Cash

[NotSure]

Given the global economic outlook, the yield of the FTSE, and the fact that historically, an SWR of 4% + CPI seems to be well established, why wouldn't one just park one's dosh (or a sizeable proportion of it, at least) in a 3-year fixed term savings account(or accounts to stay under £85k) paying 5.75% interest annually?

I still have a few years until retirement, so happy to ride the stock market with (most of) my pension, but I have to say that for ongoing savings, paying down mortgage and fixed rate bonds look very attractive. The risk/reward of stocks just doesn't seem to stack up short/medium term. What am I missing?

[kempiejon]

Given the global economic outlook, the yield of the FTSE, and the fact that historically, an SWR of 4% + CPI seems to be well established, why wouldn't one just park one's dosh (or a sizeable proportion of it, at least) in a 3-year fixed term savings account(or accounts to stay under £85k) paying 5.75% interest annually?

Tax?

I still have a few years until retirement, so happy to ride the stock market with (most of) my pension, but I have to say that for ongoing savings, paying down mortgage and fixed rate bonds look very attractive. The risk/reward of stocks just doesn't seem to stack up short/medium term. What am I missing?

Paying down mortgage is good for sleep at night feelings but, for me, overpaying works only if you can't beat its costs. But my mortgage APR has always been below my investing IRR so far. My APR is 1.xx%

[NotSure]

Given the global economic outlook, the yield of the FTSE, and the fact that historically, an SWR of 4% + CPI seems to be well established, why wouldn't one just park one's dosh (or a sizeable proportion of it, at least) in a 3-year fixed term savings account(or accounts to stay under £85k) paying 5.75% interest annually?

Tax?

I still have a few years until retirement, so happy to ride the stock market with (most of) my pension, but I have to say that for ongoing savings, paying down mortgage and fixed rate bonds look very attractive. The risk/reward of stocks just doesn't seem to stack up short/medium term. What am I missing?

Paying down mortgage is good for sleep at night feelings but, for me, overpaying works only if you can't beat its costs. But my mortgage APR has always been below my investing IRR so far. My APR is 1.xx%

Good point re tax. But even in CPI sticks at say 8%, post tax (basic rate), you'd still have a bigger pot than when you started at WR 4% + CPI

My mortgage is also less than savings rate, but not by as much as yours. even so, paying down still stacks when I do the sums. And I get to sleep at night . But what will my mortgage rate be when my fix expires?

I suppose my point is, is it realistic to expect S&S TR to exceed 5.75% (adjusted for one's particular tax situation) over the next few years, or at least exceed it by enough to risk the possibly of stocks badly tanking?

[EthicsGradient]

Tax?

Paying down mortgage is good for sleep at night feelings but, for me, overpaying works only if you can't beat its costs. But my mortgage APR has always been below my investing IRR so far. My APR is 1.xx%

Good point re tax. But even in CPI sticks at say 8%, post tax (basic rate), you'd still have a bigger pot than when you started at WR 4% + CPI

My mortgage is also less than savings rate, but not by as much as yours. even so, paying down still stacks when I do the sums. And I get to sleep at night . But what will my mortgage rate be when my fix expires?

I suppose my point is, is it realistic to expect S&S TR to exceed 5.75% (adjusted for one's particular tax situation) over the next few years, or at least exceed it by enough to risk the possibly of stocks badly tanking?

If your mortgage rate is less than the savings rate, it seems strange that paying down the mortgage is better than saving. Are you sure you did the calculations right?

If the idea is that you guess your future mortgage rate will be higher than either savings or an average total return on a stock market investment (I'm not sure what your point about CPI is, though), then it would make sense to have the cash available for that at that point. But we don't know when that is.

Beyond that, is your plan to buy an annuity when you retire - in which case, you do need a large amount of cash at that point - or is it to gradually draw down from you pension - in which case new money invested or saved now may end up being invested for several years. If the choice is "invest it now (or as I get it in the next 3 years), or invest it in 3 years' time", then you're just looking at whether, on the whole, the stock market beats savings, which it usually does. Your future investments will do better invested for N+3 years than for N years after 3 years as savings, on the whole.

