Low interest rates on savings

[teuchter]

Buying bonds when yields were 1-2% didn’t seem worth bothering with. Buying bonds that are yielding 6-10% is a different ball game.

I'd be looking at that relative to regular cash savings now paying 5% ish though wouldn't I?

Whereas previously the 1-2% was compared to <0.5% for regular savings.

I understand that bonds pay at interest plus a risk premium. But so do stocks (to a greater degree) so my main question is why not skip the middle step and go straight to stocks - for the portion that I'm willing to put at risk in exchange for potentially higher returns? It feels like it should be a matter of adjusting the proportions such that the overall level of risk ends up kind of similar.

 

[bcuster]

I'd be looking at that relative to regular cash savings now paying 5% ish though wouldn't I?

Whereas previously the 1-2% was compared to <0.5% for regular savings.

I understand that bonds pay at interest plus a risk premium. But so do stocks (to a greater degree) so my main question is why not skip the middle step and go straight to stocks - for the portion that I'm willing to put at risk in exchange for potentially higher returns? It feels like it should be a matter of adjusting the proportions such that the overall level of risk ends up kind of similar.

Absolutely sound thinking.
I recommend regular contributions to an indexed fund

 

[kabbes]

I'd be looking at that relative to regular cash savings now paying 5% ish though wouldn't I?

Whereas previously the 1-2% was compared to <0.5% for regular savings.

I understand that bonds pay at interest plus a risk premium. But so do stocks (to a greater degree) so my main question is why not skip the middle step and go straight to stocks - for the portion that I'm willing to put at risk in exchange for potentially higher returns? It feels like it should be a matter of adjusting the proportions such that the overall level of risk ends up kind of similar.

If you go back to platinumsage’s previous explanation (that you quoted earlier) for the traditional reasons that people held a portion in bonds, though, all of that logic now comes back into play. Note that his explanations for why those reasons weren’t applicable any more were all based on the fact that base rates were near-zero. As we’ve moved back away from that point, the old logic comes back into play, i.e, that typically base rates get reduced when the economy is struggling, which means bond values should rise at the very point that share values look high. Cash doesn’t substitute for bonds in the same way because its value doesn’t rise and fall — it’s the thing that other assets rise and fall against. So when base rates get reduced, cash doesn’t increase.

None of this is a hard rule, of course. In recent years, bonds and shares have been much more correlated, for example (as noted, probably because base rates were so low). And it’s reasonable enough to stick with cash for short-term needs and stocks for growth, if you prefer. But the stock market can sometimes get depressed for a few years, and a lot of people find it useful to have some funds that they might want or need to realise during such periods, which have a chance of being elevated right when the share funds are depressed.

 

[kabbes]

In the end, teuchter , it’s hard to give a generic answer. Investment is never just a thing in itself, it’s always for a purpose and in a context. That’s why individual investment advisors have to be licensed and will ask you for loads of personal details before suggesting a plan of action. So it’s hard to know what to say without knowing lots of things about you and your life plans that neither you nor I would want you to divulge.

For example, although your first instinct might be to say “I want to just make as much as possible”, the truth is that you do want to actually spend that money before you die. So there needs to be a divestment plan as well as an investment plan. And that needs to account for the fact that life never goes as expected. It might be that your aim to retire at a certain age, or that you want to pay a big lump sum within a certain time period or that you want to be ready to cope with some time of unemployment or many other things. All these mean that investment does not tend to simply be about maximising the 40-year (or even 20-year) expected value of the distribution of returns.

 

[Boris Sprinkler]

Ursuary is a crime. Change my mind

 

[Silas Loom]

Ursuary is a crime. Change my mind

I have good arguments for interest and for the investments it underpins, and also good arguments for keeping bears in appropriate compounds. Which did you want?

 

[Boris Sprinkler]

It’s not the point of being here.

 

[kabbes]

Ursuary is a crime. Change my mind

You’re alright, thanks. I’m quite happy to leave your mind unchanged. You do you.

 

[Boris Sprinkler]

But let’s hear your good arguments for interest. Work will set you free?

 

[kabbes]

But let’s hear your good arguments for interest. Work will set you free?

You’re alright, thanks. I’m quite happy to leave your mind unchanged. You do you.

 

[UnderOpenSky]

Ursuary is a crime. Change my mind

Maybe. But we live under capitalism so you can piss into the wind or try to make sure things aren't to shit when your old.

 

[PTK]

I can't bear ursary.

 

[Silas Loom]

Work will set you free?

