compound interest and the avg % year on year

GotPrincess

Alexland said:

Based on current asset valuations I would agree with Another_Saver's estimate of around 3% pa nominal return (maybe 1% above inflation) on VLS80 as a reasonable return assumption. Some years it will do much better and other years much worse. It's not very motivating but where else are you likely to get a more favourable level of return? Our investments are more adventurous with lower costs so aiming for around 2% pa above inflation.

Exactly as mentioned in other replies I'd love some more exotic funds that have bigger upside as well as the cliff edge i might be chucking the money over

MaxiRobriguez

GotPrincess said:

Alexland said:

Based on current asset valuations I would agree with Another_Saver's estimate of around 3% pa nominal return (maybe 1% above inflation) on VLS80 as a reasonable return assumption. Some years it will do much better and other years much worse. It's not very motivating but where else are you likely to get a more favourable level of return? Our investments are more adventurous with lower costs so aiming for around 2% pa above inflation.

Exactly as mentioned in other replies I'd love some more exotic funds that have bigger upside as well as the cliff edge i might be chucking the money over

Bigger rewards mean taking bigger risks. It means you need to lock away your money for longer to ride out the volatility which comes alongside the gains. Historically those seeking better returns have a bigger allocation to emerging markets and smaller companies, although that strategy wouldn't have worked over the past decade as big American companies dominated the gains.

Perhaps best to work out what sort of return you need to achieve your goals, rather than seek the best returns? The best investments are those that should meet your goals with the lowest risk possible.

GotPrincess

MaxiRobriguez said:

GotPrincess said:

Alexland said:

Based on current asset valuations I would agree with Another_Saver's estimate of around 3% pa nominal return (maybe 1% above inflation) on VLS80 as a reasonable return assumption. Some years it will do much better and other years much worse. It's not very motivating but where else are you likely to get a more favourable level of return? Our investments are more adventurous with lower costs so aiming for around 2% pa above inflation.

Exactly as mentioned in other replies I'd love some more exotic funds that have bigger upside as well as the cliff edge i might be chucking the money over

Perhaps best to work out what sort of return you need to achieve your goals, rather than seek the best returns? The best investments are those that should meet your goals with the lowest risk possible.

I'm not really goal orientated as such I have a nice business I guess I really should list more about myself and that business so you get an idea of what I earn etc but overall I don't really have any plans for the money aside from using it to live on in 30-40 years time if i make it past that age.

I know one area I'm extremely low in is my pension I have contributions to a state pension which I know isn't great at my age I've been employed 70% of my adult life along with stints of unemployment however I'm reluctant to invest in a personal pension mainly because if I don't get to retirement age then that's just money wasted IMO you may all laugh its just a point I will never change my mind on hence me wanting to start saving/investing.
I will start a new thread about my personal circumstances and you can all throw in your opinions which i'll obv respect as long as its a two way street. 

Another_Saver

GotPrincess said:

Another_Saver said:

You're asking for a few things.

1. Working out a long term return expectation.

We all know the market goes up and down in the short run, but in the long run it smoothes out towards some kind of average return. For bonds it's easy, look at the yield to maturity of vanguard's global bond index fund, currently 0.7%. Takeaway the fees of ~0.4% leaves 0.3%. but that's only over the maturity of the bonds already there, when they mature they will be replaced, probably by higher yielding bonds (academic prediction). So whereas over the next 9.2 years I know the return on that fund will be at most 0.3% annualised, over the next 30 years I would guess that the real return will be about 0%.
Stocks are much harder to work out, but skipping the academics, the historic average has been 4-6% in real terms, I would say at most 4% over the next 30 years (valuations, interest rates bottoming out, population growth, demographics).
So the real return for VLS 80 should be about 0.2*0+0.8*4=3.2% before fees, 2.8% after fees (if you're on the vanguard platform).

2. Time Vs money weighted rate of return.

You arent just interested in the returns the fund you picked will generate, but the returns the money you put it in it will generate from the date you put it in. This is different. Think regular saver, if you pay in £250 a month for a year at 5%, you don't get £150 interested but about £80.
You can work this out manually in Excel, or use the rough formula (you can work it out precisely using months but I cba):
End amount = annual investment X (((1 + rate of return) ^ years ) -1)/rate of return

E.g.
£300 a month @ 2.8% (real terms) over 30 years is

£3600 X ((1.028^30) -1) / 0.28 = £166k in today's money, a profit of £58k on an investment of £108k. If inflation is 2%, in nominal terms you'll end up with about £300k (if you keep increasing your contributions accordingly).
This information is useless when comparing different funds.

But anything can happen, fees will probably fall, earnings and the % of them you can save and invest tend to rise and peak just before retirement. And if you're thinking about the next at least 17-27 years to retirement you can afford the risk of going 100% equity.

I have assumed you are using an ISA.

