Starting out in investing

peterp85

csgohan4 said:

risk adverse and medium/high return don't mix, OP you need to set your expectations lower. 

Maybe premium bonds would be more suitable?

Got 50k in premium bonds as my emergency fund.

peterp85

Another_Saver said:

Overpaying your mortgage is great if you want to use this money for a house deposit because it's like you're saving at your mortgage rate.

For 6-8 years, and if you know you want the money for a house deposit, and given your risk profile, imho you should not be thinking about investing at all.

But there are 2 specific reasons as well.

1. Is given current stock market valuations and your short timeframe the chance of making a loss, or not making a profit of at least your mortgage rate between now and then is material.

2. Is you said low risk. The only way to invest low risk is to buy bonds, or a multi asset fund that includes bonds. Say you go for Vanguard lifestrategy or HSBC global strategy, the return you'll get from the bonds element of the funds (i.e. in vanguard lifestrategy 60, 40% of the fund so bonds, in HSBC global strategy balanced it's usually 30-40%) is the yield to maturity of a global bond index fund, currently about 0.7%, and that's before fees. If your mortgage is any higher than that, say 2%, it would be like borrowing at 2% to lend at 0.7%.

I was looking at the Vanguard funds. So over a 6-8 year period you don't think yeild more than overpaying my mortgage?

thegentleway

peterp85 said:

Another_Saver said:

Overpaying your mortgage is great if you want to use this money for a house deposit because it's like you're saving at your mortgage rate.

For 6-8 years, and if you know you want the money for a house deposit, and given your risk profile, imho you should not be thinking about investing at all.

But there are 2 specific reasons as well.

1. Is given current stock market valuations and your short timeframe the chance of making a loss, or not making a profit of at least your mortgage rate between now and then is material.

2. Is you said low risk. The only way to invest low risk is to buy bonds, or a multi asset fund that includes bonds. Say you go for Vanguard lifestrategy or HSBC global strategy, the return you'll get from the bonds element of the funds (i.e. in vanguard lifestrategy 60, 40% of the fund so bonds, in HSBC global strategy balanced it's usually 30-40%) is the yield to maturity of a global bond index fund, currently about 0.7%, and that's before fees. If your mortgage is any higher than that, say 2%, it would be like borrowing at 2% to lend at 0.7%.

I was looking at the Vanguard funds. So over a 6-8 year period you don't think yeild more than overpaying my mortgage?

Possibly if interest rates remain low and the stock market continues to do well. It's pretty risky and definitely not for someone who is fairly risk adverse. The risk-adverse strategy is to aggressively pay off your mortgage.

Albermarle

I was looking at the Vanguard funds. So over a 6-8 year period you don't think yeild more than overpaying my mortgage?

Vanguard have a lot of different investments available and they have competitors with similar products . The fact that it is a Vanguard fund is not really important , it is the type of fund and risk level that is important.

So a 100% equity investment is more likely to produce the highest returns in the long term - about 7%pa but with some big ups and downs on the way . The longer you keep it the better , 7 years would be a minimum .

If you dilute the equity % with less volatile investments , like bonds, then you get a smoother ride but with potentially lower growth.

A typical medium risk investment is around 50 to 60% equity and over 7 years you could realistically expect anything from say 1 % to 6% pa . Probably around 4% but not guaranteed at all. 

Eco_Miser

peterp85 said:

Another_Saver said:

Overpaying your mortgage is great if you want to use this money for a house deposit because it's like you're saving at your mortgage rate.

For 6-8 years, and if you know you want the money for a house deposit, and given your risk profile, imho you should not be thinking about investing at all.

But there are 2 specific reasons as well.

1. Is given current stock market valuations and your short timeframe the chance of making a loss, or not making a profit of at least your mortgage rate between now and then is material.

2. Is you said low risk. The only way to invest low risk is to buy bonds, or a multi asset fund that includes bonds. Say you go for Vanguard lifestrategy or HSBC global strategy, the return you'll get from the bonds element of the funds (i.e. in vanguard lifestrategy 60, 40% of the fund so bonds, in HSBC global strategy balanced it's usually 30-40%) is the yield to maturity of a global bond index fund, currently about 0.7%, and that's before fees. If your mortgage is any higher than that, say 2%, it would be like borrowing at 2% to lend at 0.7%.

I was looking at the Vanguard funds. So over a 6-8 year period you don't think yeild more than overpaying my mortgage?

Investment would probably gain more, but it's not guaranteed, unlike overpaying the mortgage.

An investment could grow at 7% for 6 years, to 150% of its starting value, then drop by 50%, to 75% of its starting value, just when you want to use it. You want low risk, so everybody is pointing out this option is not low risk.

Another_Saver

peterp85 said:

Another_Saver said:

Overpaying your mortgage is great if you want to use this money for a house deposit because it's like you're saving at your mortgage rate.

For 6-8 years, and if you know you want the money for a house deposit, and given your risk profile, imho you should not be thinking about investing at all.

But there are 2 specific reasons as well.

1. Is given current stock market valuations and your short timeframe the chance of making a loss, or not making a profit of at least your mortgage rate between now and then is material.

