Safe fund beating savings accounts?

Sea_Shell

For what it's worth, and I'm not saying that this IS what you need or should do....

We have, within our ISA, a Mixed Asset 20-60% fund.   It's performance is by no means outstanding, but at the same time it is not as volatile as other, more equity heavy, investments that we have.    

Rightly or wrongly, we have this fund as our, "other than cash buffer" fund, and think of it as our "not as risky" fund, and we too hope to at least beat the interest rates currently achieved by our cash buffer.   Which in the current climate isn't much, our current cash is averaging about 2%.    Year on year to date our fund price is up 1.8%.

We understand that this is in no way guaranteed, but with over 5 years of cash already to hand, we didn't need to hold any more cash, but on the other hand don't want to put it all into our more volatile 100% equities fund.    

Effectively we have 3 fairly equal pots...cash (proper), our "stable" fund, and our "volatile" fund, giving us a balance.

grumiofoundation

sebtomato said:

Gary1984 said:

To get closest to what you want you should probably keep 90% of your money as cash and put 10% into an all world equity tracker. If the tracker returns 6.5% then this would add about 0.5% onto your total return and get you towards 2%. However even then you're at risk of losing 40% of the tracker value in a month so 4% overall and therefore still more than double the acceptable 1.5%.

Ultimately what you want doesn't exist. 

Sorry, not sure that works.
If I had £100 to invest:
* £90 would be on a savings account at 1%, so earning 90p per year
* £10 would be on the stock market. If it was to lose 40% of its value, I would lose £4
Therefore, the return for the year would be minus £3.1 (or I would be left with £96.9, or -3.1%)

In this case the risk of making a loss would be the same as if you investing £100 but the actual loss you would make (if you made a loss) is much lower. 

Sailtheworld

sebtomato said:

eskbanker said:

sebtomato said:

Site likes Trustnet give a risk rating, but it's hard to know what it means.

Explained at https://www2.trustnet.com/learn/learnaboutinvesting/FE-Risk-Scores.html

Thanks, but not sure it means much to the average person likes me.
FE Risk score is relative to the volatility of leading 100 shares in the UK, so the FTSE100 would have a score of 100...
A score of 30 would therefore indicate a volatility 30% of the FTSE100.
Score is calculated of course on past performance (3 year rolling average).
Doesn't really translate well into actual risks to end customers like me...

It means that as the risk score goes up (in line with expected return) so does volatility. Say your current return is 1% in a 1 year account your return will be 1% +/- 0. You could dial up your risk slightly such that your expected return is 2% - the problem being the return will be variable 2% +/- something and it's that something you can't tolerate.

If you want to dial up the risk but want the 2% return to be +/- 0 you're effectively asking for a fund that delivers free money because you're not really willing to take the extra risk.

If you simply can't tolerate that variation in return (which could be negative) then you've got a choice of the mortgage , whatever's on offer from the banks, or, even, spend some of it.

If you decide you could tolerate risk then some suggestions have been made. Depending how much you want to invest the charges may well make it pointless though.

grumiofoundation

DiggerUK said:

sebtomato said:

eskbanker said:

sebtomato said:

Site likes Trustnet give a risk rating, but it's hard to know what it means.

Explained at https://www2.trustnet.com/learn/learnaboutinvesting/FE-Risk-Scores.html

Thanks, but not sure it means much to the average person likes me.
FE Risk score is relative to the volatility of leading 100 shares in the UK, so the FTSE100 would have a score of 100...
A score of 30 would therefore indicate a volatility 30% of the FTSE100.
Score is calculated of course on past performance (3 year rolling average).
Doesn't really translate well into actual risks to end customers like me...

My advice?....if you reduce the mortgage you are getting the best a guaranteed bang for your buck and you are increasing the equity you own in your home. That will at least increase your disposable income..._

If the OP isn't willing to a 5 year fix at 1.8% surely paying off the mortgage at 1.64% would also not be attractive to them? 

Put of interest how does overpaying a mortgage increase your disposable income?

Once the mortgage is fully paid up your disposable income increases but up until that point (if overpaying) you will have less disposable income. 

