Parking cash for 6-24 months

[nathan]

Hi all,

I'm expecting a rather nice pre-Christmas windfall this week from exiting an EIS investment (so no Income Tax, CGT or IHT to pay). I want to use the proceeds to buy a property in a year or two, so this lump sum doesn't fit my generally LTBH strategy or feel suitable for equity investment (I already have plenty of quoted equity exposure through my HYP and Lazy ETF portfolios.

With CPI at 3.1% and instant access cash accounts offering ~1%, here's the strategy I've cooked up to gain some return with limited capital risk over the short term (6 months - 2 years). Comments welcome:

30% Cash (Sainsbury's Bank 1.30%, Post Office 1.17%)
20% Equity (Vanguard FTSE100 VUKE 4.6% yield, assumed 20% capital risk)
25% Gilts (Vanguard VGOV 1.61% yield, assumed 5% capital risk)
25% Corp Bonds (iShares SLXX 2.77% yield, assumed 8% capital risk)
Overall 2.30% yield (0.80% behind CPI unfortunately), with 7.8% capital risk (although I won't necessarily have to sell any of this unless I'm willing).

Of course, I could find a way to invest in property immediately, and perhaps somebody has an idea along those lines, but for various reasons, I won't be ready to move into somewhere new for 18 months at least.

Any ideas are most welcome.

Nathan

[kiloran]

For cash, you might consider NS&I Guaranteed Growth Bonds, at 1.5% for 1 year or 2.2% for 3 years

https://www.nsandi.com/guaranteed-growth-bonds

Not instant access, but you can get at the cash if you need it

--kiloran

[tjh290633]

It strikes me that, when interest rates are likely to rise, fixed interest investment is not the way to go. Equities could also be risky. If you want the cash before five years have elapsed, then cash or maybe premium bonds might be a better choice.

TJH

[vrdiver]

Your time-scale looks like you will want the cash right in the middle of whatever uncertainty Brexit brings to the market. Assuming capital preservation is more important than achieving RPI growth, I personally would stay out of UK investments, or at least GBP earning ones.

You could buy £50k of premium bonds - probably earn 0.8% in prize money, maybe a bit more if you're lucky! Santander 123 accounts pay 1.24% on £20k, and your own bank probably has a high interest regular savings account that will pay 5 or 6% on a couple of £k.

You could also go to peer-to-peer sites like Zopa or Ratesetter, which could earn 5% (with a sale cost of 1%, so feasible to exit after 3 months or so without capital loss).

VRD

[swill453]

You could buy £50k of premium bonds - probably earn 0.8% in prize money, maybe a bit more if you're lucky!

According to this calculator https://www.moneysavingexpert.com/savings/premium-bonds-calculator/ a person with a £50,000 holding with average luck would expect to win roughly £500 per year ie 1%.

Scott.

[TUK020]

You might want to consider 10% in gold etc, as an insurance against major catastrophe in equities and bond markets
Tuk020

[TUK020]

Gold ETF

[vrdiver]

Gold ETF

Problem with this is the same as investing in shares - there's no guarantee of capital preservation at the point where you need to withdraw the money.

Gold may go through the roof, or it may tank over the next two years, what it won't do is correlate with house prices.

[nmdhqbc]

All in Bitcoin!!

[mao44]

Birmingham Midshires savings account is currently paying 1.45%.

[mao44]

Birmingham Midshires savings account is currently paying 1.45%.

[BrummieDave]

I have a feeling that's no longer available. It was at the beginning of December but is no longer on their website.

[nathan]

It's a tough one isn't it? And thanks for the input so far.

My priorities are (a) capital preservation and then (b) try to get RPI return, or at least not fall too far behind. On my other portfolios I benchmark against RPI + 4% but invest almost 100% in equities...

Does anybody know a good way of tracking a house price index?

Nathan

[scrumpyjack]

re Premium Bonds vs interest, assuming you are going to exceed the personal savings allowance, don't forget that Premiums bonds prizes are tax free whilst interest over the PSA is not. The prize fund rate is 1.4% and given the preponderance of £25 prizes if you have a sizeable holding of bonds (max £100,000 between you and your wife) you are pretty likely to get close to that rate of return, tax free.

