Which Fund to Withdraw From?

RedSky1974

Hi

This may well be a silly question, and I apologise in advance for that.

Basically, I have a stocks and shares ISA which I have been saving in for a good few years. Money is to be used when needed when we start a family, to cover bigger expenses, and also when we move house - a new sofa, for example.

There's about 8k between two funds, I was just wondering - say I need to withdraw £1000, would it be better to take it from the higher performing fund or lower performing fund?

From what I can see, if I take it from the higher performing fund, I will have less of a pool of money earning a good interest rate over time. If I take it from the lower performing fund, I will not have made as much money in that particular point in time.



I'm unsure what the best course is ... Sorry if it's obvious, it's early..

Thanks

bowlhead99

If they are the same type of fund, both decent funds, and one has gone up more than the other, and you must sell one: sell the one that has gone up the most. That's because some investment strategies work better or worse over different types of economic conditions, and the funds will each take a turn at being the 'best' over different periods. So the one that hasn't gone up as much yet, is the one to keep, because it's maybe going to take a turn at being better in the future.

After all, the way to make money when investing is to buy at low prices and sell at high prices. There's nothing wrong on selling the one that has made you a big profit because it's gone to a high price.

However, maybe they are two completely different types of funds. For example one invests in company shares and one invests in bonds or property. Or one invests mainly in the UK and the other invests more in overseas markets. In that case it wouldn't make sense to sell one specialist fund and keep a lot more of the other, so you should sell a bit of both to leave you with a balance.

The third approach is to recognise that with less than £8k invested after you withdraw your £1000, you don't really need two different funds. You could sell both of them and then put all the money into one fund which invests in a general mix of investments at a risk level you're happy with.

RedSky1974

Thank you for the detailed reply. Much appreciated and exactly what I was looking for

eskbanker

crouchmagic wrote: »

I have a stocks and shares ISA which I have been saving in for a good few years. Money is to be used when needed when we start a family, to cover bigger expenses, and also when we move house - a new sofa, for example.

There's about 8k between two funds

Does the fact that you've only built up £8K over many years, coupled with intending to use it for the likes of a sofa, signify that you don't have a savings pot in readily-accessible cash form?

If so, and you anticipate needing access to money in the next few years, you might wish to consider derisking your finances by selling at least some of your investments at a time when they've grown by enough to meet your objectives, rather than potentially being forced to do so at a time when they're below this.

dunstonh

There's about 8k between two funds, I was just wondering - say I need to withdraw £1000, would it be better to take it from the higher performing fund or lower performing fund?

I have something in my left hand and something in my right hand. I am not going to tell you what they are but which one of those things is best?

From what I can see, if I take it from the higher performing fund, I will have less of a pool of money earning a good interest rate over time. If I take it from the lower performing fund, I will not have made as much money in that particular point in time.

Are they the same risk level? Is the higher return because you are only looking at a growth period and not included a negative period where the higher performer in the growth years will go down more in the negative years?

Where does interest come into this investment?

An economic cycle is around 10 years (a bit longer at present). So, when you invest, it should be aiming for at least that sort of period. If you are investing for a few years to then buy a sofa then it does suggest you are too light on cash savings.

RedSky1974

This is where we hold our money at the moment:

- easy access saver, mainly used for car expenses on two vehicles and other emergencies if they spring up. Very little interest on this account

- regular saver - yearly. When it matures, it usually gets split among other savings. Re-open a new regular saver every year

- premium bonds - amount goes in here on a monthly basis, used towards holidays, but also easily accessible if needed

- Cash in joint current account where salaries are paid into. - day to day spending - enough for emergencies and whatever else. If we want to buy something, it comes out of here.

- 2 x workplace pensions

- 1 x SIPP




Essentially, years ago before we were married we started putting a small amount away each month so we have money available if needed when we have a baby. Time-frame 5-10 years. Put into a low risk fund. There's about 6k in the low risk fund. The other fund is higher risk, with about 2k in there.

We are aware that investments can fall, therefore we have money available through other means if that does happen. I anticipate that the bulk of the money will stay put and we will continue to contribute an amount on a monthly basis. However, I was just wondering if I wanted to take out say £1000 for a new sofa, which would be the best fund to take that from.

Thanks

bowlhead99

crouchmagic wrote: »

There's about 6k in the low risk fund. The other fund is higher risk, with about 2k in there.

I was just wondering if I wanted to take out say £1000 for a new sofa, which would be the best fund to take that from.

At the moment, you have about three quarters of your ISA money in a lower risk fund and one quarter of it in a higher risk fund. If you are happy with that mix of risks (i.e. 25% of the money is in a higher risk fund), then when you take money out of the fund it would make sense to take a bit out of each so that whatever is left in the ISA afterwards is still in the same ratios that you want (i.e. 25% of the money is still in higher risk fund).

So when you do the £1000 withdrawal, take £250 from the higher risk fund and £750 from the lower risk fund. Then you'd be left with £1750 higher risk and £5250 lower risk, which is still a 25:75 ratio.

You could think of it this way: if you take the £1k from the high risk fund and don't touch the £6k in the low risk fund, your £7k remaining balance would be split £1k:£6k or 14% higher risk 86% lower risk. Or if you take the £1k from the low risk fund and don't touch the £2k in the low risk fund, your £7k remaining balance would be split £2k:£7k or 28.6% higher risk, 71.4% lower risk.

So the question to ask yourself is would you prefer having 25% (as you have now), or 14% or 28.6% of your investments be higher risk.

You have 25% of your portfolio in a higher risk fund at the moment. Perhaps you didn't originally intend to have as much as 25% high risk, maybe only 20%ish... but the markets went through a growth period and the high risk 20% crept up to be 25% today. If that's the case (high risk went up to be more than you originally were comfortable with), then when you next do a sale or a purchase you could take the opportunity to 'rebalance' towards your target mix and try to leave you with whatever mix you would like, which might not be 25:75. That would lead you to sell more than £250 of the higher risk fund.

Likewise if the markets had been falling, and the high risk fund fell a lot more than the low risk fund, you might find yourself with only 10% in high risk and 90% in low risk. In that situation if you needed cash it would make sense to take it from the low risk side to try to change the mix back to the 20:80 or 25:75 that you are aiming for.

So really, "what should I sell?" has the obvious response from people here: "Well, what would you like to be left with?".

If your answer to that is "hmm, I don't know what I would like to be left with", you can't really expect the crowd to respond with anything better than "In that case, how do you expect *us* to know what you would like to be left with...!"