[NotSure]

If your mortgage rate is less than the savings rate, it seems strange that paying down the mortgage is better than saving. Are you sure you did the calculations right?

There is a paywalled calculator here: https://www.telegraph.co.uk/personal-banking/mortgages/mortgage-overpayment-calculator-reduce-interest-rates/ I'll try to find a non-paywalled one, but yes, for my personal situation, the sums are correct.

If the choice is "invest it now (or as I get it in the next 3 years), or invest it in 3 years' time", then you're just looking at whether, on the whole, the stock market beats savings, which it usually does. Your future investments will do better invested for N+3 years than for N years after 3 years as savings, on the whole.

Yes, I agree, the dreaded and generally ill-advised timing issue. I just think that we may have got locked into "TINA" over the last decade or so, and maybe alternatives, even simple cash, may need re-evaluating? TINA is dead, the risk-free rate is now 5 or 6%, which at least has a chance of being positive real over the next few years.

Edit: I'm talking pension money here. It's risk-adjusted return that is of interest, not just simple return

[1nvest]

For a 4% SWR you need a consistent +1.3% or so net real return.

5.75% gross = 4.6% net of 20% tax which is 4% below recent inflation. Supplemented with a 4% SWR you're talking a the pot reducing at a 8%/year real rate. Wouldn't sustain the 4% SWR.

Much of 4% SWR success/failure is determined in the earlier years, you need to achieve at least a 2% net annualised real in the first 15 years for success to be more probable.

Prior 0.5% cash deposit returns, might as well have stuck the money under a mattress, in a 2% inflation period is considerably better than the present situation. Talk of inflation coming down may simply be just that, talk only, much of government actions aren't really dealing with the issues, rather they're trying to talk down people otherwise demanding wage increases that align with inflation, to instead accept lowering of living standards. Manged decline was and continues to be Sunak's priority rather than that of growing growth/living-standards (as per BJ, LT/KK preference - that has now been firmly put to bed, and those supporting such are being witch hunted out of parliament).

[NotSure]

For a 4% SWR you need a consistent +1.3% or so net real return.

5.75% gross = 4.6% net of 20% tax which is 4% below recent inflation. Supplemented with a 4% SWR you're talking a the pot reducing at a 8%/year real rate. Wouldn't sustain the 4% SWR.

Indeed. I was only considering the next 3 years, but it depends if you think CPI will remain at 8% or drop to say 4% or even 2%.

To beat your numbers, stocks also need to leap upwards, but in the opinion of some, we're headed for a global recession to tame inflation. If (yuck, old school rubbish) PER drop back to "normal", the opposite may be true.

No one knows, but the risk/reward equation has drastically changed over the last 12-24 months, but many seem to be assuming that shares will somehow automatically take up the slack. But IMHO, that is quite a "risky" assumption. Is the potential reward there, to compensate that risk?

[JohnW]

The return on stocks is about 7%/year on average, but there’s a big variation on that with a standard deviation of 17%/year. From which we can say that in any one year your returns might be 7%-17% = -10%, and about a 15% chance of a lower return. If you’d invested £100 in stocks a year before that happened, you could well now have less than £90. That’s risky.
If you’d invested £100 twenty years ago, 7%/year return would mount up to £200; now have a bad year and lose 10% and you’re down to £180, from a return of 6.4%/year on average. Less risky.

The risk/reward of stocks just doesn't seem to stack up short/medium term. What am I missing?

You haven’t missed anything; stocks are risky in the short/medium term. We always knew it, we just to forget it.

[Gerry557]

Whilst fix rate bonds seem safe they are fixed. It's a maximum.

Generally with shares dividends can increase over time or some yield much more to begin with.

A range of shares are highly likely to return more over the medium term and grow it income. Additionally you can mix and match by doing a bit of both invest and payoff depending on the way the wind is blowing.

