Investing house deposit funds for unknown period of time

aroominyork

Eco_Miser wrote: »

Alternatively, he could buy VLS60 now, sell it when he wants to buy a home, and buy VLS100 with a proportion of the realised cash.

Interesting point. Is there no difference between a) selling 40% of a VLS60 fund and investing the balance in VLS100, and b) selling a bond fund (VLS0 equivalent) in which he invested 40% of his funds and retaining VLS100 in which he invested 60%?

Edit: I've just run this with some dummy numbers and seen he could do what you propose as the total value would be the same whether in one (VLS60) or two funds, but he would not necessarily realise 40% and switch 60%. If the bonds had risen and the equities fallen he would realise more than 40% for his property purchase.

I'm still interested in views on combining VLS100 with a cautious strategic bond fund. Obviously it's a hybrid passive/active approach but I wonder if there are any other, non-obvious (ie technical bond-related) risks to be aware of?

Eco_Miser

As you've worked out, there's no difference, except in the timing of transaction fees, if any; and that the VLS60 is auto-rebalanced, whereas holding VLS100 and VLS0 would not be.

aroominyork

I am restarting this thread, prepared to again be shot down as I deserved to be last time. The situation is the same: son getting towards end of doctorate with c.£90k put aside for his first property but no idea when he will buy it - unlikely to be in the next three years but could be significantly longer. Part of this is in fixed term savings maturing in the next few months (he also has VLS60 in ISA/LISA) so it's time to decide how to invest this.

My new approach is to base his decision on the proportion of funds he is prepared to lose. He should assume the markets fall soon after he invests and this coincides with when he wants to access the funds. So I have allocated reasonable worst case scenarios to equities, bonds and cash. Global equities might fall 40%, bonds (within VLS) by 15% and cash 0%. He can then choose a maximum loss he is prepared to tolerate; if that was around 15% he could invest 25% in equities, 35% in bonds and 40% in cash for a weighted worst case loss of 15.25% ([25%*0.4]+[35%*0.15]+[40%*0%]).

The other thing to take into account is whether the funds he currently has, combined with any his partner might contribute, already cover the deposit they would expect to put down. If the deposit is already covered he should consider taking less risk since the upside of a larger deposit is outweighed by the downside of suddenly not having enough for a deposit.

Are both parts of this logical?

MarkCarnage

If he has already got enough for deposit (surely the case in almost all areas of country?), then he does need to focus on liquidity and capital protection. Perhaps also needs to take a view on likely future house price performance in area of country he wants to buy.

Problem is that governments have tended to focus on propping up house prices for egregious short term political gain, and have been quite happy to shaft savers to do so. That needs to stop for normality to resume....

For a significant part of it to be in equities, I think that he needs to be looking at 5 years plus as a horizon. I would also caution about holding certain classes of bond investment thinking that they might be 'safe'.

Only consolation in an armageddon scenario might be that house prices wouldn't or shouldn't be defying gravity either.

aroominyork

Unfortunately he doesn't know whether he will buy within five years or even whether he will be in the UK, let alone which part of the UK. Re bonds, recently I isolated the bond element of VLS and found that over five years it had performed better then Jupiter strategic bond, which for me is the best relatively cautious fund in its sector. I am loath to select actively managed funds for him (and there isn't a cat's chance in hell of him doing so for himself) so unless there is a very clear and logical alternate to the bonds within VLS I wouldn't advise him away from them. I will however be asking him to decide if he wants to continue overweighting the UK in his equities.