MaxiRobriguez

DiggerUK said:

sebtomato said:

eskbanker said:

sebtomato said:

Site likes Trustnet give a risk rating, but it's hard to know what it means.

Explained at https://www2.trustnet.com/learn/learnaboutinvesting/FE-Risk-Scores.html

Thanks, but not sure it means much to the average person likes me.
FE Risk score is relative to the volatility of leading 100 shares in the UK, so the FTSE100 would have a score of 100...
A score of 30 would therefore indicate a volatility 30% of the FTSE100.
Score is calculated of course on past performance (3 year rolling average).
Doesn't really translate well into actual risks to end customers like me...

Welcome to the reality of meaningless financial managementspeak. 

As far as I am concerned you asked the wrong question, it was too simple and straightforward. It was obvious what you were after.

It is the mantra of financial advisers and DIY investors that understanding investing is best left to the wisdoms of a priesthood  and that you should just know your place and listen. It's an allegory on the little boy in the court of the naked king.

You must realise by now that asking how you could achieve a better return than 1.3% with lowish risk, i.e., a reduced risk of "getting back less than you invested" isn't likely, they don't know what you are on about. 

My advice?....if you reduce the mortgage you are getting the best bang for your buck and you are increasing the equity you own in your home. That will at least increase your disposable income..._

edit,  welcome to the world of the regular usual suspects and congratulations on standing up to the bullying..._

The difficulty is that the poster wants low risk but dismissed the potential of 10% losses as too much. Even traditional lower risk asset classes like bonds and gold are susceptible to those sorts of losses sometimes.

Poster also says they don't want to lock their money away for 5 years with the 1.8% savings rate, which means their investing time horizon isn't suitable either.

She/he has asked an easy question but there isn't an easy answer because the product they are seeking doesn't exist. As someone else previously pointed out, if there was a 2% paying with very low risk then people would jump on it and it'd be a well known about product.

We've had six pages of this thread and the options available to the poster haven't changed. She/he can either:
1) Take 1.8% on the 5 year fix or pay off mortgage to save 1.64% - both come with very low risk.
2) Take a punt to generate >= 2% in risk funds but accept there's a possibility the money won't be returned. Bonds would typically be the answer but yields are so low he/she will need some capital appreciation (ie, interest rates need to fall further).
3) Mix/match - put 10% into stocks and 90% on paying off mortgage to try and bridge the gap between 1.64% and 2%.

Personally I'm not seeing the necessity to generate the extra 0.36% and accept risk for it. We're talking a couple of years here, not 10+. The effect of compounding is muted on such low figures to the point whereby two years investing £100k and getting that extra 0.36% is only worth £29 a month.

Rather than seeing £29 a month I would forgo that and consider it a price for guaranteed returns.

Anyway, the answers have all been posted - it's up to the OP now to decide where to go from here. 

bowlhead99

sebtomato said:

eskbanker said:

sebtomato said:

Site likes Trustnet give a risk rating, but it's hard to know what it means.

Explained at https://www2.trustnet.com/learn/learnaboutinvesting/FE-Risk-Scores.html

Thanks, but not sure it means much to the average person likes me.
FE Risk score is relative to the volatility of leading 100 shares in the UK, so the FTSE100 would have a score of 100...
A score of 30 would therefore indicate a volatility 30% of the FTSE100.
Score is calculated of course on past performance (3 year rolling average).
Doesn't really translate well into actual risks to end customers like me...

To describe it in a bit more detail:

Generally if you are considering making an investment you will be interested in the volatility, the scale of the potential ups and downs that might be experienced while holding it over the short or medium term. But when trying to compare across different funds it can be difficult to get a sense of that in isolation, because you would expect some market conditions to make all funds generally bobble around in value and other conditions to allow funds to be a bit more stable.  So it is more useful to consider how much is it bobbling around compared to some other recent benchmark, rather than to zero. 

The FE risk score is a bit of a crude tool that looks at the last few years of volatility and compares it to some other index (in this case FTSE100), with more recent months given more weight than earlier months. 

You would generally expect nice 'safe' bond funds to be much lower volatility and the foreign / emerging markets / smaller companies funds to be higher volatility. They have to use something consistent and easy to measure as a benchmark, so FTSE100 is fine.