 

[Boris Sprinkler]

 

[teuchter]

In the end, teuchter , it’s hard to give a generic answer. Investment is never just a thing in itself, it’s always for a purpose and in a context.

Yes of course. I don't expect individualised advice on this thread. It's very useful though to check whether there is anything major that I should be giving more thought to - including whether at some point it would make sense to seek more formal/detailed advice elsewhere. All the comments & opinions on this thread are appreciated.

 

[kabbes]

Yes of course. I don't expect individualised advice on this thread. It's very useful though to check whether there is anything major that I should be giving more thought to - including whether at some point it would make sense to seek more formal/detailed advice elsewhere. All the comments & opinions on this thread are appreciated.

In that spirit, I can certainly give you the logic that I use for my own purposes. It may or may not apply to you.

I want to retire as soon as possible based on my investments
So I want those investments to provide an income
I want that income to be as stable as possible
I want that income to be as inflation-proofed as possible
I also want some element to be for future big purchases if they become necessary
I want the process to be as automatic and fool-proof as possible. I want to not shoot myself in the foot by fiddling with things, which is always bad news

To do this, I have the bulk (about 45%) invested in share funds that concentrate on companies that pay high dividends. Dividends are a pretty reliable and stable income stream. They are also the most inflation-proofed type of income, because inflation is the price of things going up, which is directly linked to corporate profits. I am as diversified as possible, which means splitting over lots of funds, who mostly can choose from worldwide equities, but some are restricted to particular regions.

The next pot (20%) is bond funds that pay high income. This is an even more stable income stream but it is not so inflation-proofed.

By allowing these funds to pay their income straight to me, I’m not forced into constant decisions about what to sell. That makes it simpler and less prone to my bad decisions. All I will have to do is rebalance the fund once a year, say.

The next pot (30%) is equities that are just there to make a as high returns as possible. This allows me to top up the bond funds if they fall behind plus gives me “savings” in case I need future purchases. This part is mostly in worldwide index funds, but I do balance that up with specialist funds to avoid being too concentrated in US mega-cap tech funds.

The final pot (5%) is cash. This provides a smoothing mechanism and will stop me having to make crash sales. I can top the cash back up whenever I deem the time to be right.

Other than the worldwide index funds, all other funds are either about 3% or 1.5% of the total. That way, I’m not too dependent on any single fund succeeding. (They have also been chosen by looking through to their underlying investments to make sure they aren’t all investing in the same companies, which would undo the diversification. I keep an eye on this using the interactive investor’s tools — that way I can tell you that other than Microsoft, no individual equity has more than 0.7% of the total pot).

Is this approach right for you? No idea. I don’t even know for sure that it’s right for me! But it has a logic based on what I’m trying to achieve and understanding the instruments I’m using to try to achieve it.

 

[og ogilby]

I just randomly picked my investments after weeks of reading and trying to get my head round it all and getting more confused.

I started at the end of 2020 and my portfolio is currently 19% up, so I'm happy with that.

I have no idea what I want from my investments other than for them to keep rising.

 

[Winot]

In that spirit, I can certainly give you the logic that I use for my own purposes. It may or may not apply to you.

I want to retire as soon as possible based on my investments
So I want those investments to provide an income
I want that income to be as stable as possible
I want that income to be as inflation-proofed as possible
I also want some element to be for future big purchases if they become necessary
I want the process to be as automatic and fool-proof as possible. I want to not shoot myself in the foot by fiddling with things, which is always bad news

To do this, I have the bulk (about 45%) invested in share funds that concentrate on companies that pay high dividends. Dividends are a pretty reliable and stable income stream. They are also the most inflation-proofed type of income, because inflation is the price of things going up, which is directly linked to corporate profits. I am as diversified as possible, which means splitting over lots of funds, who mostly can choose from worldwide equities, but some are restricted to particular regions.

The next pot (20%) is bond funds that pay high income. This is an even more stable income stream but it is not so inflation-proofed.

By allowing these funds to pay their income straight to me, I’m not forced into constant decisions about what to sell. That makes it simpler and less prone to my bad decisions. All I will have to do is rebalance the fund once a year, say.

The next pot (30%) is equities that are just there to make a as high returns as possible. This allows me to top up the bond funds if they fall behind plus gives me “savings” in case I need future purchases. This part is mostly in worldwide index funds, but I do balance that up with specialist funds to avoid being too concentrated in US mega-cap tech funds.

