Vanguard Lifestrategy ISA

Marcusian

The last few weeks I have been overhauling my finances/investments/mortgage and done hours of research and I think investing wise I am settled on a and ISA and a lifestrategy fund with Vanguard. I was looking to get this because I want to be as passive as possible and just put a lump sum in, then have a regular monthly payment. 
The question I have is about whether 60/40 is the best option for my goals?

My (total newbie) view is that;

I will be looking to see what to do with my investment (potentially cashing out) in 5 years (not before). This because I am over paying my mortgage also (essentially 50/50 over paying/investing with the money I have left over each month) and my fixed fee ends then. Now, I could decide at this point that I want to just keep investing etc, but I can accept the potential to not have as good returns for the risk lowering benefits of having 40% bonds. 

Truthfully, if the market was rock bottom or it was a bad time to cash out, I could wait it out, but I do want the option in 5 years to look at where i am at as the fixed fee on my mortgage ends. 

This isn't a huge amount, i have to invest within my means - so it's likely to be a lump sum of 500-1000 then 100 a month. 

My (rather simplistic) idea is that if this can give me a better return than my cash savings account and also above the 1.8% rate on my mortgage, then it is a better use of my money if I am not going to touch it for 5 years. Is this making some semblance of sense? I was going to go with the 60/40 fund for these reasons, but looking for advice to be honest. 

AlanP_2

You realise you are running a risk, so not going in to it blindly.

You realise that you may have to push the 5 years back a bit and whilst not ideal it can be done.

Your target is to beat cash savings (say 1% at best) and your mortgage rate of 1.8%, so even a 2% annual return will do that.

60/40 hedges your bets somwehat so yes, it seems sensible to me.

dunstonh

but I do want the option in 5 years to look at where i am at as the fixed fee on my mortgage ends. 

Which means you are only looking at around half an economic cycle.  Are you going to get the good half or the bad half?

That is the problem with short term investing.

This isn't a huge amount, i have to invest within my means - so it's likely to be a lump sum of 500-1000 then 100 a month. 

Your timescale is not suitable for regular payments.  Only one will be invested for 5 years.  Then each gets one month less than the last.  Regular contributions need around 15 years ideally.  In some periods you can get away with 10 years.   In a smaller number of periods, you can get away with 5.

Thrugelmir

 Marcusian said:

Truthfully, if the market was rock bottom or it was a bad time to cash out, I could wait it out, but I do want the option in 5 years to look at where i am at as the fixed fee on my mortgage ends. 

Markets don't have to be at rock bottom to produce poor or negative returns. Five years of regular saving guarantees nothing. Ideally investing in stocks and shares should be over a minimum of 10 years. To provide certainty of a positive return. 

Alexland

At current asset prices you really need to think longer term than just 5 years. Valuations on equity and bonds are both high according to traditional valuation methods due to low interest rates making them more attractive. I wouldn't have confidence of a positive return over 5 years although it seems more likely than not so we stay invested. Is the mortgage deal worth constraining your thinking to such a short time period? Can you broaden out and think about the next 15-25 years in which case you could be heavier in equities which are ultimately are more likely to provide a better long term return far in excess of your mortgage rate if you can accept the increased volatility.

Marcusian

Alexland said:

At current asset prices you really need to think longer term than just 5 years. Valuations on equity and bonds are both high according to traditional valuation methods due to low interest rates making them more attractive. I wouldn't have confidence of a positive return over 5 years although it seems more likely than not so we stay invested. Is the mortgage deal worth constraining your thinking to such a short time period? Can you broaden out and think about the next 15-25 years in which case you could be heavier in equities which are ultimately are more likely to provide a better long term return far in excess of your mortgage rate if you can accept the increased volatility.

I could certainly do the 10 years and this makes sense. Basically i have a 23 year mortgage (of £95k, until i am 60), so ideally i want to take 10 years off that with a combo monthly overpayments, adhoc lump sums and then investing for the longer term to draw out as I get closer to paying it off. I can do 10% overpayment a year. 

