£60k to invest in s&s isa fund - pound cost averaging

icypear

Hello all

I have 40k currently invested in a cash isa and am waiting to add 20k into the isa pot as soon as the next tax year starts, so will have 60k to put into a s&s isa.

I am looking at investing for 7-12 years, I am currently 36 and would say my risk appetite is low/medium, looking to aim for 5%-10% a year.

I am looking at funds, etf's, investment trusts and all other type of isa wrapped investments in equities, still working out what means what, but from what I have understood from my minimal research a world equity index tracker looks a decent bet and should return results as good as if not better than a managed fund with minimal fees.

However, with markets possibly looking toppy depending on your outlook, would investing say £5,000 a month over 12 months be a wiser approach than dumping the full 60k in one go...?

masonic

Nobody knows which would be the best approach, but on average lump sum investing will give rise to a better long term return. If markets rise over the next 12 months and this is followed by a stockmarket crash, then your 12 month drip feed won't help.

You say your risk tolerance is low/medium, whereas your chosen investment (all world equity index tracker) is high risk (short term loss potential of >50%). Nothing wrong with that if you really can stomach the risk, but you might consider a multi-asset fund which would contain bonds as well as equities to reduce the volatility of the fund. A couple of options are Vanguard Lifestrategy and L&G Multi index.

ColdIron

You won't get a sustainable 5% - 10% from a low risk fund, choose one or the other or something in between. 100% equities is not low risk, on a scale of 1 to 7 it would be about a 5

icypear

Thankyou to both of you for replying.

I watched a video series, 'investing demystified by Lars Kroijer' which is where I got the idea for a world equity index tracker, he supports this low cost type of fund strongly.

In regards to a fund that fits my risk profile, what sort of return should I expect? I would be happy with 5% per year if thats acheiveable within my low/medium risk parameters.

Masonic - thanks for mentioning Vanguard Lifestrategy and L&G Multi index , I will spend some time reading up on those. In regards to the weighting of these funds, do you know roughly what % of bonds they have that help stabalize the volatility? Is there any other ingredient I should look out for in a fund other than bonds that lowers the risk. Im not actually totally risk averse, I could stomach a 15% drop but I think that would be my point where I would start to worry if it would bounce back.

As an 'average' Joe with a 10 year (approx) time plan, im trying to get a better picture of what do others in my position usually go for as I am better off going with a tried and tested strategy than doing something thats unconventional. I would rather know now about the potential losses and horror stories that have happened so that I can try and avoid these, I read lots of 5% - 10% to 300% in 5 years stories over message boards but not seen any 'I lost 25% of my initial investment and the fund never recovered' stories.

Fatbritabroad

I'd spend some time understanding what these global asset funds actually are.

For me that helped massively with the thought they can crash by up to 50 % periodically. View your s and s isa as a more accessible version of your pension. When the 2008 crash happened did you stop paying into a pension? Or did you blindly carry on paying into it without even knowing what had happened like I did? Look what happened the years after it crashed.

For me hearing a guy called dave ramsay talk about passive investing (and the same applies to well diversified active investing whatever your thoughts on that argument) really made it click. '' When you are investing in thousands and thousands of companies, the worst that can happen is one of those companies goes bust and you lose 100% of that 'piece'. So Downside is capped at 100%. In contrast the upside is uncapped. It could be 200, 300 or 3000%. If you believe that the world economy will, over time, grow with more people buying more things with more innovation and efficiency, how could it do anything other than increase ''
The key for me is psychologically getting ready for those drops. As an example I put a whole 40k inheritance into the market last year in August. Market tanked 20%. I've simply increased what I've put in and I'm already pretty much back to where I was. Now that may not have happened for many years, such a quick bounce back doesn't always happen but it will happen I believe and ultimately will go above the last all time high. That understanding helps me stay the course.

OldMusicGuy

icypear wrote: »

I watched a video series, 'investing demystified by Lars Kroijer' which is where I got the idea for a world equity index tracker, he supports this low cost type of fund strongly.

He does indeed. But you might be missing a key part of his strategy. He recommends investing in a combination of low risk investments (minimum risk bonds) plus a higher risk world equity index tracking product. If you just have the equity part of his recommended portfolio, you are following a high risk strategy, which seems at odds with your stated risk profile. But maybe you have your bonds/low risk investments elsewhere in your portfolio?

masonic

icypear wrote: »

I watched a video series, 'investing demystified by Lars Kroijer' which is where I got the idea for a world equity index tracker, he supports this low cost type of fund strongly.

