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cautious would-be investor

edited 30 November -1 at 1:00AM in Savings & Investments
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blokedownpubblokedownpub Forumite
19 posts
edited 30 November -1 at 1:00AM in Savings & Investments
A question from a cautious would-be investor -

I have a reasonable lump of cash to invest (around 200k) and have had it sitting in an NS&I account for a good bit over a year awaiting the big correction, which stubbornly seems to not be happening.

I've recently read "Investing Demystified" by Lars Kroijer and his whole shtick (which could be written on a beer-mat) is to realise that being able to outsmart the market is pretty much luck, so the best approach is to diversify as much as possible and balance appetite for risk by varying bonds vs stocks. I'm guessing this is pretty much what the various Vanguard LifeStrategy funds do?

I'm still worried that the world is going to go to hell in a handcart in the near future, so I'm thinking Vanguard LifeStrategy 20%.

Make sense? Better alternatives? Or for this kind of decision I should really be seeking financial advice?

I'm 48 and looking to lock it away for a good while (retirement).

Ta.
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Replies

  • AlanP_2AlanP_2 Forumite
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    Before deciding on what to invest in have you considered what wrapper to put it in?

    If its for retirement would a pension wrapper, with its associated tax benefits, be the way to go for you?

    When do you want to retire?

    How much do you need when retired?

    What is your current situation as regards pension, mortgage, debts, general savings etc?

    Is there a spouse / partner to consider? Children?

    How will you feel and how will you react when markets take a tumble as they surely will at some stage?

    Are you still adding to your overall savings, as a market fall allows you to buy cheaper investments which you anticipate will increase in value over your length of ownership?
  • AlbermarleAlbermarle Forumite
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    https://forums.moneysavingexpert.com/showthread.php?t=6091293

    As a starter for 10 read this thread just posted as well . Initial thoughts are as follows :
    I'm 48 and looking to lock it away for a good while (retirement).
    In which case you have time to ride out market fluctuations , so should be investing at a higher equity level than 20%
    Or for this kind of decision I should really be seeking financial advice?
    Possibly, but most likely the advisor will also recommend a higher risk/return long term strategy than VLS 20, but charge you for the privilege .( OK I am simplifying it a bit )
  • MalthusianMalthusian Forumite
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    I'm guessing this is pretty much what the various Vanguard LifeStrategy funds do?
    Correct.

    But if the world goes to hell in a handcart then companies and countries will default on bonds en masse, and the credit markets will seize up, and Vanguard LifeStrategy 20% will lose money like everything else. That doesn't really matter however as if you'd done nothing, the UK Government would either have defaulted on your six-figure NS&I investment or printed enough money to dramatically reduce the value.

    If we're not talking about hell in a handcart but a normal boring crash like 2008, then you would expect Vanguard 20% to temporarily fall in value by less by other funds. But it will still fall. Once you go below 50% equities you start sacrificing meaningful amounts of return for non-meaningful reductions in risk.

    Vanguard 20% is also much more vulnerable to increases in interest rates (or the expectation of them) than a fund more balanced between equities and bonds.

    If you are worried about the possibility that your future-self might panic during a crash and cash in at the bottom of the market, you should consider seeing an IFA as one of the services they offer as standard is a sense of perspective.
  • PowysshrewPowysshrew Forumite
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    I'm in a similar position, where having recently moved to a SIPP, I have almost all my money in cash.

    I am ready to invest but am concerned if the market is due an adjustment downwards however I am not keen on leaving as cash!
  • eskbankereskbanker Forumite
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    Anyone considering investing in handcart manufacturers? ;)
  • MaxiRobriguezMaxiRobriguez Forumite
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    If you're trying to prevent capital loss with an allocation to bonds then you're going about it the wrong way.

    It would make more sense to drip feed the money in over time, awaiting your perceived crash, at which point you invest the lot...

    And/or you could invest based on fundamental ratios: e.g - you'll invest different proportions when average P/E ratios are at X, Y, Z etc. This means investing less when markets appear to be expensive, and more when they're not quite so expensive.

    But, waiting for a crash when interest rates are so low will likely mean you're waiting for a while. New would be bond investors don't really have any alternative apart to equity if they're seeking growth, so expect equity prices to continue to rise whilst rates are low, even if the macro backdrop weakens a little. It's only in a full blown recession where zombie companies finally die that equity markets are going to see big price declines. How confident are you of a recession over the next 5 years say? How long are you willing to wait whilst giving up dividend gains? :)
  • Thanks folks.

    My hell in a handcart reference I may have been over egging. 2008 levels of crashery, I was thinking. :-)

    Time-frame-wise, at least until I'm 60. I've no mortgage and already have a bit of a pension pot. Just me and my wife to thing about. No kids.

    As it's already cash in the bank then I would think there's no benefit in putting it into a pension? Transferring it into a stocks and shares ISA over time would make more sense?

    So, 60% Vanguard a sensible balance?
  • SonOfSonOf Forumite
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    So, 60% Vanguard a sensible balance?

    Not for a cautious investor.
    As it's already cash in the bank then I would think there's no benefit in putting it into a pension?

    Why not?
    Transferring it into a stocks and shares ISA over time would make more sense?

    For some it. However, pension may be better.
    and already have a bit of a pension pot.
    And is that pension sufficient?
    Is that pension for retirement provision or tax efficiency or both?
  • SonOf wrote: »
    Not for a cautious investor.
    Hmm, OK. Looks like I need to understand the risks. Is 60% pretty standard for a neutral investor at my stage in life?

    SonOf wrote: »
    Why not?
    One thing I didn't mention is that I'm not earning at the moment. Am I right in thinking that the pension is only of benefit if using it to offset income tax?

    SonOf wrote: »
    And is that pension sufficient?
    Alas no.
    SonOf wrote: »
    Is that pension for retirement provision or tax efficiency or both?
    I've used my pension so far for tax efficiency and getting the free portion from my previous employers.
  • MaxiRobriguezMaxiRobriguez Forumite
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    Hmm, OK. Looks like I need to understand the risks. Is 60% pretty standard for a neutral investor at my stage in life?

    60% equity investment will suffer in a market downturn because equity sell-offs typically are bigger than bond gains in any rotation type scenario, and with 60% equity in the portfolio this will be amplified even more. It's not an allocation split for a neutral investor, not at all.

    There's also no guarantee whatsoever that your bonds will gain in a market downturn this time round. If equity markets tank because central banks are raising interest rates to combat unexpected inflation then your bond prices are going to sink in tandem.

    If you want to lower your risk by having divergent investments then you'll probably fare better with gold and cash rather than bonds this time round.
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