Low interest rates on savings

[strung out]

Talking of percentage fees - Mrs Nick continues to use St James Place for pension because that it what her company used for pension contributions a while ago. Their percentages are outrageous. But she is the kind of person who has absolutely zero interest in managing personal money - so paying them a fortune is better than leaving it in a current account - and they do provide a nice biscuit and coffee when I drag her in there for the odd review meeting + sales pitch

I was just about to bring up St James Place and say that if anyone used them for investment advice, to get out ASAP

Like you say, their fees are utterly outrageous, and I think they've got pretty hefty exit charges too. I spotted a brochure of theirs at my retired in-laws' house a while ago, but don't think they'd appreciate having me tell them to withdraw it all and stick it in a cheap tracker.

 

[nick]

Yep
I looked into it a couple of years ago - I remember being shocked that they hit you with an exit fee if you withdraw within 6 years.
I've managed to ensure she doesn't put anything except pension into them though - so that is a small victory.

At least it is now their job to bully her into permitting them to rebalance everything now and then - saving the domestic grief of me trying so to do

 

[kabbes]

Is that a return per annum? If so, a 16% time weighted rate of return is fantastic.

 

[20Bees]

The wrinkle is that I have an egregious amount of ISA contributions doing very nicely in Fundsmith - so no platform fees. If I move it to within this IFA's organisation as I diversify, then I am going to take a big fee hit in order for them to re-purpose it in light of Terry's oncoming retirement (but I guess cost is small in comparison to taking a swan dive if Fundsmith tanks instead of making the current 25% pa, or whatever it is)

I’ve had a small amount from redundancy and that job’s work pension sitting as cash in an HL SIPP, and have just moved a fraction of it into Fundsmith and the HSBC FTSE 250 tracker fund. I have been considering a Global tracker for another few £k (HSBC again?) but as someone who likes cash and would instinctively lean towards keeping it under the mattress, it’s very easy to assume every day is the one it’s all going to go pear-shaped. What’s the best 5-minute daily headlines to browse over breakfast?

 

[nick]

Bbc web site
If you see news of your investment on that - it means you probably should have sold last week

 

[kabbes]

Speaking as somebody who can’t help but compulsively check every day, I would strongly urge against compulsively checking every day. It’s utterly pointless and achieves nothing except increasing anxiety and giving you a compulsive habit.

 

[20Bees]

Speaking as somebody who can’t help but compulsively check every day, I would strongly urge against compulsively checking every day. It’s utterly pointless and achieves nothing except increasing anxiety and giving you a compulsive habit.

Gotta love another compulsive habit... maybe just over Sunday breakfast!

 

[og ogilby]

Speaking as somebody who can’t help but compulsively check every day, I would strongly urge against compulsively checking every day. It’s utterly pointless and achieves nothing except increasing anxiety and giving you a compulsive habit.

I bought a fund with Saxo bank and their platform gives you the actual numbers as the shares within the fund rise and fall in price. Now that is addictive to watch. I have it on all day long.

 

[kabbes]

I bought a fund with Saxo bank and their platform gives you the actual numbers as the shares within the fund rise and fall in price. Now that is addictive to watch. I have it on all day long.

The modern world never ceases to find ways to fuck with us, hey?

 

[weltweit]

A couple of guys I knew had their portfolios on live on their pcs all day and if things changed too much were often tempted to sell something or buy something else. I am sure their motivation was well but I bet their transaction fees were massive.

 

[platinumsage]

A couple of guys I knew had their portfolios on live on their pcs all day and if things changed too much were often tempted to sell something or buy something else. I am sure their motivation was well but I bet their transaction fees were massive.

They say the best-performing portfolios are those held by dead people.

 

[strung out]

On low cost financial advice, this looks really interesting for people who might need some handholding but don't want to spend the earth. Fees of 0.79%, including platform and fund charges: Vanguard slashes the price of financial advice

 

[kabbes]

On low cost financial advice, this looks really interesting for people who might need some handholding but don't want to spend the earth. Fees of 0.79%, including platform and fund charges: Vanguard slashes the price of financial advice

It seemed good at first but as I read the article I became more cynical. The only thing you can buy are its own passive tracker funds. That might be fine but then you’re paying a lot just to invest in tracker funds! They say the platform part is 0.5% and that may or may not be good value depending on how much you are investing — suffice to say that my platform costs me a hell of a lot less than that, and it provides me with more options than Vanguard passive trackers. And I wonder how much advice somebody needs just to be told to invest in a diversified set of trackers?