Ty for the in depth break down the math is to complicated for me but yes I plan t hold one product that being the LifeStrategy 80% Equity Fund - Accumulation and just continue to pump money into this until im Dead, Retired or Rich haha 

I would like to take on something much more risky that makes up maybe 5-15% of my portfolio however I'm not sure what to punt on in any case it would only be a small % but with the capacity for bigger returns I think the only way to get this sort of return is possibly though buying individual shares but I'm happy to be educated

You're welcome to look but stocks are the best performing long term investment. There is questionable evidence that emerging markets (can) do better over the next 30 years, or small caps. If you're thinking about 5-15% if your portfolio then why not go VLS 100 and remove that safe 20% bonds into stocks. Personally I have a 2/3 UK weighting (I've written a longer post with the reasons https://forums.moneysavingexpert.com/discussion/comment/77871575#Comment_77871575), other have their own portfolios for their own reasons, and VLS already has a nice kick of UK upweighting. If you are going to research something you think can do better than a vanilla global index fund it's important you understand why you think that.

And I guessed a *3%ish REAL total return over the next 30 years! Over the next 10 years I think closer to 1% above inflation is more realistic.

GotPrincess

Here's my new thread guys I'm ready to be roasted!
https://forums.moneysavingexpert.com/discussion/6226013/new-to-investing-my-personal-circumstances-and-what-i-want-to-achieve/p1?new=1

Eco_Miser

GotPrincess said:

I would like to take on something much more risky that makes up maybe 5-15% of my portfolio however I'm not sure what to punt on in any case it would only be a small % but with the capacity for bigger returns I think the only way to get this sort of return is possibly though buying individual shares but I'm happy to be educated

Investment Trusts are companies listed on the LSE whose whole business is investing, not managing investments, actually owning shares in other companies.  Various trust have various objectives from preserving wealth to profiting from the latest fads. See their trade body https://www.theaic.co.uk/ Before you invest in any of these do a lot of reading and be sure you understand how they work. Not only can the underlying investments fall, but the price of the trust can fall further, known as being at a discount.

If you've not found them yet, have a good read of Monevator - an archive of over ten years worth of financial blogs, with good explanations and lots of links.

Eco_Miser

GotPrincess said:

I'm not really goal orientated as such I have a nice business I guess I really should list more about myself and that business so you get an idea of what I earn etc but overall I don't really have any plans for the money aside from using it to live on in 30-40 years time if i make it past that age.

I know one area I'm extremely low in is my pension I have contributions to a state pension which I know isn't great at my age I've been employed 70% of my adult life along with stints of unemployment however I'm reluctant to invest in a personal pension mainly because if I don't get to retirement age then that's just money wasted

What's the difference between the money in the first paragraph (investment via ISA) and the money in the second paragraph (investment via pension)?

With a pension you get at least 6.25% more, thanks to tax advantages, but can't touch it until age 55 (probably 57 when you get there).

In both cases, if you don't live long enough your heirs get it, not exactly wasted though you don't get direct benefit.

GotPrincess

Eco_Miser said:

GotPrincess said:

I'm not really goal orientated as such I have a nice business I guess I really should list more about myself and that business so you get an idea of what I earn etc but overall I don't really have any plans for the money aside from using it to live on in 30-40 years time if i make it past that age.

I know one area I'm extremely low in is my pension I have contributions to a state pension which I know isn't great at my age I've been employed 70% of my adult life along with stints of unemployment however I'm reluctant to invest in a personal pension mainly because if I don't get to retirement age then that's just money wasted

What's the difference between the money in the first paragraph (investment via ISA) and the money in the second paragraph (investment via pension)?

With a pension you get at least 6.25% more, thanks to tax advantages, but can't touch it until age 55 (probably 57 when you get there).

In both cases, if you don't live long enough your heirs get it, not exactly wasted though you don't get direct benefit.

I don't have any heirs and family wise im the oldest of my brothers however were not close and they never helped me when I was on my !!!!!! so I don't intend on helping them when i pop my clogs

bowlhead99

GotPrincess said

I know one area I'm extremely low in is my pension I have contributions to a state pension which I know isn't great at my age I've been employed 70% of my adult life along with stints of unemployment however I'm reluctant to invest in a personal pension mainly because if I don't get to retirement age then that's just money wasted IMO you may all laugh its just a point I will never change my mind on hence me wanting to start saving/investing.

A personal pension can be drawn from your late fifties. For a lot of people that would give about four decades to get your money out before you hit your mid to late nineties - according to office of national statistics the average '40 year old lad' today will live to 85 (so only about three decades of being able to draw personal pension), but one in four will live to 94 and one in ten will live to 98+.

If you make it to your sixties (which the vast majority of 40 year olds do), and you have been investing by that point for 20/30 years (as you have said in this thread that you intend to do), you will look like a bit of a chump when the people around you end up with so much more money than you do for the same cost of investment - because they used pensions and made free money from tax relief, while you refused to use pension because you don't understand them and made it a point of principle never to understand them or have them as something that you would ever change your mind on. 

Now you are on this thread looking for ideas for 'something much more risky' for a part of your portfolio to improve your potential returns, while steadfastly refusing the most obvious thing to do to improve your potential returns which is to take tax relief and get free money from the government towards your investments. You say you are 'happy to be educated' on riskier investments, yet you refuse to be educated on private pensions because, "you may all laugh its just a point I will never change my mind on".