2. Is you said low risk. The only way to invest low risk is to buy bonds, or a multi asset fund that includes bonds. Say you go for Vanguard lifestrategy or HSBC global strategy, the return you'll get from the bonds element of the funds (i.e. in vanguard lifestrategy 60, 40% of the fund so bonds, in HSBC global strategy balanced it's usually 30-40%) is the yield to maturity of a global bond index fund, currently about 0.7%, and that's before fees. If your mortgage is any higher than that, say 2%, it would be like borrowing at 2% to lend at 0.7%.

I was looking at the Vanguard funds. So over a 6-8 year period you don't think yeild more than overpaying my mortgage?

Firstly, the fact these funds are Vanguard funds has nothing to do with the return I expect from them. The same points I made go for any of main multi-asset funds ranges: HSBC Global Strategy, BlackRock Consensus, L&D Multi-Index etc.

Secondly, it's not that I think a sensible fund choice will return less then your mortgage over the next 6-8 years, it's more that I think the risk that that could happen is significant enough to make you think twice, because of the reasons in my first post. Whereas with your mortgage you know exactly what you're getting and it's guaranteed.

You mentioned you're risk averse and that you want to use this money for a house deposit in 6-8 years. Given those 3 things you have said, and for the other reasons I have said, my opinion is that focusing on overpaying your mortgage may be the more sensible option.

You can also mix up the two options. For example if you put 50% of this money into overpaying your mortgage, and 50% into a 100% equity index fund in a stocks & shares ISA, it would be as if you were investing in a 50% equity 50% cash multi asset fund, and the interest on the cash element would be the same as your mortgage rate. Whereasmsay you invested 100% of this money in Vanguard Lifestragy 60, which is considered a balanced or medium risk investment, the interest you get on the bonds that make up 40% of the fund is only about 0.7%.

Apologies if I've gotten a bit technical

Thrugelmir

peterp85 said:

Another_Saver said:

Overpaying your mortgage is great if you want to use this money for a house deposit because it's like you're saving at your mortgage rate.

For 6-8 years, and if you know you want the money for a house deposit, and given your risk profile, imho you should not be thinking about investing at all.

But there are 2 specific reasons as well.

1. Is given current stock market valuations and your short timeframe the chance of making a loss, or not making a profit of at least your mortgage rate between now and then is material.

2. Is you said low risk. The only way to invest low risk is to buy bonds, or a multi asset fund that includes bonds. Say you go for Vanguard lifestrategy or HSBC global strategy, the return you'll get from the bonds element of the funds (i.e. in vanguard lifestrategy 60, 40% of the fund so bonds, in HSBC global strategy balanced it's usually 30-40%) is the yield to maturity of a global bond index fund, currently about 0.7%, and that's before fees. If your mortgage is any higher than that, say 2%, it would be like borrowing at 2% to lend at 0.7%.

I was looking at the Vanguard funds. So over a 6-8 year period you don't think yeild more than overpaying my mortgage?

Statistically, investing in equities you've a one in six possibilty that the value of your investment will fall at least 15% within a calender year. When you've six figures invested. 15% starts to become a significant sum. People often then aren't so comfortable with the level of volatility that they are exposing themselves too. 

steampowered

Op, you might benefit from reading this article, which fairly and clearly explains the benefits and risks of investing.

https://www.nutmeg.com/nutmegonomics/increasing-your-chances-of-positive-portfolio-returns-the-facts-about-long-term-investing/

As you can see, over a 6-8 year timescale, the chance of making a loss with a Vanguard 100% equity fund is about 5-10%. That figure will be significantly lower if you choose a Vanguard fund with a lower percentage of equities.

The benefit is that a 100% share investment is expected to return, on average, 7-8% per year over the long term. That is the average return historically generated by the stock markets.

The question is: Are you prepared to accept a 10% risk of making a loss, in return for a high probability of making 7-8% a year on your investment? 

In most circumstances, the answer is a no brainer: over a 6-8 year time period, the reward is enormously bigger than the risk, so you should be investing. But, if you absolutely need all of this money for your new house, or if you feel that fluctuations in the value of your investment over the time period might cause you stress, then you might not be willing to take investment risk.

A good middle ground might be to invest half, and save half.

By the way, you are taking risk right now. Over 6-8 years, inflation will reduce the value of your cash savings and your money in premium bonds. There is no "risk free" option.

Prism

peterp85 said:

Albermarle said:

What is your pension situation and your age ? You might well be better increasing regular contributions to your pension rather than starting a S&S ISA. 

I'm 35, contributing 1200 a month to a pension (maxed out employer contributions).

So you are not starting investing. You have been investing since you began the pension

ElephantBoy57

Thrugelmir said:

Statistically, investing in equities you've a one in six possibilty that the value of your investment will fall at least 15% within a calender year.

If you had invested your money for a quarter, or 65 days, during that same 49-year period, your chances of making a profit increased to 65.09%. Investing for any one year would have generated a positive return 71.83% of the time, while investing for ten years increased your chances to 93.91%. Putting your money in a high interest account, its highly likely that your investment will not keep up with inflation.

I have always chosen the riskier, but more profitable option.