Still, it’s a good way to get the basics set up — handholding, as you say — and 0.5% for a platform is reasonable if you are investing less than £20k or so in total. Once the fund gets bigger, you can always port it elsewhere.

 

[20Bees]

It seemed good at first but as I read the article I became more cynical. The only thing you can buy are its own passive tracker funds. That might be fine but then you’re paying a lot just to invest in tracker funds! They say the platform part is 0.5% and that may or may not be good value depending on how much you are investing — suffice to say that my platform costs me a hell of a lot less than that, and it provides me with more options than Vanguard passive trackers. And I wonder how much advice somebody needs just to be told to invest in a diversified set of trackers?

Still, it’s a good way to get the basics set up — handholding, as you say — and 0.5% for a platform is reasonable if you are investing less than £20k or so in total. Once the fund gets bigger, you can always port it elsewhere.

Initially only available to those with at least £50k to invest, levels of service offered are on a scale and and at £50k-£100k it’s a ‘digital financial planning experience’! Over £750k and you get your own financial planner who can offer face to face advice.

 

[kabbes]

0.5% for a platform is very expensive if you have £750k. To put it into context, Interactive Investor’s cheapest rate is £10 per month fixed (which includes one free trade a month — enough if you are just going for a tracker). So that’s 0.016%. Doesn’t seem much point in saving your investment fee by going for passive over active and then spending it on the platform fee instead.

 

[platinumsage]

0.5% for a platform is very expensive if you have £750k. To put it into context, Interactive Investor’s cheapest rate is £10 per month fixed (which includes one free trade a month — enough if you are just going for a tracker). So that’s 0.016%. Doesn’t seem much point in saving your investment fee by going for passive over active and then spending it on the platform fee instead.

No, that 0.5% is for the financial advice, which is way cheaper than for example HL who charge 1-2% for their restricted (i.e. non-independent) advice service.

Vanguard haven't published the details yet, which may include a cap (their 0.15% platform fee is ordinarily capped at £350).

It will probably suit people with £50k-200k, as most IFAs probably wouldn't want to take clients in the lower end of that range.

 

[strung out]

It seemed good at first but as I read the article I became more cynical. The only thing you can buy are its own passive tracker funds. That might be fine but then you’re paying a lot just to invest in tracker funds! They say the platform part is 0.5% and that may or may not be good value depending on how much you are investing — suffice to say that my platform costs me a hell of a lot less than that, and it provides me with more options than Vanguard passive trackers. And I wonder how much advice somebody needs just to be told to invest in a diversified set of trackers?

Still, it’s a good way to get the basics set up — handholding, as you say — and 0.5% for a platform is reasonable if you are investing less than £20k or so in total. Once the fund gets bigger, you can always port it elsewhere.

It's 0.5% for the advice and 0.15% for the platform I think, then 0.12% fund charges. 0.5% for the advice is extremely competitive.

If you don't want the advice, Vanguard have always had one of the cheapest standalone platforms at 0.15%, capped at £375 (free if you've got more than £250k invested). I agree with you about being restricted to Vanguard funds, but they've got virtually everything you could want in their tracker range.

 

[kabbes]

Ah, I misread the article.

So it really comes down to whether people want to pay 0.5% to be told which passive funds to invest in. Could be worth it, but not so much for me.

 

[teuchter]

The combination of rubbish interest rates and this thread has got me thinking about this investment stuff again.

I was previously considering the question of paying-off-part-of-mortgage vs putting the same amount in a savings account. That would mean accepting some cost of doing so (because the mortgage interest rate is higher than any savings account) but with the benefit of keeping funds 'available' to some extent.

Now I am trying to think through the implications of putting some amount into investment funds vs. using it to pay off part of a mortgage.

Say I commit to a 2 or 3 year mortgage at 1.5%. And put an amount into investment funds. If after 2 or 3 years, that investment has grown by 1.5% or more, then obviously I haven't lost out.

The worst case scenario is that after 2 or 3 years, the investment has done worse than that, and when my mortgage deal comes up for renewal, they offer some kind of very high interest rate like 5% or something. And then I'd have to make a choice: (a) withdraw the funds, and accept the hit, and get a portion of the mortage paid off to try and avoid some of the cost of a high interest rate or (b) leave the funds in there and have faith that they'll produce a return in the long run which will eventually compensate for the high interest rate on the mortgage. So after 5 or 10 years I'd be no worse off than if I'd paid off a portion of the mortgage now.

