Investing for Intermediate Term - paying for studies

chrisscole

Hi,

I am interested to get some feedback on kind of portfolio allocation for intermediate term investment horizon. My wife and I have the interesting prospect of her maybe starting studies again next year for the next four years. If it goes ahead, we have a year now to save as hard as possible so we can manage finacially. Given the rubbish interest rates currently in bank accounts, I am considering building a conservative investment portfolio of cash, bonds and shares to give us the best returns possible over this period. For retirement we have a long horizon and not a huge amount of capital, so are very aggresively invested (yes did take a bit of a hit the last month, but nothing to panic about), but for this shorter term goal it's difficult to find much advice on the net.

We will be using those funds through the whole stretch of the studies - so starting 1 year from now, up until the end of the 5th year from now and will have the chance to add to those funds during the summer holidays.

So I am thinking about starting with something like the current allocation:

30% Cash
50% Short term (1-3 year) bond funds
20% Equity growth/income

(bit pessimistic about longer term bonds due to rate hikes and would likely be using an ETF/index fund - although am open to other opinions)

Any different advice on allocations and how allocations would change throughout the four years and how to go about drawing down on the portfolio?

Thanks a lot,
Chris

Alexland

I don't really know what you mean by 'intermediate term' but the Chartered Insurance Institute (who set the IFA exams) definition of short term is less than 5 years, medium term is up to 15 years and long term is anything beyond.

It sounds like you are talking about withdrawing all the money in the short term so you do not have an investment horizon (as the risk of suffering a loss will be unacceptably high) the most suitable answer would be to stay in cash based products.

Alex

masonic

chrisscole wrote: »

So I am thinking about starting with something like the current allocation:

30% Cash
50% Short term (1-3 year) bond funds
20% Equity growth/income

Do you think short dated bond funds are going to deliver more than the 2.0-2.5% per year obtainable from 1-3 year fixed rate savings accounts?

Taking 1-5 year gilts and 1-5 year corporate bonds, returns over the last two years have been -0.7% and 0% for the gilts and 1.7% and 0.7% for the corporate bonds. Good quality bonds (especially) have tended to trade at premiums during their term so the yield to maturity will be very low on short dated bonds.

20% equities is appropriate for a 5 year view, but it seems your wife will have spent all of this money before 5 years is up. I don't really see that you can invest money that she will need and would probably be best off sticking to the best available current accounts/regular savers/fixed rates and make use of an instant access account like Marcus for the short term savings when you've filled the current accounts.

chrisscole

Thank you both for the info.

The stock allocation was for the later part of final year 2022 - 2023:

Year 1 start Sept 2019 - cash allocation
Year 2 2020 - cash + bond
Year 3 2021 - bond
Year 4 2022 - bond + equity
Year 4 end summer 2023

and would probably only be putting money into that only in the first year. If the stock market portion goes decently into plus, would then move it into bonds or cash. As to 1- 3 year bonds, was considering hedged US or International bonds, as the interest rate is attractive at the moment and 3 yr duration is enough to mitagate against credit rate risk (something like Vanguard's Global Short-Term Corporate Bond Index Fund which currently has a 2.5% yield and 3 yr average maturity). From what I see there are also one or two floating rate bonds around in UK. UK bond market like you say is even less attractive at the moment than others. But the current accounts like you say may be a better idea.

As you're talking about Financial Advisor info, can you recommend any books/resources to build up knowledge to IFA level without taking courses?

Thanks again,
Chris

Alexland

I found my 2015 edition R01 module (which covers this stuff) study text on ebay for about £3 inc postage. The seller might have suffered a small loss. Reading books has been a lot cheaper and more satisfying than paying an IFA 0.5% PA to manage my investments. The other modules might also be of interest to you.

https://www.cii.co.uk/qualifications/diploma-in-regulated-financial-planning-qualification/

For the equity if you will begin withdrawing at the end of year 3 (begining of year 4) you have around a 15% chance of crystalising a loss which could be up to around 50%. You may find the below graph useful. Your plan is a short term gamble not an investment.

https://www.nutmeg.com/nutmegonomics/increasing-your-chances-of-positive-portfolio-returns-the-facts-about-long-term-investing/

Alex

masonic

chrisscole wrote: »

As to 1- 3 year bonds, was considering hedged US or International bonds, as the interest rate is attractive at the moment and 3 yr duration is enough to mitagate against credit rate risk (something like Vanguard's Global Short-Term Corporate Bond Index Fund which currently has a 2.5% yield and 3 yr average maturity). From what I see there are also one or two floating rate bonds around in UK. UK bond market like you say is even less attractive at the moment than others. But the current accounts like you say may be a better idea.

Taking the Vanguard global corporate bond fund you mention with a yield of 2.5% - this is about the same rate you could get risk free in a fixed rate savings account. It may be fairly insulated against credit rate risk, but in an economic downturn, it would still be somewhat exposed to market sentiment and default risk - more so than Government bonds. It's hard to imagine there will be further capital gains to be had in the fixed interest sector, but of course not impossible. Personally I would opt for a guaranteed return when the difference in potential returns is small.

As for the inclusion of equities, if you were following a standard decumulation strategy, in favourable markets you'd tend to preserve your cash buffer and sell the equities first (thereby minimising any potential gains), while in unfavourable markets you'd hold them until the end in the hope of a positive outcome, which would be unlikely over a short period of time that starts with a loss. In other words, you'd have little to gain from the exercise.

chrisscole

Thanks for all your answers...going for some of the 5% current/regular saver accounts. No chance in getting that level of return without any risk from anywhere else. Probably worth maxing out these kind of accounts before investing any spare capital anyways - at least for a year.