Well yes, we will all laugh that you don't want to understand how much extra money you would make in a pension versus an ISA over the next 30 years, but dismissing out of hand such an obvious good idea is unlikely to make us want to teach you other good ideas.

The way I would think of it is:

- if you put money into a pension and don't make it to your late 50s because you get hit by a bus, you won't ever draw the pension and some other family member will just get to inherit it (this may be an existing family member that you don't care much for, or a future partner you haven't even met yet). You'll be sitting up in heaven or whatever thinking, "dammit I never got to spend my pension. Ah well I'm dead now so I don't need it".

- likewise if you put money into the lifestrategy ISA with the intention of keeping investing for 20-30 years and don't make it to the 20 years because you get hit by a bus, you won't ever get to spend the money and some other family member will just get to inherit it (although there will be less for them to inherit than if you had used a pension because you don't get any money knocked off your income tax if you invest outside a pension, so you wouldn't be able to afford to have invested as much).  You'll still be sitting up in heaven or whatever thinking "dammit I never got to spend my investments. Ah well I'm dead now so I don't need them".

- whereas, if you *do* make it until about 60 (which is more likely than not, given average life expectancy  of age 85 as a 40-y/o today) and you chose not to use a pension... and you look at how much you have in your investments, you'll be sitting here on earth, thinking "dammit, now I'm going to get to spend my investments and I've got thousands less than if I had used a pension because I refused to take income tax relief for the last twenty years of investing, hoping I'd have died by now and I'd have been feeling clever about that decision, but unfortunately I'm not dead and I've got thousands less in my investments to spend in my sixties, seventies, eighties and nineties, compared to what I could have had".

GotPrincess

bowlhead99 said:

GotPrincess said

I know one area I'm extremely low in is my pension I have contributions to a state pension which I know isn't great at my age I've been employed 70% of my adult life along with stints of unemployment however I'm reluctant to invest in a personal pension mainly because if I don't get to retirement age then that's just money wasted IMO you may all laugh its just a point I will never change my mind on hence me wanting to start saving/investing.

If you make it to your sixties (which the vast majority of 40 year olds do), and you have been investing by that point for 20/30 years (as you have said in this thread that you intend to do), you will look like a bit of a chump when the people around you end up with so much more money than you do for the same cost of investment - because they used pensions and made free money from tax relief, while you refused to use pension because you don't understand them and made it a point of principle never to understand them or have them as something that you would ever change your mind on. 
Your point is very valid its just a personal point I am stuck on I don't like the idea of not earning the extra 6% I would investing into a pension however maybe I need to look into contributing to this alongside a regular investment also 

Now you are on this thread looking for ideas for 'something much more risky' for a part of your portfolio to improve your potential returns, while steadfastly refusing the most obvious thing to do to improve your potential returns which is to take tax relief and get free money from the government towards your investments. You say you are 'happy to be educated' on riskier investments, yet you refuse to be educated on private pensions because, "you may all laugh its just a point I will never change my mind on".

Well yes, we will all laugh that you don't want to understand how much extra money you would make in a pension versus an ISA over the next 30 years, but dismissing out of hand such an obvious good idea is unlikely to make us want to teach you other good ideas.

The way I would think of it is:

- if you put money into a pension and don't make it to your late 50s because you get hit by a bus, you won't ever draw the pension and some other family member will just get to inherit it (this may be an existing family member that you don't care much for, or a future partner you haven't even met yet). You'll be sitting up in heaven or whatever thinking, "dammit I never got to spend my pension. Ah well I'm dead now so I don't need it".

- likewise if you put money into the lifestrategy ISA with the intention of keeping investing for 20-30 years and don't make it to the 20 years because you get hit by a bus, you won't ever get to spend the money and some other family member will just get to inherit it (although there will be less for them to inherit than if you had used a pension because you don't get any money knocked off your income tax if you invest outside a pension, so you wouldn't be able to afford to have invested as much).  You'll still be sitting up in heaven or whatever thinking "dammit I never got to spend my investments. Ah well I'm dead now so I don't need them".

- whereas, if you *do* make it until about 60 (which is more likely than not, given average life expectancy  of age 85 as a 40-y/o today) and you chose not to use a pension... and you look at how much you have in your investments, you'll be sitting here on earth, thinking "dammit, now I'm going to get to spend my investments and I've got thousands less than if I had used a pension because I refused to take income tax relief for the last twenty years of investing, hoping I'd have died by now and I'd have been feeling clever about that decision, but unfortunately I'm not dead and I've got thousands less in my investments to spend in my sixties, seventies, eighties and nineties, compared to what I could have had".

.If you make it to your sixties (which the vast majority of 40 year olds do), and you have been investing by that point for 20/30 years (as you have said in this thread that you intend to do), you will look like a bit of a chump when the people around you end up with so much more money than you do for the same cost of investment - because they used pensions and made free money from tax relief, while you refused to use pension because you don't understand them and made it a point of principle never to understand them or have them as something that you would ever change your mind on. 
Your point is very valid its just a personal point I am stuck on I don't like the idea of not earning the extra 6% I would investing into a pension however maybe I need to look into contributing to this alongside a regular investment also