and some cake to eat as well!!
Sizeable portfolio pot currently in cash. Wanting to preserve capital but achieve a fixed rate of return (accepting that this may not stave of inflation in real terms). Consider as standalone proposition, ie. ignore overall financial position.
Timeline 3-5years.
What would you do? Of course caveat emptor, DYOR......
I don’t think it’s currently possible to match or beat inflation with minimal risk. Answer to your question would depend on the lowest acceptable yield/coupon then to look at the various options which may include short dated corporate bonds, preference shares, building society PIBS, REITs (many of which receive inflation linked rent increases). Trouble is if rates rise then high risk of capital loss on fixed interest securities. Some rare issues have floating rate e.g. £INVR, but again no guarantee of return of capital.
You don't say whether tax sheltered or not. If not and you want low risk, fixed rate of return? National Savings!
Otherwise, guaranteed? Tricky! Inflation-proof? Tricky! The plague is making income forecasts a bit of a Mystic Meg exercise. I have a chunk of the income portion of my ISAs in £ELLA, the ecclesiastical insurers, I should probably have more.
Thanks for response. Yes understood risk of capital loss against fixed interest securities. Will research more on the asset classes suggested.
Low risk with fixed rate of return... lock your cash away for 5 years you can get 1.85% with Secure Trust Bank (LON:STB) (i hold) or 1.81% with UBL UK.
not much else out there
Rates are going up, you can get 1.80% for 3 years now.
I would not lock rates for 5 years at the moment.
Secure up to £85,000 per financial institution.
Preference shares carry more risk but pay around 5%.
£LLPC is 5.65%
£ELLA is 5.48%
I do hold both, both have also gone up in price since I bought but of course could go down.
I'm also a fan of prefs, have a bit of £RE.B & £RAVP . Both at the racier end of risk spectrum but the yields reflect this.
The safest place to park larger amounts of cash (i.e. more than the 85k single bank deposit coverage) is NSI Direct saver account. Govt guaranteed up to 2 million pounds. But, interest rate is only 0.15% and you pay tax on that. Given inflation is higher than this, the real rate is negative. Welcome to QE driven financial repression! It means holding cash is not risk-free as it's almost guaranteed to lose value, in real terms.
The standard academic answer to this question used to be something like a 60:40 split between a stock index tracker and bond fund. But, with inflation looming, bonds look frightening in terms of capital loss. Buying short dated bonds, i.e. expire and return capital within your 3-5 year outlook would be an option though.
Ray Dalio of Bridgewater Capital argues for an 'all weather' portfolio which is a mix of assets, such that something will always do ok in any market environment. The composition is made up as shown in the table below (from their web site). You have to buy all four quadrants and sit tight.
If you were convinced inflation is coming, then you would just buy the top row. The only bonds here are IL (Inflation Linked). Weighted towards commodities, EM Credit.
Otherwise, all other options scale up the risk-reward curve in some fashion. You need to take a position in something you know about for higher returns and hence, more risk.
Thanks all for feedback. Pause for me to do more thinking as to what I really need to achieve.
The following portfolio is not zero risk but I believe it is relatively low risk.
Equal shareholdings in the following three multi-asset investment trusts:
Capital Gearing Trust (CGT)
https://www.stockopedia.com/sh...
Personal Assets Trust (PNL)
https://www.stockopedia.com/sh...
Ruffer Investment Company (RICA)
https://www.stockopedia.com/sh...
This portfolio would have performed quite well with relatively low volatility over the past two years, which includes the short Covid bear market in 2020.
Yes. I used to hold £ELLA too - Ecclesiastical Insurance preference shares. They pay a fixed rate of interest as long as the insurance company is making enough profit to cover the payments. But the share price is not fixed and will fall if/when interest rates rise. So you may well lose on the capital value of your investment. These are better to buy in a high interest rate environment as you will then get the fixed rate preference dividends plus capital gains as interest rates from other sources fall making the ELLA preference shares a better bet. If you like preference shares the Northern Electric preference shares (NTEA) are also a good option. With all preference shares it is important to check the small print
* are they cumulative - i.e. will they pay any dividends missed if the company had been unable to pay for a period
* are they redeemable - i.e. the company can buy them back (usually at par) on demand
Timeline only 3-5 years - I.e. you will withdraw the money then - you must be cautious; and only cash deposits fit this - at 0.5% pa.
