How do you know which funds to invest in?

BananaRepublic

Audaxer wrote: »

You said you keep 5% cash as an emergency fund which doesn't seem a lot to have to take advantage of the next equity crash, but I suppose it's a balancing act as to how much cash to keep for that purpose. I have been moving funds from maturing Cash ISA's over the last year, but as we have been in a bull market for so long, I am more comfortable keeping a bigger cash buffer to hopefully take advantage of an equity crash when it comes.

I don’t keep cash to take advantage of the next crash. As I’ve said, you lose money by doing that so it is best avoided. I do happen to have an emergency fund for when I need cash quick e.g. unemployment, a car etc. Perhaps you have not invested for long so you are under the mistaken belief that you can predict a crash.

Audaxer

BananaRepublic wrote: »

I don’t keep cash to take advantage of the next crash. As I’ve said, you lose money by doing that so it is best avoided. I do happen to have an emergency fund for when I need cash quick e.g. unemployment, a car etc.

But you said "Oddly enough I do that. Once the market has crashed, it’s relatively safe to put in the emergency fund since it shouldn’t drop much more, and will recover soon." So if you invest most of your small emergency fund when a crash occurs, what would happen if an emergency occurred and you needed the money and your investments dropped further. All I was saying is I like to have a bigger emergency fund, part of it to be used to my advantage when the next crash occurs.

Perhaps you have not invested for long so you are under the mistaken belief that you can predict a crash.

I know I can't predict when a crash will occur, but at the last crash I didn't sell the investments in my S&S ISA at that time - I invested a bit more, but I regret not piling more in at the time. I know more now, so I would not be so tentative next time.

BananaRepublic

Audaxer wrote: »

But you said "Oddly enough I do that. Once the market has crashed, it’s relatively safe to put in the emergency fund since it shouldn’t drop much more, and will recover soon." So if you invest most of your small emergency fund when a crash occurs, what would happen if an emergency occurred and you needed the money and your investments dropped further. All I was saying is I like to have a bigger emergency fund, part of it to be used to my advantage when the next crash occurs.
I know I can't predict when a crash will occur, but at the last crash I didn't sell the investments in my S&S ISA at that time - I invested a bit more, but I regret not piling more in at the time. I know more now, so I would not be so tentative next time.

This seems to be a rather circular discussion. To answer your first question, an emergency fund is an easy access fund for dare I say emergencies. Investing in the markets risks a large loss on withdrawal. Obviously investing it after the market crashes incurs risk as the market could drop further, but the risk is greatly reduced. Honestly you are best simply investing. However you clearly like the feel good factor associated with keeping money aside for years, earning nowt, then investing during a crash and making 25% growth in a year.

Come the next financial year, much of my emergency fund will go into my SIPP.

Thrugelmir

BananaRepublic wrote: »

Even when the GFC occurred equities recovered in a couple of years.

Northern Rock and the Bradford and Bingley were nationalised. Abbey National, Alliance & Leicester and HBOS were forced to seek a willing buyer. RBS and Lloyds a decade later are only just pulling through from the difficulties encountered.

Indices alone can be very misleading. As the constituents change (on a quarterly basis). Capital lost is gone forever.

Bonds have been in a 30 year bull market. Questions are being asked if the tide is about to turn.

Alexland

Thrugelmir wrote: »

Northern Rock and the Bradford and Bingley were nationalised. Abbey National, Alliance & Leicester and HBOS were forced to seek a willing buyer. RBS and Lloyds a decade later are only just pulling through from the difficulties encountered.

Yup and if my investments were concentrated into those companies then I would have been very concerned. What's less talked about is the companies that were able to capitalise on those opportunities to grow their market share.

BananaRepublic

Thrugelmir wrote: »

Northern Rock and the Bradford and Bingley were nationalised. Abbey National, Alliance & Leicester and HBOS were forced to seek a willing buyer. RBS and Lloyds a decade later are only just pulling through from the difficulties encountered.

Indices alone can be very misleading. As the constituents change (on a quarterly basis). Capital lost is gone forever.

Bonds have been in a 30 year bull market. Questions are being asked if the tide is about to turn.

Yes, the GFC was very serious and as you indicate the effects are felt to this day. We have had very low wage growth since those days.

darkidoe

Audaxer wrote: »

So if you invest most of your small emergency fund when a crash occurs, what would happen if an emergency occurred and you needed the money and your investments dropped further. All I was saying is I like to have a bigger emergency fund, part of it to be used to my advantage when the next crash occurs.

I think we need to be clear what we define as our emergency fund. The general concept of the emergency fund is to deal with circumstances that are not within our control, eg being ill off work, car breakdown, redundancy etc that may potentially impair our income earning capacity or a situation that would result in an unexpected non-budgeted expense. A sort of self-insurance to tide us over till we regain our regain our income earning capacity.

To hold cash as part of a portfolio as a defensive strategy in anticipation of a market fall is more of an active investing decision. If you look at most funds, they all hold some proportion of cash as part of their portfolio, sometimes whilst looking or waiting for a good acquisition. This is a fair strategy but I would always try to factor this in when calculating my overall returns as there is an opportunity cost to this strategy.

Two ideological difference to how to think of cash but perhaps useful as they each have their own purpose. Of course practically we can still lump it all together and call it cash whilst holding it in easy access accounts.

k6chris

Investing is not a competition to see who made the most money, it is to create an ongoing supply of money to try and maximise the chance it meets your needs. If those needs include sleeping well at night, wanting the comfort of some cash on hand or wanting to be right about an equity pull back then great. Having a chunk of cash sitting an an interest paying account is not the worst thing you can do, but do you have a plan of what you are going to do with it? Are you going to feed £20k a year in as a new ISA period becomes available? Are you waiting for a 10% pull back? 20%?? What happens if the when the market pulls back 50% and things look so grim you are tempted to cash in the other 50% rather than investing your cash??

I think a reasonable plan which you stick to is at least as important as the funds you choose and the exact allocations. Who knows if bonds are a safe bet these days?? The past is a great view of what has happened, but is only an approximation of what happens in the future.

darkidoe

k6chris wrote: »

Investing is not a competition to see who made the most money, it is to create an ongoing supply of money to try and maximise the chance it meets your needs. If those needs include sleeping well at night, wanting the comfort of some cash on hand or wanting to be right about an equity pull back then great. Having a chunk of cash sitting an an interest paying account is not the worst thing you can do, but do you have a plan of what you are going to do with it? Are you going to feed £20k a year in as a new ISA period becomes available? Are you waiting for a 10% pull back? 20%?? What happens if the when the market pulls back 50% and things look so grim you are tempted to cash in the other 50% rather than investing your cash??

I think a reasonable plan which you stick to is at least as important as the funds you choose and the exact allocations. Who knows if bonds are a safe bet these days?? The past is a great view of what has happened, but is only an approximation of what happens in the future.

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