Sounds like you need an offset mortgage with the ability to put money in for paying off the mortgage and a investment part that you can withdraw when the market turns down so you can get a better yield and then put those dividends back into both parts of the offset till next time.

[1nvest]

Whilst fix rate bonds seem safe they are fixed. It's a maximum.

And a minimum. In nominal Pound terms.

the FT All Share dropped -55% in 1974. Cash gained +11.5% (base rate). Cash at year end bought over 70% more stock shares than it did at the start of the year (stock purchase power of cash gained +71.5%).

[gryffron]

As a general rule, and over the long term, company profits (and thus share prices) keep up with inflation much better than cash. But if you’re happy to settle for a guaranteed return of half inflation, then go for it.

Over the next 3 years, I couldn’t tell you. But over 7-10 years I’m pretty confident shares will win.

Gryff

[LooseCannon101]

The return on stocks is about 7%/year on average, but there’s a big variation on that with a standard deviation of 17%/year. From which we can say that in any one year your returns might be 7%-17% = -10%, and about a 15% chance of a lower return. If you’d invested £100 in stocks a year before that happened, you could well now have less than £90. That’s risky.
If you’d invested £100 twenty years ago, 7%/year return would mount up to £200; now have a bad year and lose 10% and you’re down to £180, from a return of 6.4%/year on average. Less risky.

The risk/reward of stocks just doesn't seem to stack up short/medium term. What am I missing?

You haven’t missed anything; stocks are risky in the short/medium term. We always knew it, we just to forget it.

You mention the return on £100 invested 20 years ago. At 7%/year this works out at about £400, not £200.

The Rule of 72 is useful to determine the length of time needed to double one's investment e.g. 8 years at 9%, 9 years at 8%, and 10 years for 7.2%.

[JohnW]

Thanks. I'd just like to say I throw in the odd mistake to see if anyone's reading my posts, but it wouldn't be true. What my maths teacher said was right.

[Gerry557]

It's getting to the point where I should draw out the cash from my mortgage and put the cash in a higher rate cash savings.

I think I can get a higher rate now with my own provider but I'll have to check to see if I can get it paid monthly.

There might be another rate rise to come soon too. Which might help the equation a bit more.

[Gerry557]

Whilst fix rate bonds seem safe they are fixed. It's a maximum.

And a minimum. In nominal Pound terms.

the FT All Share dropped -55% in 1974. Cash gained +11.5% (base rate). Cash at year end bought over 70% more stock shares than it did at the start of the year (stock purchase power of cash gained +71.5%).

True.

I suppose it depends on your time horizon, risk attitude etc. Plus what other things might be available should your shirt be taken. A bag of dry powder alway helps when there is a downturn.

I was really just trying to highlight that there might be a way to prevent inflation eating too much but yes it's more risky but both options have risk.

[1nvest]

And a minimum. In nominal Pound terms.

the FT All Share dropped -55% in 1974. Cash gained +11.5% (base rate). Cash at year end bought over 70% more stock shares than it did at the start of the year (stock purchase power of cash gained +71.5%).

True.

I suppose it depends on your time horizon, risk attitude etc. Plus what other things might be available should your shirt be taken. A bag of dry powder always helps when there is a downturn.

I was really just trying to highlight that there might be a way to prevent inflation eating too much but yes it's more risky but both options have risk.

Since the end of WW2, thirds each in HYP, silver, gold supported a 4% 30 year SWR and always ended with your inflation adjusted start date portfolio value still intact. A 100% HYP with a 4% 30 year SWR applied in the worst cases ended with nothing left. But on average just HYP alone ended with more. Generally - left more for heirs. Higher average reward came with higher risk, where for some/many that risk is a personal risk, with a view to leaving more for heirs. That higher HYP alone average reward tended to arise out of inclusion of infrequent great case outcomes, where the start date of those typically followed prior large declines, many investors would have missed that 'average' bias effect. In the median case rewards weren't that dissimilar. With such insight the general choice tends to be to hold some dry-powder of one form or another (cash, gold, silver, bonds, whatever) rather than not. Many might prefer 60/40 stock/bonds or whatever over that of all-stock primarily with worst case risk reduction in mind rather than looking to maximise upside potential.