Does that make any sense as a way to think about it?

Essentially the question is, how likely is it that 2 or 3 years from now mortgage interest rates will have gone up substantially in conjunction with investments having done badly? Likely or unlikely or highly unlikely? I realise that the nature of the question is that no-one can really answer it.

 

[stdP]

Personally my inclination would be to start overpaying the mortgage right now, but it largely depends on your personal situation. If it's a brand new mortgage with a lot outstanding, the benefits of overpaying as soon as possible are higher than doing so further down the line. I mentioned it in a previous post but MSE have a mortgage overpayment calculator here that you can try chucking some numbers in to:

Mortgage Overpayment Calculator: Pay off your debt early?...

Mortgage Overpayment Calculator shows how much you can save by paying off your mortgage early - if your mortgage allows overpayments.

www.moneysavingexpert.com

If you're planning on doing the "chuck £100 a month in to investments" you can always try splitting it in to £50 on the mortgage and £50 in to stocks and shares if you're uncertain of the figures. Stock market-wise I think it's generally best to think in a minimum term of 5 years to ride out any ups and downs; if you can work on timescales like that then you could always try hoovering out some of the investment profits out on a yearly basis and using that to overpay the mortgage (that's what I would do if I had a lump sum bigger than the penalty-free-overpayment limit on my mortgage).

I'm always paranoid that mortgage interest rates will jump and that the cost of consumer borrowing at least will rise and leave a lot of chickens coming home to roost; I got in to a long-term fixed on the assumption they'd jump, but they haven't done so yet. I'm not sure if interest rates themselves will jump but I do feel like we're at the start of a sizeable inflationary jump at least, and I'm worried the number of people being priced out of the housing market (even if the population can't afford houses there's endless private equity funds waiting in the wings looking to buy cheap and seek rent) along with post-covid and post-brexit woes is going to lead to significant turmoil in the property market not unlike the early 90s recession. But I'm no financial nostradamus, just a very cautious chap with a mortgage (and paying off the mortgage is dead easy).

 

[kabbes]

The combination of rubbish interest rates and this thread has got me thinking about this investment stuff again.

I was previously considering the question of paying-off-part-of-mortgage vs putting the same amount in a savings account. That would mean accepting some cost of doing so (because the mortgage interest rate is higher than any savings account) but with the benefit of keeping funds 'available' to some extent.

Now I am trying to think through the implications of putting some amount into investment funds vs. using it to pay off part of a mortgage.

Say I commit to a 2 or 3 year mortgage at 1.5%. And put an amount into investment funds. If after 2 or 3 years, that investment has grown by 1.5% or more, then obviously I haven't lost out.

The worst case scenario is that after 2 or 3 years, the investment has done worse than that, and when my mortgage deal comes up for renewal, they offer some kind of very high interest rate like 5% or something. And then I'd have to make a choice: (a) withdraw the funds, and accept the hit, and get a portion of the mortage paid off to try and avoid some of the cost of a high interest rate or (b) leave the funds in there and have faith that they'll produce a return in the long run which will eventually compensate for the high interest rate on the mortgage. So after 5 or 10 years I'd be no worse off than if I'd paid off a portion of the mortgage now.

Does that make any sense as a way to think about it?

Essentially the question is, how likely is it that 2 or 3 years from now mortgage interest rates will have gone up substantially in conjunction with investments having done badly? Likely or unlikely or highly unlikely? I realise that the nature of the question is that no-one can really answer it.

Broadly, I would say there is nothing wrong with your thinking, with the exception that you should allow for tax in your equation — you potentially have tax on investments but any elimination of mortgage interest comes off the top line.

There’s an excellent chance that the value of investments will dip right at the point you’d like to liquidate them, owing to good old Sod’s law. Also, bond and share prices are inversely correlated to interest rates (the former just because of maths, the latter for more indirect reasons). So if rates go up, chances are your investments will be depressed at the same time.

Nevertheless, if you can afford to risk it, the odds of beating the mortgage rates — even after allowing for tax — are very high in the medium term. And one option that might help with timing is to invest now and liquidate once the portfolio has returned a given yield, which allows you to pay the mortgage at that time and know you’ve beaten the system.