But because it is a 'live' system, it can be the case that if the FTSE100 has a particuarly rocky patch and some other market doesn't, the fund you're looking at might have a flatteringly low score for a while (because "it's all relative") while still being something whose value changes could take you by surprise. Or if FTSE is tranquil for a bit, some foreign specialist fund might seem to have a particularly high riskscore in the 'last 3 years weighted towards the most recent months' volatility measure, while actually over a 10 year rolling period the scale of its ups and downs and overall performance was no better or worse than the FTSE index. But fortunately, because it's a relative measure, both Fund A and Fund B are both getting a relative score against the FTSE at the same time, so you can see that score of A and compare it to the score of B, which are the two funds you are really comparing.

It's important to note that measuring 'volatility' is some sort of proxy for risk, but being stable is not all you are after. For example, a fund that consistently loses 1% every damn month is pretty stable in what it is doing, but it's not a great investment.  So, FE risk score is just one measure that might be useful when comparing funds to each other across market conditions, but it's not the case that you can say a fund with riskscore 60 will get me 6% so a fund with riskscore 40 will get me 4%. 

DiggerUK said:
Welcome to the reality of meaningless financial managementspeak. 

It is the mantra of financial advisers and DIY investors that understanding investing is best left to the wisdoms of a priesthood  and that you should just know your place and listen. It's an allegory on the little boy in the court of the naked king.

edit,  welcome to the world of the regular usual suspects and congratulations on standing up to the bullying..._

IMHO, if someone is trying to get their head around how investments products work and how they might usefully be compared, I don't think it's particularly useful to dismiss every statistical measure as 'meaningless financial management speak', or castigate people for having expertise in a topic, fearing that they will bully the people who don't have the expertise.

My advice?....if you reduce the mortgage you are getting the best bang for your buck and you are increasing the equity you own in your home. That will at least increase your disposable income...

I agree that sometimes it is useful to 'think outside the box' when considering products on sale, and if you can pay down your mortgage to reliably save 2% on the principal paid off, that may be more useful than buying an investment portfolio that hopefully returns 2% but may deliver -10%.

Of course, they are not directly comparable because if you had bought an investment fund that fell 10% and there was some emergency or opportunity requiring you to get it back, you could instantly sell the investment fund and take back the remaining 90% of the money. Whereas if you pay off a mortgage and some emergency or opportunity comes along, you have a demonstrably lower mortgage debt but can only get your hands on 90% or 100% or 102% of the money you once had, by asking the bank to lend you money against your house. In some financial conditions, this may be difficult or expensive - e.g. if house price falls 25%, a 70% LTV mortgage becomes a 93% mortgage; or if your employment situation worsens, your existing mortgage deal may not exist for 'new' borrowings. 

MaxiRobriguez

We're talking 2 years. Poster could overpay mortgage and take out a 2 year interest free credit card. If worse comes to worst and they need that 10%, they could load up the credit card and then remortgage before the interest free period ends assuming that term less than the credit card.

But I still suspect we're all making this more complicated than it needs to be. 

DiggerUK

All supposedly based on past performance, with no string holding a lot of random thoughts together, just arbitrary mumbojumbo......whatever happened to "past performance is no guide to future performance"..._

Prism

DiggerUK said:

All supposedly based on past performance, with no string holding a lot of random thoughts together, just arbitrary mumbojumbo......whatever happened to "past performance is no guide to future performance"..._

You understand that volatility is not normally used as a measure of performance? Over the shorter term it can be a factor though. The fact that you are invested in gold kind of tells me that volatility isn't a problem for you. It is however for someone looking for a shorter term investment with a fixed withdrawal time period where a burst of volatility can mess up either your return, or your date of withdrawal.

DiggerUK

We live on a volatile planet, in a volatile solar system, in a volatile universe........so what's new? Volatility exists, it's real, get over it, stop making it the foundation for the mumbojumbo of a priestly cast of pontificators of magic pennies.
To claim there is some yardstick by which you can gauge the volatility in financial markets is poppycock.

As to your gold comment, well, what can I say. Is it a cackhanded attempt at a 'non sequitur' or the most blatant attempt to take the thread off topic..._