Investing lump sum. Advice?

[david_carnell]

The OP asked for no snarky comment Jezza! ;-)

I'm not passing judgement on any of the investments, merely offering them as possibilities.

[AnotherEDer]

Heh, that's OK. Please don't make me move to Penge.

I had considered a BTL property too. Need to look into this more, sounds a bit scary. Plus my mum had a bad experience with her tenants so this might be clouding my judgement. Also I'm 27 and who wants a 27 year old landlord?!

As I need to access the cash within 4 years, I think 5 year fixed savings accounts, FTSE or S&S ISAs might not be the best options as I can't imagine they will yield enough in this period.

I'm really grateful for all the replies here.

[LadyNorwood]

AnotherEDer Wrote:

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> Heh, that's OK. Please don't make me move to

> Penge.

>

> I had considered a BTL property too. Need to look

> into this more, sounds a bit scary. Plus my mum

> had a bad experience with her tenants so this

> might be clouding my judgement. Also I'm 27 and

> who wants a 27 year old landlord?!

>

> As I need to access the cash within 4 years, I

> think 5 year fixed savings accounts, FTSE or S&S

> ISAs might not be the best options as I can't

> imagine they will yield enough in this period.

>

> I'm really grateful for all the replies here.

Perhaps mentioning you needed to access the cash within the next four years would have provided different responses....?

Personally speaking, I'd pay down my mortgage (you say your payments are management "at the moment" but may not be if/when rates go up) - I overpaid on my monthly repayments and when I finally sold up had an extra few grand in my pocket...

Interest rates on savings accounts are negligible; if you need the cash within four years don't put it in a five year fixed account as you'll be penalised for taking the cash out early...

Good luck!!

[poppet27]

What about splitting isas?

[alice]

Don't knock being a young landlord - i got my first place at 26, renting it out let me travel and live in US, and now no mortgage - ps that house was sydenham not penge! either way nows the time to leap

[LadyDeliah]

Pay off the mortgage cos when mortgage interest rates go up and the property bubble burts you are less likely to lose your home or suffer from negative equity.

[MrBen]

AnotherEDer- all good sensible advice above. Short of doing something high risk/exotic like sticking it all on an obscure mining stock, or investing in a start up, it doesn't get much more exciting than either a safe-ish savings /investment route or taking more risk with property.

Couple of observations:

1. Risk - all true above re. understanding your risk profile. Risk and return broadly correlate and if I could offer some advice it would be that the vast majority of people don't take enough risk. One way to look at it is to think about how much worse your life really would be if you were to lose that ?40k tomorrow? Weren't you doing ok before? I would argue that 27 is a great age to take risk because you don't have family commitments of the 30/40 something bracket or the pensions/retirement concerns of the 50+ bracket. Both demographics in my experience are more likely to be risk averse. At 27 you can make a play, lose and still have plenty recovery time. Think about it - when else can you do that?

2. Your future earnings potential his likely to increase - I don't know what you do (are you able to say?) but at 27 years old it's likely your earnings are on the up and that you'll hit your maximum earning potential in your late 30's or 40's. If you plot that trajectory ahead for your job/profession, what would your likely earnings be in say 5 years time? This might better inform your appetite for risk now e.g. if you expect a steady increase then you can arguably take more risk now. If you're earnings have peaked then you might wish to be more cautious.

3. Property - Mick is right. The huge advantage of property is that it is a leveraged investment and tax efficient. I can't think of any other way that a man with ?40k income and ?40k in the bank can borrow ?200,000 to invest in something that, if its his main home, doesn't get taxed on any uplift (stamp duty at purchase aside). That said?.. my personal belief (my opinion only) is that the underlying fundamentals for property are still hugely problematic. Household debt from the past 15 years binge still hasn't unwound. In "sub prime" London, earnings to houseprice ratios are still way out of whack. Whilst the economy is improving and the headlines are more optimistic, we need a very slow de-leveraging process to get out of the underlying household debt mess. This will take a long time (5-10 years) and will require rate rises that are nicely in step with rising salaries (which we've yet to see). Lots of people know that interest rates have to (and will) rise but their spending behaviour still doesn't correlate ( an "ostrich" effect). The Help to Buy has artificially created a price spike in London that's already fizzling out. I challenge anyone to say the current London market isn't overvalued.

So what would I do? Without knowing anymore about you, I would take more risk than a mortgage pay down or saving. I would probably go down the BTL route and use your 40K to get a decent-ish deposit on say a ?200k purchase to cushion you against any decline in capital value. I would be looking in fringe areas of SE London which offer a gross yield > 5% OR more likely I would be looking outside of London where prices are still sluggish, there's a high rental demand (students, a hospital whatever) and where you'll find more value. Perhaps you have a hometown in Kent/Scotland/Wales that you know well and so could research easily to find how that local market has performed? There is lots you can do to make being a landlord easy but it does require some thought and effort. Get it right and it can be relatively hassle free. Good luck.

I'd then look to sell your BTL in 4-5 years time depending on the market and use the proceeds (CGT applies to any profit) to help fund your house purchase with any uplift/equity you carry forward from your own flat + future salary rise.

[MrBen]

Looking at the higher risk end and not for the faint hearted, investment in a start up via the new SEIS scheme is very attractive. You can offset your income tax and get a substantial capital gains break.

See http://www.hmrc.gov.uk/seedeis/background.htm

Not one for the layman though?.

[LostThePlot]

Jeremy Wrote:

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> Quids... you're not seriously suggesting that

> somebody with little financial knowledge invests

> in this?