An offset mortgage can help here too — it allows you to have the funds sitting ready to invest if you think the timing is good. I’m not sure (but what do I know?) that now is the right time to go for shares as they are mostly at record peaks, which I don’t feel bodes well. Not that I’m selling either, which makes no logical sense at all (if the prices are high you should be willing to sell just as much as you are reluctant to buy) but whoever said humans are rational?

 

[teuchter]

Stock market-wise I think it's generally best to think in a minimum term of 5 years to ride out any ups and downs; if you can work on timescales like that then you could always try hoovering out some of the investment profits out on a yearly basis and using that to overpay the mortgage (that's what I would do if I had a lump sum bigger than the penalty-free-overpayment limit on my mortgage).

I'm trying to get my head around whether the logic of this actually makes sense.

Because, if I've already decided to put a certain amount into investments instead of using it to pay off mortgage... in the expectation that I'll do better out of it in the long term, then why wouldn't I apply the same rationale to any of the investment profits? In other words reinvest them instead of using them to pay off mortgage.

If I extend that thinking then it appears to lead me to a point where I don't pay off any of the mortgage until the day before the end of its term. But I suppose the longer I leave it, then the greater the potential returns but also the greater risk of my whole scheme collapsing.

 

[teuchter]

The MSE overpayment calculator is handy to an extent but it ignores the crucial question of "what could the money be doing instead".

 

[kabbes]

I'm trying to get my head around whether the logic of this actually makes sense.

Because, if I've already decided to put a certain amount into investments instead of using it to pay off mortgage... in the expectation that I'll do better out of it in the long term, then why wouldn't I apply the same rationale to any of the investment profits? In other words reinvest them instead of using them to pay off mortgage.

If I extend that thinking then it appears to lead me to a point where I don't pay off any of the mortgage until the day before the end of its term. But I suppose the longer I leave it, then the greater the potential returns but also the greater risk of my whole scheme collapsing.

You’re right that it doesn’t make sense from a theoretical perspective but it helps a lot of people from a psychological one.

Theoretically, there is an optimal strategy at a given time and normally this involves going all in or all out. Lots of stats written about this kind of thing (“top-slicing”, they used to call it) but basically it comes down to that a price is either worth buying into in full or getting out from in full.

But psychologically, it is hard to cope with that kind of all or nothing strategy, particularly when you lose. So it can help with the mindset of it to spread your bets.

 

[platinumsage]

I’m not sure (but what do I know?) that now is the right time to go for shares as they are mostly at record peaks, which I don’t feel bodes well. Not that I’m selling either, which makes no logical sense at all (if the prices are high you should be willing to sell just as much as you are reluctant to buy) but whoever said humans are rational?

Shares are often at record peaks because the stock market trends upwards - that's why it's a good long-term investment. Rather than not boding well it should bode that things are entirely normal. For example the S&P 500 sets a record high on approximately 7% of weekdays.

Timing the market is a mugs game and you get the best returns by investing everything you have available to invest now, rather than waiting.

 

[kabbes]

Shares are often at record peaks because the stock market trends upwards - that's why it's a good long-term investment. Rather than not boding well it should bode that things are entirely normal. For example the S&P 500 sets a record high on approximately 7% of weekdays.

Timing the market is a mugs game and you get the best returns by investing everything you're going to invest now rather than waiting, provided you are investing for at least 5-10 years.

I always invest everything immediately, so it’s good to know that the data backs this up . I had no idea that a record high is set so regularly — good stat.

 

[teuchter]

You’re right that it doesn’t make sense from a theoretical perspective but it helps a lot of people from a psychological one.

Theoretically, there is an optimal strategy at a given time and normally this involves going all in or all out. Lots of stats written about this kind of thing (“top-slicing”, they used to call it) but basically it comes down to that a price is either worth buying into in full or getting out from in full.

But psychologically, it is hard to cope with that kind of all or nothing strategy, particularly when you lose. So it can help with the mindset of it to spread your bets.

It seems to me that the best strategy is different according to how long is left on the mortgage. So something that might involve a sensible level of risk when the mortgage had 20 years to go, would be less sensible if it only had 5 years to go.

 

[kabbes]

It seems to me that the best strategy is different according to how long is left on the mortgage. So something that might involve a sensible level of risk when the mortgage had 20 years to go, would be less sensible if it only had 5 years to go.

