S&S LISA could be used within 5 years

pip895

My DD has a S&S ISA & LISA + cash savings.  - she is currently entering her final year at Uni.  She has no Idea what she will be doing in 5 years, but It isn't impossible that she will want to buy a house.  She is in the lucky position of having some inheritance monies and monies from the junior isa we set up for her, so depending on the area she is looking at, enough for a deposit on a first property.   In such a circumstance she would want to use all the monies in the LISA and probably the majority in the ISA as well.  Both these accounts are currently invested although there is a fair amount sitting in cash in both.  The Isa is about 60% equity and the LISA 50%.   Cash gets no interest and we don't really fancy transferring them to a cash isa/lisa as the rates are terrible. 

My thoughts are that she should move gradually over to a very defensive position perhaps split the monies between PNL, CGT and cash in the LISA and transfer the majority of the ISA gradually into the LISA and PBonds.  I would hope this approach would at least keep up with inflation..  Are Money Market funds helpful? I have always assumed that the gains would be largely offset by the platform charge (she pays 0.25% btw).  

Alexland

If there's a good chance the money might be used in the next 5 years then I think we go back to basics which is that it probably shouldn't be invested in volatile assets especially given we have had a really good run recently and low interest rates have driven most asset prices high / not cheap. If you take the risk of keeping it invested (using either a conservative asset allocation or using a wealth protection trust that will hopefully do somethiing similar) then it's a bit of a gamble. In terms of money market funds they are unlikely to provide any meaningful return above your platform costs. It might be best to move back to cash products and hope that rates get better.

Albermarle

On the other hand ( everybody has a different opinion when it comes to investing ) . a 50:50 mixture ( or similar ) of PNL/CGT and cash/premium bonds , would be quite defensive /relatively low risk and would offer the possibility of some growth/keeping up with inflation ( not guaranteed of course ).

pip895

Alexland said:

If there's a good chance the money might be used in the next 5 years then I think we go back to basics which is that it probably shouldn't be invested in volatile assets especially given we have had a really good run recently and low interest rates have driven most asset prices high / not cheap. If you take the risk of keeping it invested (using either a conservative asset allocation or using a wealth protection trust that will hopefully do somethiing similar) then it's a bit of a gamble. In terms of money market funds they are unlikely to provide any meaningful return above your platform costs. It might be best to move back to cash products and hope that rates get better.

I came to the same conclusion re money market funds..  I think the LISA clearly needs to be kept going though and added to, up to the point she is ready to buy (that £1000 bonus is too good to miss).  The only option is either keep it in S&S and treat it conservatively - or transfer it to a cash LISA like The Nottingham at 0.8%.  My concern with the latter is that the rate could reduce at any time and is virtually guaranteed to loose her money even as it stands + it would be hassle..  The ISA I may suggest she initially treats the same way but gradually transfers to cash as she gets closer to a potential house purchase.  She has already doubled her money in this account so she is very unlikely to loose out.  

Thrugelmir

As saving rates have fallen. The interest in investing has grown.  Not least that over recent years markets seem an easy place to make money.  Last years brief correction being dismissed as a mere blip. Nevertheless a warning sign as to how rapidly markets can turn.  The last thing that she'd want is a 20% correction just when the funds are needed. 

Alexland

pip895 said:

My concern with the latter is that the rate could reduce at any time and is virtually guaranteed to loose her money even as it stands

Over the long term cash returns less than inflation but if this money is already earmarked for a property purchase then general inflation isn't as important as what might happen to property prices in the next 5 years as you would be trying to preserve its value relative to what it could have bought now (eg a 10% deposit). It may be that following the recent property price surge with people pushing themselves to the limits of affordability that property prices may plateau for a few years especially if we see slowly rising interest rates.

pip895

Thrugelmir said:

As saving rates have fallen. The interest in investing has grown.  Not least that over recent years markets seem an easy place to make money.  Last years brief correction being dismissed as a mere blip. Nevertheless a warning sign as to how rapidly markets can turn.  The last thing that she'd want is a 20% correction just when the funds are needed. 

Whilst I accept some of what you are saying - I think in practice it would be difficult to imagine the scenario in which this would happen, as by the time there is any conceivable possibility of her needing the funds (+2 years) cash and PB will make up well over 60% of the portfolio and the invested part will be 100% in wealth preservation funds.  Even if the equity part of her current portfolio were to crash 20% tomorrow and stay at that level for the next 2 years she would still be in a much better position than if she had invested in cash from the start. 

No course of action is risk free whilst you can't predict future house prices/interest rates/ inflation or investment returns.  It is also far from impossible that she is still living at home in ten years time 

Thrugelmir

pip895 said:

Thrugelmir said:

As saving rates have fallen. The interest in investing has grown.  Not least that over recent years markets seem an easy place to make money.  Last years brief correction being dismissed as a mere blip. Nevertheless a warning sign as to how rapidly markets can turn.  The last thing that she'd want is a 20% correction just when the funds are needed. 

  Even if the equity part of her current portfolio were to crash 20% tomorrow and stay at that level for the next 2 years she would still be in a much better position than if she had invested in cash from the start. 

 When markets dipped in 2007. It took 6 years just to recover to the same levels. Within that six year period there was also the cliff edge fall in 2008. That's why investing in equities carries a risk premium over cash deposits/Government bonds. There's no such thing as certainty. 

steampowered

Why don't you discuss this with your daughter? It's her money so she should really decide. If she doesn't know anything about saving or investing, now is the time for her to learn.

Over a 5 year period, the chance of making a loss on a stock market tracker investment is about 12%. That risk will reduce significantly if she is invested in a mixed portfolio of stocks and bonds, such as the Vanguard VLS 60 or VLS 40 funds.

That is a perfectly reasonable and sensible risk for a young person to take.

If she is looking at property, she should also consider the risk of house price increases outstripping what she is able to afford based on her salary and the size of her deposit. That risk is mitigated better by an investment than it is by cash savings which are likely to grow less than house prices do.

Thrugelmir

UK Vanguard based funds have only been available during a bull market. Ten years this year. 

eskbanker

steampowered said:

Over a 5 year period, the chance of making a loss on a stock market tracker investment is about 12%.

Every time you repost that Nutmeg chart you make sweeping statements like this, but they're not supported by the facts!

There is a huge difference between "12% of 5-year periods entailed value loss when retrospectively reviewing selected historical data" and your unqualified assertion about future performance of unspecified equity portfolios....