£140k to invest

[GrahamPlatt]

Hello, everyone.

It's been a long time since I've been hereabouts.

I hope evereyone is well.

Imagine, if you will, that I had - hypothetically - sold a property and, in September, invested £140000 in UK Income Bond, returning 1.16%

Now, imagine that the UK Gov has reduced that return to 0.01%.

Where would the shrewdies put that £140000 if said shrewdies were Risk Averse?

You have mail.

[Aminatidi]

Start with a simple question which is if you put that £140K somewhere and go back to it at some point how much would you want to find there?

If I was risk averse (and I am somewhat) and focused more on preservation with some growth I would look at the approaches used by all weather funds/trusts.

Examples of these are Ruffer, Capital Gearing, Troy Trojan/Personal Assets.

They won't make you rich but they won't fall off a cliff either.

[hiriskpaul]

You could hold the whole lot in cash deposits, scattered around so you are within FSCS limits. But that is not safe in the sense that its real value will be stable - you could lose against inflation.

I would second GS's approach. Find risk assets that are acceptable to you and size your trade into those assets according to how much downside you are prepared to accept. X% into deposits, (100-X)% into something with a 95% probability (2 standard deviations) of doubling or halving in 5 years is a good way of thinking about it. For X=90%, you would have a 95% chance of your total portfolio being between 95% and 110% of what it is now in 5 years time, plus interest on the 90% deposits and a 2.5% chance of being somewhere between 5% and 10% (the maximum loss) down. Is that acceptable? If not, what outcome is?

There is another psychological issue that you need to consider as well. For example, if you invested 10% into something which halved in 3 months but don't need the money, how would you react? Would this give you sleepness nights? Would you bail out? If so, then you would not have sized your trade correctly. It is all very well saying risk investments deliver over the long term. Investors need the stomach to get to the long term.

[ChrisNix]

You could hold the whole lot in cash deposits, scattered around so you are within FSCS limits. But that is not safe in the sense that its real value will be stable - you could lose against inflation.

I would second GS's approach. Find risk assets that are acceptable to you and size your trade into those assets according to how much downside you are prepared to accept. X% into deposits, (100-X)% into something with a 95% probability (2 standard deviations) of doubling or halving in 5 years is a good way of thinking about it. For X=90%, you would have a 95% chance of your total portfolio being between 95% and 110% of what it is now in 5 years time, plus interest on the 90% deposits and a 2.5% chance of being somewhere between 5% and 10% (the maximum loss) down. Is that acceptable? If not, what outcome is?

There is another psychological issue that you need to consider as well. For example, if you invested 10% into something which halved in 3 months but don't need the money, how would you react? Would this give you sleepness nights? Would you bail out? If so, then you would not have sized your trade correctly. It is all very well saying risk investments deliver over the long term. Investors need the stomach to get to the long term.

I think the time period over which the sum can be left untouched is very significant.

If one needed to draw out, say, £40k in three years, the number of acceptable investments shrinks dramatically.

If, however, for example, the sum could be left for ten years, a sizable equity risk premium, for absorbing the capital value volatility along the way, can be earned.

[hiriskpaul]

You could hold the whole lot in cash deposits, scattered around so you are within FSCS limits. But that is not safe in the sense that its real value will be stable - you could lose against inflation.

I would second GS's approach. Find risk assets that are acceptable to you and size your trade into those assets according to how much downside you are prepared to accept. X% into deposits, (100-X)% into something with a 95% probability (2 standard deviations) of doubling or halving in 5 years is a good way of thinking about it. For X=90%, you would have a 95% chance of your total portfolio being between 95% and 110% of what it is now in 5 years time, plus interest on the 90% deposits and a 2.5% chance of being somewhere between 5% and 10% (the maximum loss) down. Is that acceptable? If not, what outcome is?

There is another psychological issue that you need to consider as well. For example, if you invested 10% into something which halved in 3 months but don't need the money, how would you react? Would this give you sleepness nights? Would you bail out? If so, then you would not have sized your trade correctly. It is all very well saying risk investments deliver over the long term. Investors need the stomach to get to the long term.

I think the time period over which the sum can be left untouched is very significant.

If one needed to draw out, say, £40k in three years, the number of acceptable investments shrinks dramatically.

If, however, for example, the sum could be left for ten years, a sizable equity risk premium, for absorbing the capital value volatility along the way, can be earned.

A situation when someone wants or is very likely to want a certain amount in a few years time can be catered for relatively easily though. What is harder is the relatively common case like the one presented here. No concrete anticipated need for the money over the next few years, but the desire to maintain the option to spend it at any point if necessary or desired and/or the lack of a stomach for significant falls along the way. In other words, higher than risk free rate growth desired, but without too much downside risk.

[ChrisNix]

You could hold the whole lot in cash deposits, scattered around so you are within FSCS limits. But that is not safe in the sense that its real value will be stable - you could lose against inflation.

I would second GS's approach. Find risk assets that are acceptable to you and size your trade into those assets according to how much downside you are prepared to accept. X% into deposits, (100-X)% into something with a 95% probability (2 standard deviations) of doubling or halving in 5 years is a good way of thinking about it. For X=90%, you would have a 95% chance of your total portfolio being between 95% and 110% of what it is now in 5 years time, plus interest on the 90% deposits and a 2.5% chance of being somewhere between 5% and 10% (the maximum loss) down. Is that acceptable? If not, what outcome is?