Exactly that, like what in the pensions world is called "lifestyling". You can even get lifestyling products, although since these switch mostly to bonds rather than cash in the last few years, they are less appropriate for working towards a single big cash lump sum.

 

[stdP]

The MSE overpayment calculator is handy to an extent but it ignores the crucial question of "what could the money be doing instead".

You've essentially asked two "how long is a piece of string?" questions - one some hypotheticals for a mortgage, one some hypotheticals for investments. We can't actually know what the outcome of any investment package might be - your return might be zero, it might be 5%, 10%, or you lose the lot in a stock market crash.

I've got a very low appetite for risk, so my money will generally go on "paying off my debt" first as that's essentially zero-risk, concrete reward for both short and long term, doesn't require any active management, doesn't incur any CGT. Like kabbes says, there's always an optimum strategy, but this is only ever wholly revealed in hindsight. Because I know I'm not a fortune teller, I favour a pessimum strategy.

If I had more money than I could spend on mortgage overpayments, I'd probably invest the surplus and use that to pay off the mortgage when the next year rolled around.

It seems to me that the best strategy is different according to how long is left on the mortgage. So something that might involve a sensible level of risk when the mortgage had 20 years to go, would be less sensible if it only had 5 years to go.

Correct. Overpaying your mortgage by £1000 when it's 90% paid off will net you much smaller gains than overpaying by £1000 when it's 1% paid off thanks to the magic of compound interest. At some point there's a break-even where regular investments will return more for your £1000 (but do come with associated risks).

 

[kabbes]

I thought it might help people if I listed the top dozen funds I personally have an investment in, together with a commentary as to why. This is not a recommendation -- in fact, this has been a long way from an optimal strategy over the last five years. I make terrible choices, frankly. But the logic of it might help to explain why you might do things when.

These top dozen make up about 2/3 of the total investments by value.

Threadneedle Monthly Extra Income (I)

Premier Miton Monthly Income (I)

Jupiter Monthly Alternative Income (I)

Baille Gifford European (A)

VT Downing Monthly Income (I)

Thesis Climate Assets (A)

Vanguard FTSE UK All Share Index (A)

Janus Henderson UK Smaller Companies (A)

JPM Global Unconstrained Equity (A)

Premier Miton European Opportunities (A)

Barings Europe Select (I)

Aegon Global Sustainable Equity (A)

What I am shooting for in retirement is to have an income coming entirely from my investments. To get there, one option is to try to use growth funds as much as possible and then sell these and buy income funds once I have enough. This is good in theory but I find it quite hard to know what “enough” looks like without being able to actually see something more concrete. So I take option 2 — get the income funds now so that I can see exactly what they deliver month by month. Well, I actually have a 50/50 approach — half is in the income funds, half in more general growth funds. That way I have an excellent idea of how close I am to my retirement needs but can I still leave half the fund to be more ambitious with.

The top 3 and number 5 on the list are my “income” funds. That “(I)” means I have the “income” rather than the “accumulation” units — this means they pay out their dividends to me as cash rather than reinvest them into the fund. By having these kind of units, I can see exactly what income they are paying out and know (if I scaled up) what my total income could be if everything was invested in this kind of fund. These four funds are almost all invested in shares, so almost all their income comes from the dividends paid by their shares. Two of them invest in large UK companies, one in small UK companies and the other is a weird blend of exotic stuff. (It’s UK heavy because UK shares have very high dividend yields. I have some smaller worldwide/US income funds too, but the income rate is noticeably smaller).

The answer is about 4-5%, by the way. The annual income they pay is worth about 4-5% of their value. I go for funds that pay quarterly or monthly, to better match how I need to get an income in practice. These funds also tend to grow in value at about 2-3% per year, but this is very erratic, as you would expect from shares. Broadly, this tells me that whatever income I want, I can get it by having total investments of about 20-25x this income invested in these kind of funds. These funds will then also grow in value (taking their income up with them) similarly to inflation.

The other eight in the list are all (A) (with one accidental exception), which means they are accumulation units — their income is reinvested back into the fund. They are a mix of stuff that seemed good value at the time. Not much US on that list but there is a lot more in the next dozen. It’s more ambitious — some climate-related stuff, some sustainable, one unconstrained, some that seek out opportunities across Europe. Plus one vanilla tracker.

There, feel free to point and mock.