There's nothing wrong with going 100% equities with a world index tracker. Ideally your investment horizon would be 20+ years so that you can ride out the worst case loss potential and still leave a sufficient number of 'good' years to end up with a better outcome than other types of investment.

In regards to a fund that fits my risk profile, what sort of return should I expect? I would be happy with 5% per year if thats acheiveable within my low/medium risk parameters.

For 100% global equities, a reasonable returns expectation would be 5-6% + inflation, for 60% equities about 5% + inflation, and for 40% equities about 3% + inflation.

However, based on historical returns, a 100% equities portfolio has an 90% likelihood of generating return of no less than -1.5% per year over 10 years and an annual return >1% over 20 years, whereas a 20% equities portfolio has an 90% likelihood of generating annual returns of >1.5% over 10 years and >2% over 20 years - all these figures are above inflation, so the 1.5% per year loss would not be a negative nominal return, but your investment would lose value due to inflation.

The problem is that bonds in particular (but also equities) have had their prices driven up by the action taken after the global financial crisis and that is only just starting to unwind. So we might be in for a period where returns are closer to the latter set of returns figures than the former long term averages.

Masonic - thanks for mentioning Vanguard Lifestrategy and L&G Multi index , I will spend some time reading up on those. In regards to the weighting of these funds, do you know roughly what % of bonds they have that help stabalize the volatility? Is there any other ingredient I should look out for in a fund other than bonds that lowers the risk. Im not actually totally risk averse, I could stomach a 15% drop but I think that would be my point where I would start to worry if it would bounce back.

If a 15% drop is the worst you would ever be willing to see, then that would limit you to about 20% equities and 80% bonds (and other defensive investments). The worst case loss for such a portfolio was 18% over 2 years in 1973-4, and it took 3 years to recover (contrast with 100% equities which lost 73% over 2 years and took another 9 years to recover)

For someone with such a low risk tolerance, I'd rule out the Vanguard funds straight away and look to the L&G funds, which are better quality for the lower end of the risk spectrum. There are several of these numbered according to their risk profile, for example L&G Multi-Index 3 aims to stay within a risk profile of 3 out of 10, 10 being the most risky. It can vary the amount of equities it holds according to market conditions. It holds a small amount of property exposure as a diversifier alongside bonds.

An alternative to the above is to put 20-30% of your money into a 100% equities tracker and keep the rest in cash. You might even want to consider a 'smoothed' with-profits investment such as PruFund.

As an 'average' Joe with a 10 year (approx) time plan, im trying to get a better picture of what do others in my position usually go for as I am better off going with a tried and tested strategy than doing something thats unconventional. I would rather know now about the potential losses and horror stories that have happened so that I can try and avoid these, I read lots of 5% - 10% to 300% in 5 years stories over message boards but not seen any 'I lost 25% of my initial investment and the fund never recovered' stories.

It's important to remember that markets are at or near all time highs, so there will be no examples of those who invested conventionally, remained invested and lost a significant amount of their wealth. However, there will be plenty of examples of people who sold at market lows after losing too much money and missed out on the recovery.

For 100% equities, 'corrections' of 10% are common and occur every few years, 'crashes' of 20% or more are less common, but typically occur every 10 years or so, whereas more substantial events where losses exceed 30% are likely to be once in a generation.

icypear

Really appreciate the time you have all taken to reply, its given me lots to mull over and research and I have had a good few days reading all about it.

In regards to 100% equities or de-risking using bonds..... my current property is around a 60k mortgage with approx 120k equity in the house, the mortgage rate is 2.1%, you can guess where im going with this!

If I was to assume an 80 equities/20 bonds risk profile, could I simply pay £12,000 (20% of my 60k investment pot) into the mortgage as the de-risking asset. Would this act in the same way as buying bonds which are currently paying less than my mortgage interest?

Or another way of looking at it - would the 120k equity in the house mean I can simply go 100% equities and pay nothing into the 'derisking' pot as im already well up in the derisking department... (120k equity in the house v 60k to invest in equities) ...... and in the future if I ever get to a large enough balance in my equities pot then I can start to add to my de-risking pot by pay into my mortgage? Its a repayment mortgage so I can possibly paying into my de-risking pot every month if my mortgage can be considered as the de-risking asset....

I have lots to think about :-)

masonic

Holding a mixture of equities and bonds has been suggested for psychological reasons, so that you don't experience a larger loss than you can tolerate, and to avoid the worst possible outcome of giving up and selling after your investments have fallen.

Money used to pay off your mortgage is unlikely to serve that purpose, but it would reduce the amount of money you had at risk. If you think you'd find going 100% equities with a smaller sum as reassuring as having a larger sum invested with a lower loss-potential, then that could be an option.