Premium Bonds - Stock market crash

tomo92

Hi everyone,

What do people think of this idea I have just thought up... I'm not sure if it is a new idea however I have never heard of it before.

While waiting for the inevitable stock market to crash, rather than keep investing my money into S&S as I currently am.... I increase my monthly purchasing of premium bonds. When the stock market "crashes", sell up my premium bonds and invest the money into S&S.

This has the benefit of potential earnings from premium bonds while waiting for the crash and at the same time my money will not decrease as it would if it was invested in S&S. It keeps my money liquid and ready to take advantage of the crash.

I am in no way suggesting when the next stock market crash will be, but in principle do you think this plan would work?

T

takesyourchances

one word, no - unless you have a crystal ball - will the market rise 50% before it crashes 40% and so on....guess work

bostonerimus

It might work, but it might not. Take a bit of time to look at asset allocation and the statistics of possible future portfolio values give historic returns. Whatever you read, think or feel you cannot know the future so it is best to use a strategy that maximizes some predetermined success criteria based on the statistics of past markets rather than absolute gain based on a hunch.

Malthusian

It's called timing the market and is old as the stockmarket itself. Sorry to disappoint.

If you do this you will most probably never buy back into the market and will lose a large amount of money through missing out on reinvested dividends and timing your re-entry badly.

"The market is at its peak, I'll sell all my equities"
-> "I may have lost out on some gains but the market is still going to crash at any moment so I haven't actually lost anything"
-> "The market is crashing! I was right!"
-> "Still further to fall, I won't buy yet."
-> "This is a dead cat bounce."
-> "Equities are overbought and structural weaknesses remain."
-> "The market is at it's peak, I'll wait for a crash."

After all that you'll have been sitting in cash for 10+ years and made yourself potentially 33% poorer through loss of reinvested dividends alone.

Rheumatoid

The returns on Premium bonds (bar the chance of a large win) are often worse than some savings accounts. Why not put your money in those instead if you decide you don't want to keep investing in S&S until a crash!

redux

Look at the stock market performance since the last big crash in 2008, and ask yourself when in that timespan you wish you had started your idea.

I think the answer will be not yet.

JimmyTheWig

tomo92 wrote: »

While waiting for the inevitable stock market to crash
...
I am in no way suggesting when the next stock market crash will be

As you point out, you don't know when the next crash will be, but there is bound to be one.
The question is, however, when it does crash, will prices fall below today's prices?

If the crash comes next week, then certainly they will. In which case your plan is brilliant.
If the crash comes in 5 years time, then probably they won't. In which case your plan is terrible.

It's like chopping and changing motorway lanes in heavy traffic. You know that your lane will slow down at some point but you don't know when. So you don't know when is best to change lanes. And so the best thing to do, generally, is pick a lane and stay in it.

Thrugelmir

You should hold a diversified portfolio at all times. Not just when you think the wind might change direction. Crashes occur because no one expects them.

Malthusian

Thrugelmir wrote: »

You should hold a diversified portfolio at all times. Not just when you think the wind might change direction. Crashes occur because no one expects them.

And in exactly the same way, nobody expects bull markets either.

People think timing the market must be easy because they look at the stockmarket graph now and say "The FTSE 100 was at 3,750 - how could you not invest?" But nobody was saying that at the time. If they were saying it, the FTSE 100 wouldn't have been 3,750.

3,750 may have been the best time to invest with hindsight but at the time it felt like the absolute worst. Nobody was talking about it being the bottom of the market and the perfect time to invest. Everyone was talking about a permanent recession, about how the debt bubble would take decades to unwind, and producing very convincing graphs showing the Baltic Dry Index indicating that the world economy was grinding to a complete halt.

If you had told people that you were going to invest in the stockmarket in March 2009, 99% of them would have told you you were mad. "Cash is now king" they'd've said. "This is the new normal" they'd've said. "It's now about return of capital, not return on capital, hold what you have and cut your cloth" they'd've said.

For all we know the OP may have been one of the miniscule percentage of people who ignored the opinion of every single other person in the market, bought in and made a huge gain. The odds are however strongly against it.

Prism

Thrugelmir wrote: »

You should hold a diversified portfolio at all times. Not just when you think the wind might change direction. Crashes occur because no one expects them.

I know thats good general advice but when you really don't need the money for at least 10 years or so (such as a pension) you can choose to be less diverse and ride out any short term crashes. Within my pension I am 100% equities and don't see that changing for years to come. Of course within those equitie holdings it is better to be somewhat diversified than not. There is no real need for cash, gold, bonds etc when shares provide the best returns long term.

kidmugsy

Rheumatoid wrote: »

The returns on Premium bonds (bar the chance of a large win) are often worse than some savings accounts. Why not put your money in those instead if you decide you don't want to keep investing in S&S until a crash!

The PB fund prize receives 1.4% p.a. which is roughly 1.25% for the small prizes and 0.15% for the big ones. So with enough invested you get approx 1.25% p.a. tax-free, plus the thrill of a long odds gamble on the 0.15%. Sounds a good deal to me.

But in the OP's shoes I'd probably start with a regular saver that pays 5% p.a.