Cash:stock ratio

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El_Selb
El_Selb Posts: 108 Forumite
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I am looking to buy a house in perhaps 2-3 years time.

I would like to grow my funds as much as possible whilst protecting what I've got. Okay stating the obvious!!

I've got around 50:50 in cash:funds/trackers (VLS80, S&P, FTSE250 and a few other bits).

I'm happy to accept a 10-15% loss on my pot (about £17k currently) in the quest for higher returns, but would be disappointed with much more.

Wondering if it's worth increasing the stock:cash ratio or should I resist temptation?
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  • AndyT678
    AndyT678 Posts: 757 Forumite
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    I'd say you're already risking taking about 20% - 25% losses and you need to be thinking more cash less stock.
  • AlanP_2
    AlanP_2 Posts: 3,253 Forumite
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    If it were me I would ditch the stock and keep it all in cash for a 2-3 year time frame rather than risk a substantial drop delaying my house purchase.

    Sounds like you have ~£34k to date. What about a HTB ISA fof some of it and then spread the rest around Current / Regular Savers at 3-5%?
  • Ray_Singh-Blue
    Ray_Singh-Blue Posts: 507 Forumite
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    I'm with 1990 Nobel Prize for Economics winner Harry Markowitz on this one:

    "I visualized my grief if the stock market went way up and I wasn't in it - or if it went way down and I was completely in it. So I split my contributions 50/50 between stocks and bonds."
  • kidmugsy
    kidmugsy Posts: 12,709 Forumite
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    Ray_Singh-Blue wrote: »
    I'm with 1990 Nobel Prize for Economics winner Harry Markowitz on this one:

    "I visualized my grief if the stock market went way up and I wasn't in it - or if it went way down and I was completely in it. So I split my contributions 50/50 between stocks and bonds."

    Bet he wasn't saving to buy a house.
    Free the dunston one next time too.
  • chockydavid1983
    chockydavid1983 Posts: 713 Forumite
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    If I was looking to buy in 2-3 years' time, I would be much more in cash.
    If it's a more flexible time period, perhaps more stocks could be OK, minimum 5 years, ideally 10 or more.
  • Malthusian
    Malthusian Posts: 10,944 Forumite
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    If you're currently 2-3 years' savings away from being able to afford the kind of house you want, then investing in the stockmarket might trim that to 2 years if there are a few more good years to come, or extend it to 5-6 years if there's a crash coming. If you're that close to reaching your target then the risk / reward outcomes are skewed against you.

    If it was me I would probably keep what I had in the stockmarket and direct further savings into cash.
  • Ray_Singh-Blue
    Ray_Singh-Blue Posts: 507 Forumite
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    kidmugsy wrote: »
    Bet he wasn't saving to buy a house.

    If Harry Markowitz was saving to buy a house (a guy ha to live somewhere after all), I wonder what characteristics he would want in his savings vehicle?

    Perhaps a good correlation with house prices would be important. After all, imagine his grief if house prices went way up but his savings stood still.

    So maybe he would look for a residential property REIT, except they don't really exist in a meaningful way. So back to the drawing board, I wonder if house prices would correlate better with a 50:50 stock:bond portfolio than with cash? Perhaps this would cut the mustard after all.

    I like his quote so much I'm going to borrow it for my sig
  • Malthusian
    Malthusian Posts: 10,944 Forumite
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    The point of that off-repeated Harry Markowitz quote is that Markowitz was the inventor of modern portfolio theory, which very briefly says that investors should hold equities and bonds in some specific ratio X/Y determined by their risk profile. However, when Markowitz had to calculate the equity/bond ratio that was appropriate for his own risk profile, he was unable to do so, so he went with the arbitrary 50/50. Economist, model thyself.

    This either illustrates that economic theory is impractical in the real world or it illustrates that there's a difference between applying a model to a population and applying it to a single individual, depending on your outlook.

    It is of limited relevance to the OP because his main concern is the risk that a major stockmarket crash arrives just as he reaches his deposit target and wants to buy a house. When a major crash happens, both stocks and bonds become correlated downwards. So the split between cash and risky investments is what matters most, not the split between shares and bonds within his risky investments.
  • Ray_Singh-Blue
    Ray_Singh-Blue Posts: 507 Forumite
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    Malthusian, I take your point that cash and bonds are not quite identical for the purposes of portfolio modelling.

    My main concern for El Selb is that house prices may advance or retreat, and so their "deposit target" is likely to be a moving goalpost.

    There is not necessarily safety in cash. If s/he gets 1% per year on £17K of savings, then when s/he comes to buy the house will have £17.5K. If in three years time house prices have also risen by 1% per year, then the balance stands equal. But if in three years house prices have risen by 10% per year, then s/he has to spend more or buy a more modest house. Conversely, If in three years time prices have fallen by 10% per year, then s/he can spend less, or buy something a tad more flashy.

    A mix of bonds (or cash, if you rather) and equities might provide some insurance against scenario (A), at the cost of some gain in the event of scenario (B).

    I personally think that half and half is a great default position. So it seems did Dirty Harry, There may be reasons to lean away from this position - perhaps reasons of conviction or timescale- perhaps El Selb wants to shoot for a palace but wouldn't mind a phone box.
  • AndyT678
    AndyT678 Posts: 757 Forumite
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    Without knowing the exact situation I think it's more likely that avoiding the worst outcome is the most important consideration.

    I'm going to assume that the 2 - 3 years is to allow additional time for saving so if OP has £17k and needs say £35k in 3 years then the most important considerations are adding £500/month and preserving the £17k. Whether the £17k generates 0.5%, 1%, 5% or even 10% growth per year is actually fairly irrelevant.

    What would be much more problematic IMO would be to diligently save an additional £18k but find that your £17k is suddenly only worth £10k because of some market downturn and you're £7k short of where you need to be.
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