I endorse PKA’s comments on CGT & PNL. I have gradually moved money into them; but they could fall over the time.
I sold out RICA after they bought Bitcoin. They made money but high risk - not what one expects from a cautious fund.
A structured deposit plan or structured investment plan sounds like it could be of interest. Investec are market leaders in the UK. Link here
Investec's products are only available through IFAs. A google search may uncover more direct offerings.
1. Some small scale property developers are largely funded by rich individuals, before they gain credibility and grow large enough to qualify for commercial funding through specialist lenders eg Close Bros and Paragon. Typically 0.5-1.0% pm but far more important than the headline interest rate is getting best possible security eg through first charges, personal guarantees and low LTV. I've met people who've done well from this type of lending but you've got to know your onions and be prepared to play hardball if it's necessary to enforce the security (and be a good judge of character). If you don't have a network of contacts it's harder to start. There are 'introducers' out there, eg Iain Maitland and his UK Property Alerts service, who charge a fee from the borrower and sometimes put together syndicates of lenders, though I'm not clear where they stand in relation to FCA promotion of unregulated collective investment rules. For a substantial sum you'd probably want to diversify over more than one project, so increasing complexity and timeframe. Obviously it's not a risk free option and debt/credit investing requires a different mind/skill-set to equity investing! You'd ideally want a decent lawyer on your side too.
2. A softer version of 1. would be a P2P lender such as Relendex. Essentially lots of small lenders are put together and earn a return of typically 5-8% pa depending on the loan. For my sins, I've participated in 35 loans through their ISA scheme since 2017 but decided to wind down my lending in early 2020. One loan is definitely impaired (perhaps 50% loss beckons) while two others are still outstanding. Covid meant significant delays on many projects so nearly all loans due for redemption in 2020-21 went into arrears, still accruing interest. A practical problem would be the time it takes to deploy £750k as most lenders' loan parts are under £10k and Relendex strongly encourage diversification (might be worth talking to them if you were serious about committing large sums). Another risk is the survival of Relendex itself - it's had a fairly chequered history (I should know, as a one-time shareholder!) - and the need to investigate their arrangements for transferring the loan book should they go under. More info here https://www.relendex.com/faq
3. Returning to public markets, traded options allow you to construct a very specific risk/return/duration strategy though you still have to take a view on the likely direction of the underlying and understand the risks if it doesn't pan out. Popular in the US but I believe there are few option traders in the UK now. You need a reasonable grasp of the mathematics of options pricing and the advice to a newbie would always be to start small. I suspect the learning curve is just too steep to make it worthwhile, even if you had the time available. Possibly there are professionally managed option strategies out there, though this is veering towards structured products that someone else has mentioned. There's lots of option strategy books available if your appetite is whetted.
I did P2P for 10 years and made money. It's high risk, look at Lendy, Funding Secure and Collateral, three P2P agents that have gone bust "... investigate their arrangements for transferring the loan book" It dosen't happen, an Admistrator is put in place to liquidate the company and you probably end up with pennies in the pound returned on loans you thought were well backed by security that ends up being over valued. i.e. loan with 70% Loan to value thats end up being 30% LTV. So you think you risked 30% when in fact you risked 70% of your money.
I did have about 100k in P2P but ended up with about £30k which was all interest I had earned, as I had pulled all my capital out. I have got most of the interest back but could lose up to £10K of that interest as it's stuck in non performing loans in the above compaines.
There are people with 100's of thousands in the above P2P companies who stand to lose a big chunk of their money.
This may seem daft... but if you have a Corporation Tax liability, HMRC will pay you 0.5% for paying your Tax early.
They will pay I think 6 months before the period end and for 9 months after the period end until the due date.
I pay my CT ahead of time in order to gradually de-risk a fixed future liability.
Interest rates for late and early payments - GOV.UK (www.gov.uk)
https://www.gov.uk/government/...