All-stock is more appropriate for those who have other sources of income, pensions, own their own home ....etc. They aren't really all-stock, nothing else, paying rent and drawing income out of stocks alone. If you have inflation adjusted pensions then that might be considered a form of 'bond' holding. If you own a home your 'rent' is liability matched. Whilst individually stocks, house, gold ... whatever prices might broadly negate inflation, individually they tend to do so in a volatile manner. Diversifying across multiple assets has the tendency to smooth that volatility/risk. Someone for instance who initially loaded a third each into a GBP house value, US$ invested in US stocks, and gold, holds three currencies (gold is a form of global non-fiat currency) and three assets (land, stocks, commodity). Income is also diversified across imputed rent, dividends and SWR. Wont be the best, wont be the worst. Where middle road average tends to be good enough. Even better if that is further supplemented with pensions income.

[EthicsGradient]

True.

I suppose it depends on your time horizon, risk attitude etc. Plus what other things might be available should your shirt be taken. A bag of dry powder always helps when there is a downturn.

I was really just trying to highlight that there might be a way to prevent inflation eating too much but yes it's more risky but both options have risk.

Since the end of WW2, thirds each in HYP, silver, gold supported a 4% 30 year SWR and always ended with your inflation adjusted start date portfolio value still intact. A 100% HYP with a 4% 30 year SWR applied in the worst cases ended with nothing left. But on average just HYP alone ended with more. Generally - left more for heirs. Higher average reward came with higher risk, where for some/many that risk is a personal risk, with a view to leaving more for heirs. That higher HYP alone average reward tended to arise out of inclusion of infrequent great case outcomes, where the start date of those typically followed prior large declines, many investors would have missed that 'average' bias effect. In the median case rewards weren't that dissimilar. With such insight the general choice tends to be to hold some dry-powder of one form or another (cash, gold, silver, bonds, whatever) rather than not. Many might prefer 60/40 stock/bonds or whatever over that of all-stock primarily with worst case risk reduction in mind rather than looking to maximise upside potential.

All-stock is more appropriate for those who have other sources of income, pensions, own their own home ....etc. They aren't really all-stock, nothing else, paying rent and drawing income out of stocks alone. If you have inflation adjusted pensions then that might be considered a form of 'bond' holding. If you own a home your 'rent' is liability matched. Whilst individually stocks, house, gold ... whatever prices might broadly negate inflation, individually they tend to do so in a volatile manner. Diversifying across multiple assets has the tendency to smooth that volatility/risk. Someone for instance who initially loaded a third each into a GBP house value, US$ invested in US stocks, and gold, holds three currencies (gold is a form of global non-fiat currency) and three assets (land, stocks, commodity). Income is also diversified across imputed rent, dividends and SWR. Wont be the best, wont be the worst. Where middle road average tends to be good enough. Even better if that is further supplemented with pensions income.

Is that investing a cash lump sum and immediately starting the draw down from it, or is it, like most people invest, either leaving a lump sum invested for a bit, or investing in several stages over years (which is what typical investment is, though we'd have to define how the cash is invested), and then drawing down?

[NotSure]

Thanks to all for replies.

As a general rule, and over the long term, company profits (and thus share prices) keep up with inflation much better than cash. But if you’re happy to settle for a guaranteed return of half inflation, then go for it.

Over the next 3 years, I couldn’t tell you. But over 7-10 years I’m pretty confident shares will win.

Gryff

My pension is 80% shares - I'm not touching it for at least 10 years, maybe a few more than that. So basically, I agree.

But half of inflation over the next three years? Do you think average CPI over the next 36 months will exceed 11% p.a.?