There is another psychological issue that you need to consider as well. For example, if you invested 10% into something which halved in 3 months but don't need the money, how would you react? Would this give you sleepness nights? Would you bail out? If so, then you would not have sized your trade correctly. It is all very well saying risk investments deliver over the long term. Investors need the stomach to get to the long term.

I think the time period over which the sum can be left untouched is very significant.

If one needed to draw out, say, £40k in three years, the number of acceptable investments shrinks dramatically.

If, however, for example, the sum could be left for ten years, a sizable equity risk premium, for absorbing the capital value volatility along the way, can be earned.

A situation when someone wants or is very likely to want a certain amount in a few years time can be catered for relatively easily though. What is harder is the relatively common case like the one presented here. No concrete anticipated need for the money over the next few years, but the desire to maintain the option to spend it at any point if necessary or desired and/or the lack of a stomach for significant falls along the way. In other words, higher than risk free rate growth desired, but without too much downside risk.

I think you're positing a false dichotomy.

The only reliable way to avoid 'significant falls along the way' is to eschew equities/property/risk assets and stick to fixed interest style investments with short term maturites, certainly less than five years. Better than risk free rate but not by a huge amount. That said, some zero coupon prefs yield 6%-7% to maturity even with a couple of years to go, and some such as UTIL are actually safe.

Other solutions are just playing the odds of an unexpected event occurring and involve what might be termed 'tail risk'.

You pays your money and takes your choice.

[Bubblesofearth]

Where would the shrewdies put that £140000 if said shrewdies were Risk Averse?

Can you quantify what you mean by 'risk averse'? Different people will have different definitions.

BoE

[scrumpyjack]

'Risk free'? There are no risk free assets, now that index linked assets sell at a price that guarantees a real loss.

Anything in cash or equivalents suffers from the inflation risk, so is not risk free. One might argue that it carries the almost guaranteed risk of a small loss but avoids the risk of a big loss. But with the amount of money printing and government largesse it is quite possible that future inflation is not 'small'

It is important to be mindful of the inflation risk, as financial advisers/the newspapers usually ignore it.

[Alaric]

One option you may wish to consider is Hargreaves Lansdowne have an 'Active Savings' facility where you setup an account which then allows you to allocation to different organizations offering returns from different saving institutions (banks, building societies etc.)

If intending to hold sizeable sums in cash and deposits, having an umbrella account such as offered by Hargreaves would seem the way to do it. It's marginally surprising that other platforms have not developed something similar.

[swill453]

One option you may wish to consider is Hargreaves Lansdowne have an 'Active Savings' facility where you setup an account which then allows you to allocation to different organizations offering returns from different saving institutions (banks, building societies etc.)

If intending to hold sizeable sums in cash and deposits, having an umbrella account such as offered by Hargreaves would seem the way to do it. It's marginally surprising that other platforms have not developed something similar.

AJBell have their "Cash Saving Hub" which sounds the same. I had a look and none of the rates looked particularly attractive to me, but I suppose nothing does these days.

Scott.

[GoSeigen]

'Risk free'? There are no risk free assets, now that index linked assets sell at a price that guarantees a real loss.

Anything in cash or equivalents suffers from the inflation risk, so is not risk free. One might argue that it carries the almost guaranteed risk of a small loss but avoids the risk of a big loss. But with the amount of money printing and government largesse it is quite possible that future inflation is not 'small'

It is important to be mindful of the inflation risk, as financial advisers/the newspapers usually ignore it.

There are risk free assets. You are just inventing your own meaning of the term.

EDIT: Inflation is a rise in the general price of goods and services. As such it affects the purchasing power of all assets, not just cash and cash equivalents.

GS

[Walrus101]

Start with a simple question which is if you put that £140K somewhere and go back to it at some point how much would you want to find there?

If I was risk averse (and I am somewhat) and focused more on preservation with some growth I would look at the approaches used by all weather funds/trusts.

Examples of these are Ruffer, Capital Gearing, Troy Trojan/Personal Assets.

They won't make you rich but they won't fall off a cliff either.

I don't like these statements. I don't see them being anywhere near as safe as you suggest.

[Flure]

Thank you to everyone for their contributions.

Having been a regular on TMF many years ago, and an active investor in Stocks and Shares, this has served somewhat in getting the grey matter moving again and reminding me of the many aspects of potential "investing".

Food for thought.

[Padders72]

Prefs.
BOI @ ~6%
SBSA @ ~ 6%
NWBD @ ~ 6%
...
ITs
EAT ~ 6%
SMIF ~ 7.5%
HEFL ~ 7.5%
....

Etc

Your definition of risk averse and mine differ considerably. I hold several of the above but I don't kid myself for a second that they are fully safe from a capital preservation POV. I bought one at around third of its current value because of fears over an existential risk I seem to recall.

[GrahamPlatt]

Your definition of risk averse and mine differ considerably. I hold several of the above but I don't kid myself for a second that they are fully safe from a capital preservation POV. I bought one at around third of its current value because of fears over an existential risk I seem to recall.

Yes, yes, as did I. But then reductio ad absurdam nothing is 'safe'. We cling to our only habitable planet, which hurtling through space, while we poison it. ... what do you propose?