but we won't know for sure until I am retired.

One scenario I have run shows that I could take the 25% tax free, use up cash we have in ISAs etc and have a tax free income in the 30K range until we are 75. That obviously includes SPs and two small DB pensions my wife has once they all kick in. So in that scenario, the 75% remaining in the SIPP could be invested for the long term, But I'm not making any final decisions until I have retired. My DC pot has grown really well since 2008 (mainly through aggressive saving but there has been reasonable growth in the funds) so my short term fear is pound cost ravaging during early retirement years. Hence my ultra-cautious approach, but it works for me. On as risk scale of 1 to 5, I am probably a -1.......

edinburgher

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.

I have heard 5%, but never 10%.

Malthusian

edinburgher wrote: »

I have heard 5%, but never 10%.

That's because these advisers only exist in the padded cell somewhere in Digger Mansions where Diggy keeps his strawmen.

I wonder how much of Digger's portfolio would actually be invested in gold if you correctly valued his final salary pensions and included that in the total portfolio figure.

There is no universal agreement on how much is a sensible amount to put in gold, or precious metals or commodities generally, or any reason it should be a multiple of the number of fingers on your hand. But 5% is somewhere around the level where most people can shrug off a permanent loss providing the rest of the portfolio makes money.

That said, if you give someone an annual statement showing that their 60% in equities went up, and their 35% in bonds went up, and their 5% in commodities went down, the first thing they will want to talk about is why their commodity holdings have done so badly.

EdGasket

Worst case is you can lose the lot; plenty of big and small companies gone to the wall. I was even unfortunate enough to be in a fund that went bust; basically lost the lot in that. That is the extreme case but it is possible to lose everything. If you are risk averse stick to global tracker funds but be aware of the currency risk i.e. if Brexit is a roaring success and the £ doubles in value then your 'world' fund would likely halve in value due to exchange rates.

atush

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

This is, of course, completely wrong. A FTSE 100 tracker is actually quite high risk, as it is just UK, and not whole of market but just the top companies by size.

For a UK only investment (still higher risk) an all share would be better, and better yet a global tracker.

Plus

stoozie1 wrote: »

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.

One thing to understand and be wary of is your own psychology.

Let's imagine the price of, I don't know, toilet rolls goes up and down and you're a dealer in toilet rolls.
When toilet rolls are cheap, that's the time to buy.
When they're expensive, that is the time to sell.
Common sense, right?

On the markets, when things have risen a lot there tend to be news articles saying how the market has gone up lots and people made loadsamoney. When these appear in the popular press, naive investors buy thinking they can only win. But they're actually buying when the market is expensive and has limited room to rise.

Then there's a correction and prices fall. What those naive investors should do is buy more - after all, the shares are cheaper now. But instead they panic and sell, swearing never to go near the market again.

That means the naive investor buys expensive and sells cheap, when they should be buying when cheap and selling when expensive. They panic because they invested beyond their risk tolerance, and their actions made it worse.

Maybe you're entirely fine with losing 5/10/20/50/80% or whatever your personal risk tolerance is. But the paradox still applies: things that have recently done well are (in general terms) going to find it harder to maintain that performance. While things that have done badly can more easily turn around. The markets often overshoot, going too high or too low and then correct.

This is 'reversion to mean', and is just what happens in noisy systems. The difficulty is wrestling between the two competing influences. Reversion to mean would tend to impede upward and downward trends, but underlying effects (eg a stellar company/sector or one that is failing) would cause the trend to continue. By looking at the past performance you can't tell how much is fluke and how much is fundamentals.

So is share X or fund Y or market Z going up because it's a good investment and so you should invest now to follow it up? That's what natural human psychology makes us think. Or has it had a good run and you should find an unloved example to invest in instead? You have to fight your psychology to throw good money after bad. The hardest thing is you can know that humans think like this and you should do the opposite - but you're still trapped in that thought process.

Malthusian

EdGasket wrote: »

If you are risk averse stick to global tracker funds but be aware of the currency risk i.e. if Brexit is a roaring success and the £ doubles in value then your 'world' fund would likely halve in value due to exchange rates.

If Brexit is a roaring success and the rest of the world continues largely as it is, then your world fund would be worth as much as it was before, it would just buy you fewer pounds. (©1967 Harold Wilson.) But your holding in the world fund in pounds would buy twice as much stuff as long as it came from somewhere outside the UK, so I doubt most UK investors would be feeling too bad, unless they were absolutely determined to.

The scenario you describe does however reinforce why most people prefer to have a bias towards their own country in their portfolio.

*edit*

I was even unfortunate enough to be in a fund that went bust; basically lost the lot in that.

Geared?