The final pot (5%) is cash. This provides a smoothing mechanism and will stop me having to make crash sales. I can top the cash back up whenever I deem the time to be right.

Other than the worldwide index funds, all other funds are either about 3% or 1.5% of the total. That way, I’m not too dependent on any single fund succeeding. (They have also been chosen by looking through to their underlying investments to make sure they aren’t all investing in the same companies, which would undo the diversification. I keep an eye on this using the interactive investor’s tools — that way I can tell you that other than Microsoft, no individual equity has more than 0.7% of the total pot).

Is this approach right for you? No idea. I don’t even know for sure that it’s right for me! But it has a logic based on what I’m trying to achieve and understanding the instruments I’m using to try to achieve it.

Have you not retired yet, i.e. do you still have a day job income? I'm interested if so in your decision to put 45% into income funds already. Why did you decide to do that rather than focus on growth until you retired?

 

[teuchter]

Have you not retired yet, i.e. do you still have a day job income? I'm interested if so in your decision to put 45% into income funds already. Why did you decide to do that rather than focus on growth until you retired?

This was going to be one of my questions too.

 

[kabbes]

I’m actually planning to retire this year, but that doesn’t really change my answer because my investment plan hasn’t changed over the last five years or so.

It’s theoretically sound to say that you should just invest for maximum return and then change strategy when your circumstances change. (To be honest, it’s probably theoretically sound to invest for maximum return even during retirement and just sell judiciously as and when you need it.) But it comes back to simplicity, emotion, impulse control and the psychological advantages of making a plan you can stick to over one that is theoretically ideal. I knew I wouldn’t be able to entrust my life to something I hadn’t seen working in practice for some years. I knew I would emotionally struggle to convince myself to sell funds if they were going through a bad patch. I knew I would emotionally struggle to sell funds if they were going through a good patch. I knew I’d find it scary to liquidate an entire portfolio and buy a different one. So I worked with my nature instead of against it, and aimed to build it up as I wanted it as I went.

 

[og ogilby]

It’s theoretically sound to say that you should just invest for maximum return and then change strategy when your circumstances change. (To be honest, it’s probably theoretically sound to invest for maximum return even during retirement and just sell judiciously as and when you need it.)

That's my plan, if I do have a plan at all.

 

[Hollis]

See, I'm about 2-3 years away from retirement and my approach is slightly different for the pension funds:

Emergency fund of 2-3 months expenses in cash
2-3 years worth expenditure in bonds
Global equity index trackers /investment trust equivalents for the rest, except
'Care home fund' - tech index trackers or equivalent trust funds <5%

My rough plan is to annually rebalance and drawdown cash.
When the markets had a good year I take mainly from the index trackers
If the market crashes I draw down on my bond funds, and hopefully it recovers before it runs out.

I think this is broadly known as the 'buckets' approach - having said that I may alter it depending on how I feel at the time.

 

[kabbes]

See, I'm about 2-3 years away from retirement and my approach is slightly different for the pension funds:

Emergency fund of 2-3 months expenses in cash
2-3 years worth expenditure in bonds
Global equity index trackers /investment trust equivalents for the rest, except
'Care home fund' - tech index trackers or equivalent trust funds <5%

My rough plan is to annually rebalance and drawdown cash.
When the markets had a good year I take mainly from the index trackers
If the market crashes I draw down on my bond funds, and hopefully it recovers before it runs out.

I think this is broadly known as the 'buckets' approach - having said that I may alter it depending on how I feel at the time.

I think the key point you and are demonstrating is that however you do it, you need a divestment plan as well as an investment plan, and you need to cover yourself for the downs as well as the ups. In a way, the details aren’t important — pick something that suits your personal style. But there is normally sense in having some cash, more bonds and most in equities.

 

[Chz]

Asking for a bit of advice here. We paid off the mortgage last year, after spending all our extra cash on overpayments. Not knowing what to do with the extra cash freed up, we bought a (used) car and I stuffed the rest in a high interest savings account. Which has just finished its promotional term and dumped a lump of cash in my current account.

Having spent all spare funds on the mortgage in the past, I have no ISA built up. And the savings now exceed the annual ISA limit. The high interest account I went for last year seemed good enough, but not so hot after paying taxes. My work pension is generous enough, and doesn't easily allow for one-off payments. (seriously, transferring in was such a PITA I never want to deal with them again!) What do the financial minded people here think I should do with my new savings? I've been extremely conservative with money in the past, but with the house paid and a half decent pension plan I'm open to risk now.