Alexland

Marcusian said:

I could certainly do the 10 years and this makes sense. Basically i have a 23 year mortgage (of £95k, until i am 60), so ideally i want to take 10 years off that with a combo monthly overpayments, adhoc lump sums and then investing for the longer term to draw out as I get closer to paying it off. I can do 10% overpayment a year. 

It all depends how you see the mortgage. I used to see it as simply something to pay down to reduce risk and the interest as money down the drain. But since it clicked that that long term equity investments are highly likely to produce a return greater than the mortgage rate I now see it as useful leverage. In recent years the money that we would have used to overpay the mortgage has delivered very good returns but (as above) I don't expect that to continue at the same amazing rate but still over a long enough time it's an opportunity to profit on the difference between the investment returns and mortgage rate. Those returns are enhanced further when considering the tax/bonus benefits of using a pension or lifetime ISA wrapper to hold the investments.

So it all depends on your situation, attitude to risk, income security, overall financial plan, etc on if you really should payback the mortgage that quickly. We are probably at an extreme where we already have enough in our ISAs to payback the mortgage and the interest is more than covered by smoothed dividends so are going to needlessly run it as interest only for a few decades to pocket the difference in return and enable us to make good use of our various ISA and pension allowances.

Albermarle

If you were to invest via a pension instead, you would get a tax benefit , but the money would be inaccessible until your mid/late fifties. Presume you have a pension at work ? If so an increase in your monthly contributions could be part of a plan.

Marcusian

Thrugelmir said:

 Marcusian said:

Truthfully, if the market was rock bottom or it was a bad time to cash out, I could wait it out, but I do want the option in 5 years to look at where i am at as the fixed fee on my mortgage ends. 

Markets don't have to be at rock bottom to produce poor or negative returns. Five years of regular saving guarantees nothing. Ideally investing in stocks and shares should be over a minimum of 10 years. To provide certainty of a positive return. 

I understand that (I am total newbie though), but in perhaps more simple terms - If I had a return of say 2-3% after 5 years, this would still be better than my savings or the 1.8% saved on the mortgage. So this would still be a net win. Now I get that in 2026 might be the year for negative returns, but it's a possibility amongst modest returns and above average returns. 

If it was giving me negative return I could of course wait it out, I might not look to cash for far longer, I just want to lower my risk IF I did want to cash out in 5 years, if that makes sense? The original question was what bond/equity spread suits me best for that. 

dunstonh

 If I had a return of say 2-3% after 5 years, this would still be better than my savings or the 1.8% saved on the mortgage

And what if your return was minus 20%?

Now I get that in 2026 might be the year for negative returns, but it's a possibility amongst modest returns and above average returns. 

Its a possibility of a large negative overall vs a not very high upside due to the nature of the regular contributions.

If it was giving me negative return I could of course wait it out, I might not look to cash for far longer, I just want to lower my risk IF I did want to cash out in 5 years, if that makes sense?

If you can wait it out, which could be 3-10 years, then that is fine.  

Thrugelmir

Marcusian said:

Thrugelmir said:

 Marcusian said:

Truthfully, if the market was rock bottom or it was a bad time to cash out, I could wait it out, but I do want the option in 5 years to look at where i am at as the fixed fee on my mortgage ends. 

Markets don't have to be at rock bottom to produce poor or negative returns. Five years of regular saving guarantees nothing. Ideally investing in stocks and shares should be over a minimum of 10 years. To provide certainty of a positive return. 

I understand that (I am total newbie though), but in perhaps more simple terms - If I had a return of say 2-3% after 5 years, this would still be better than my savings or the 1.8% saved on the mortgage. So this would still be a net win. Now I get that in 2026 might be the year for negative returns, but it's a possibility amongst modest returns and above average returns. 

Markets aren't savings accounts that generate nice smooth annual returns. Far more volatile than that. Overpaying the mortgage provides certainty. Whereas markets are akin to a roller coaster. Dipping when you least expect them to.