Personally I'd want to know why the first 5 years, 1990 to 1995 have a much greater scale than the rest of the graph. That shows grown not to be as strong in those years, but if you adapt that then it will be a stronger growth in that period.

Graphs, a great way of telling the story you want to tell....

[AnotherEDer]

Hi

Mr Ben - Thanks for your advice. I think the major influencing factor is that any investment we make is only going to be short term. We'd like to buy a family house in 3 or 4 years, and that, I imagine is the deciding factor. If not, I might be more inclined to take on more risk.

As for earnings, we have done extensive research into our industry, its average salaries over time, etc and I think realistically our joint income will not exceed ?80k over the next 15+ years. That doesn't take into account any maternity implications.

With buy to let, I will have another look, although I'm dubious that we would get approved for a mortgage. The one on our own place is 85% LTV.

Choices!

[????]

AnotherED - investment implies risk, and that's what you asked advice on.

Savings and paying down debt are not investments - they may be admirable and what suits you. A 3-4 year time frame makes it (investment) more risky too.

Cautious people on the whole don't make much money with their spare money but they don't make that much of a loss (except to the extent that inflation eats into their savings and the 'opportunity' cost around dead spare cash and/or leverage).

Given your plans and longer term goals/income expectations, I'd suggest you do your move now if...unless you think property prices are going to crash or be the same by your proposed step up date.

or hold on do a split 1/3 off mortgage: 1/3 in some kind of investment vehicle(s) - 1/3 in cash.

[Mick Mac]

MrBen Wrote:

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> Looking at the higher risk end and not for the

> faint hearted, investment in a start up via the

> new SEIS scheme is very attractive. You can offset

> your income tax and get a substantial capital

> gains break.

>

> See http://www.hmrc.gov.uk/seedeis/background.htm

>

> Not one for the layman though?.

Agreed - And like BES relief in the 1980s and Enterprise Zone reliefs in the 1990s, the tax reliefs are great because the investments are very high risk.

[red devil]

This.

???? Wrote:

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> or hold on do a split 1/3 off mortgage: 1/3 in

> some kind of investment vehicle(s) - 1/3 in cash.

Most experts will say to spread your risk and not put all your financial eggs in one basket...

[Mick Mac]

If going down the shares route as opposed to property - picking a spread of strong performing unit trusts is the best bet for me, maybe 5/10k in each, that's what I'd do, one from each of UK, USA, Europe, Japan and a lesser amount in emerging eg China/India.

Research it well (fund supermarket sites have the past performance data on all of the unit trusts) and - Quids - I think this beats just doing a FTSE tracker as 1) you get a decent fund manager choosing your stocks and 2) you get a global spread of risk/upside. Quite low charges on most unit trusts and no acquisition cost through a fund supermarket.

[????]

FTSE trackers have a habit of beating most Fundmanagers as does sticking pins in the shares page or gettin a 2 year old to pick them......

however, your idea makes sense other than that Mick, I'll give you that

Motley Fool website is good for cheap advice too

[Mick Mac]

???? Wrote:

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> however, your idea makes sense other than that

> Mick, I'll give you that

Charming.

[MrBen]

For any fund, try to work out the true total cost of charges/fee's over time. Merryn Somerset Webb has rightfully been challenging in her columns for ages....

This article gives you a quick laymans feel:

http://www.ft.com/cms/s/2/fee13228-51e3-11de-b986-00144feabdc0.html#axzz2pLOH7nL7

[Mick Mac]

I have always used a funds supermarket which reduces the upfront fee to low or zero (basis of no advice being needed) and hence no trail commissions which MSW refers too either.

The key features show the annual charges and the charges are a key reason why some people choose tracker over unit trust - but I prefer to take care/time to choose the correct fund and hope the manager will continue to outperform the index even after fees, and usually have been able to choose one that does that.

Usually the past 3 years performance compared to benchmark is a reasonable basis on which to make a decision.

There are good performing unit trusts and bad performing unit trusts - the tracker may outperform many but I feel a good manager with a good track record is worth the charges (although of course I'd be happy for them to be lower)

[MrBen]

ok. But at 1.5-2% in annual charges for a lot of funds plus inflation (2.5-3%) you really need to be getting 8%+ pa to make it worthwhile.

Sticking a lump sum in to get a sub 5% return annually is like watching paint dry don't you find Mick?

[????]

put it all on Rory

[Mick Mac]

MrBen Wrote:

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> ok. But at 1.5-2% in annual charges for a lot of

> funds plus inflation (2.5-3%) you really need to

> be getting 8%+ pa to make it worthwhile.

>

> Sticking a lump sum in to get a sub 5% return

> annually is like watching paint dry don't you find

> Mick?

Absolutely - But I tend to invest in market "upcycles" ... and that's just judgement/educated guessing/good timing.

(and yes nothing comes close to my 160x times multiple over 3 years in my betting fund ? smarty pants)

[grabot]

How about, since you are young with your life ahead of your, investing in yourself? Is there anything that you could do, courses and such, that would increase your long term earning potential? From experience, and I am sure that many will beg to differ, if you are considering any kind of change of path, it is easier before the age of 30, when you tend to get more settled.

[El Pibe]

very sensible advice

I changed career *although that rather flatters my previous efforts* at 25 by doing a 1 year course, got a good job off the back of it. investment of about 12 grand has definitely beaten inflation.

[womanofdulwich]

what was the course???

[MrBen]

Stamp collecting.