I agree with another poster's comments that holding fixed interest stocks whilst interest rates are rising is risky.

Lastly the FTSE100 is substantially non UK in profit source ( I think about 75% of FTSE100 co profits come from overseas operations as so many are multinationals). that may or may not be a good thing. Also it is very heavily weighted to a few mega large companies in a few sectors - Banks, Oil and Miners etc. Historically that has underperformed the FTSE250 but who knows what will happen in future.

[Daytona]

As others have said, interest rates are rising - from 350 year lows. Rising interest rates means bond and equity values decline. The stock market is also at a high.

Now is absolutely not the time to be betting on short term outperformance.

In this screwed up world of QE, safety has a price. It's the loss in real terms on cash savings. It is, imo, a fair price to pay.

If you really want to match your savings to property, see if any of these funds still exist -
http://www.telegraph.co.uk/finance/pers ... uying.html

[limetree10]

I am in a similar position to the OP and as Kiloran suggests have used the new NS&I 3yr Guaranteed Growth Bond. It is fixed at 2.2% pa but has the benefit of allowing withdrawals. There is a 90 day interest penalty for withdrawals but even with this penalty it will have returned 1.65%AER if you take your money out at 12 months rising to 1.93% at two years and then the whole 2.2% if you are still in at three years. Not bad returns considering you can deposit up to £1 million and it is fully protected.
Cheers Lime

[swill453]

re Premium Bonds vs interest, assuming you are going to exceed the personal savings allowance, don't forget that Premiums bonds prizes are tax free whilst interest over the PSA is not. The prize fund rate is 1.4% and given the preponderance of £25 prizes if you have a sizeable holding of bonds (max £100,000 between you and your wife) you are pretty likely to get close to that rate of return, tax free.

No, you're more likely to get nearer 1% return, if you discount the unlikely possibility you'll win a major prize like £1 million.

Scott.

[scrumpyjack]

re Premium Bonds vs interest, assuming you are going to exceed the personal savings allowance, don't forget that Premiums bonds prizes are tax free whilst interest over the PSA is not. The prize fund rate is 1.4% and given the preponderance of £25 prizes if you have a sizeable holding of bonds (max £100,000 between you and your wife) you are pretty likely to get close to that rate of return, tax free.

No, you're more likely to get nearer 1% return, if you discount the unlikely possibility you'll win a major prize like £1 million.

Scott.

No if you ignore all other prizes than the £25, your return will be 1.224% and the chances of getting the odd £100 prize on top if you have the maximum holding aren't that bad.

(This calculation is based on the chances of a bond winning a £25 prize are 1 in 24,500 each month. So the annual average return on £100,000 of bonds (husband and wife) would be
1/24500*12*25 *100000 = 1,224.49

The 1 in 24,500 are the current odds quoted on the moneyvator website

[Chrysalis]

It seems to me that if you want capital preservation, the choice is between NS&I Growth bonds and premium bonds. The better return between the two will depend on your holding period and your top tax band. And of course there is a limit to the amount that can be put in premium bonds.

Short dated bonds or gilts might give the possibility of higher return, but check the tax position and of course there is also the possibility of loss. I think if you are certain you want to use the money in the next few years, I would stick with a cash deposit and suck up the inflationary loss (which of course might not actually materialise since you want to buy housing, which can go down as well as up....)

[Chrysalis]

Another thought - it might also help to consider your portfolio asset allocation as a whole, since after all, this is a part of it. You don't necessarily need to think about 'keeping up with inflation' just within this subsection of the portfolio (I know you have earmarked it for a purpose, but that is just about making sure you have enough liquidity to make the purchase when you need to).
So if you are still comfortable that your asset allocation as a whole will keep you abreast of inflation (or your required growth rate), that might help prevent you reaching for return inappropriately for this tranche of funds (ie making sure you are not a forced seller of equities when you want to buy your property).
I know its a psychological trick, but it sometimes helps to conceptualise things differently.