27k to invest, not sure about key posts

[brianb8802]

Hi guys, I was looking at the key posts but I still dont know what the best option or options are for my own circumstances. Was wondering if I could run it by ye see what ye think.

I have been working but I am going back to college for a year in september, I have all my expenses for the year covered. My long term plan is go back to college for a year, work for 12 months and go travelling for another 12-18 months. So plan is to be back in ireland Summer 2010. Then get back to work straight away when I get back.

So looking to invest roughly €27k for min 3 years, max 5. Im hoping to come back from travelling and not touch the money for a year or two. But obviously i cant gaurantee this. But i definately wont be touching it before 3 years.

Id usually have a neutral to defensive outlook on money matters, but Ive never invested before so i could be persuaded otherwise. I wouldn't mind taking a bit of a risk, but nothing too flashy.

Any views would be greatly appreciated

 

[ClubMan]

Id usually have a neutral to defensive outlook on money matters

What do you mean by this - conservative, low appetite for risk/volatility?

 

[brianb8802]

What do you mean by this - conservative, low appetite for risk/volatility?

I took that from the rabo direct website, id be willing to take certain risks, but nothing major

Your risk profile: Neutral

You are a good in judging the risks you are willing to take. The concept of investing is not new to you and you aim for a good return in the long run. Your portfolio reflects this by containing a balanced mix of bonds and shares.

 

[LDFerguson]

General opinion is that for any form of equity-based investment, five years is a minimum realistic timeframe with flexibility to extend this if market conditions after five years aren't favourable.

It's possible to invest in shares directly or managed funds with no early exit penalties which theoretically might give you a good return after three years, but the short timeframe would make that a high risk venture.

With a three-year view I'd be inclined to pick the best deposit rate from the Best Buys list here on Askaboutmoney.

 

[gonk]

General opinion is that for any form of equity-based investment, five years is a minimum realistic timeframe

Whose opinion?

What about, for example, all the equity-based SSIA accounts which in general did much better than their deposit-based equivalents? Although the accounts had a life of five years, since the investment was being made monthly over that time, the average investment period was only 2.5 years.

I see this minimum five year time being cited very often on AAM, but the SSIA experience is a very clear example that it's perfectly possible to successfully invest in equities over shorter timeframes without actually getting into day-trading.

 

[ClubMan]

Whose opinion?

What about, for example, all the equity-based SSIA accounts which in general did much better than their deposit-based equivalents? Although the accounts had a life of five years, since the investment was being made monthly over that time, the average investment period was only 2.5 years.

It (5 years being the minimum term for equity investments) is a catch all general rule of thumb so not necessarily applicable in all cases. Don't forget that (a) many equity SSIA holders seem to have rolled their investment over so their overall investment term is still ongoing and (b) by investing in equities for less that 5 years you are undertaking more risk and potential volatility than someone who invests longer.

I see this minimum five year time being cited very often on AAM, but the SSIA experience is a very clear example that it's perfectly possible to successfully invest in equities over shorter timeframes without actually getting into day-trading.

Of course. But don't forget that some equity SSIA holders - especially those who started early and cashed in after 5 years - did not earn great returns either!

 

[Brendan Burgess]

Hi Brian

If you invest in a deposit account, you will get your own money back after 3 to 5 years. It will probably lose a little bit of real value if inflation is higher than the interest rate.

If you invest in the stockmarket, it is likely that in 3 years time, that your investment will be worth more as the return in most cases will exceed inflation. There is a low chance - probably 20% that your investment will fall or rise by less than the rate of inflation. Can you handle such a fall? That's up to you, but if a fall won't hurt you too badly, then you should invest in equities.

The best way to do so would be though a fund which has no exit charges and no initial charges. This means that you could cash it in whole or in part at any time should you need it.

Brendan

 

[Superman]

Following on from Brendan's advice, also consider mixing your exposure:

e.g.:
With €20k of the €27k: Stick €10k in Rabo, €10 k into Northern Rock, Feed €1k a month into the High Interest Savings account from Anglo Irish, €300 into AIB, (and whatever into Bank of Ireland and Halifax - check the sub-forum for the exact details).

With the remaining €7k: Invest in stock

 

[gonk]

Don't forget that (a) many equity SSIA holders seem to have rolled their investment over so their overall investment term is still ongoing

Not me! My wife and I hedged our bets by opening one equity-based and one deposit-based SSIA.

The equity-based one very comfortably beat the deposit-based one (the ACC fixed interest account, which was widely agreed to be among the best deposit-based SSIA accounts at the time). The return on the equity-based one was €4k higher after tax - this as I say on an average 2.5 year investment period.

We have closed the equity-based account and moved the funds into a commodity investment.

The point I'm making is I disagree with the commonly seen advice on AAM that one should not even consider an equity investment for a shorter period than five years. Provided one understands the greater risks, an equity-based investment could be a perfectly viable choice for much shorter periods. I stress again, I'm not talking about the very short-term, which I would describe as trading not investment.

 

[LDFerguson]

Hi Gonk,

Brian says he may need access to the money in three years. In three years' time, the value of an equity-based investment may have dropped and so he'd either have to sell the investment at a loss or defer selling until the value had recovered.

But I take your point - the five year rule of thumb is not based in any real scientific reasoning, to the best of my knowledge. I guess it's primary role is to be long enough to discourage inexperienced investors from attempting to "get rich quick" in a rising market, without being aware of the potential downsides. There's a minor point also that many equity-based managed fund products contain early encashment penalties in the first fve years, but they exist for commercial reasons.

I think the important part of the advice for anyone considering equity investment is that they muct have flexibility as to their exit date. If there is a definite need to access the cash after three years, I'd still hold that equity investment is not suitable.

Regards, Liam

 

[gonk]

Hi Gonk,

Brian says he may need access to the money in three years. In three years' time, the value of an equity-based investment may have dropped and so he'd either have to sell the investment at a loss or defer selling until the value had recovered.

But I take your point - the five year rule of thumb is not based in any real scientific reasoning, to the best of my knowledge. I guess it's primary role is to be long enough to discourage inexperienced investors from attempting to "get rich quick" in a rising market, without being aware of the potential downsides. There's a minor point also that many equity-based managed fund products contain early encashment penalties in the first fve years, but they exist for commercial reasons.

I think the important part of the advice for anyone considering equity investment is that they muct have flexibility as to their exit date. If there is a definite need to access the cash after three years, I'd still hold that equity investment is not suitable.

Regards, Liam

Brian says he has €27k to invest for min 3 years, max 5, so he has the flexibility which you suggest is required in which to pick his exit point if he goes for equities. He will not be forced to exit at a low point in the market. (Unless that low persists for two years, which I grant is possible.) In my view a perfectly reasonable option would be to split between deposit and equity-based investments - say 50/50 between a deposit account and an ETF like the ISEQ 20 ETF.

ETFs have none of the drawbacks with regard to early encashment you mention and have very low management charges.

I strongly disagree with your advice that in Brian's specific circumstances he should not even consider an equity investment. Deposits carry their own risks, specifically that the after-tax return will not preserve the inflation-adjusted value of the money. At present interest and inflation rates, there is almost no chance of actually increasing the real value of a deposit-based investment. There is a very good chance a well chosen equity-based investment could do so in the three to five year timeframe mentioned.

 

[ClubMan]

Don't forget that the original poster seems, by his own admission, to have a relatively low appetite for risk/volatility. Of course it's quite possible that he is mistaken in having such a conservative view but only a proper, objective and comprehensive fact find/financial review and assessment of his overall circumstances can determine this in my opinion. As ever what is most suitable really depends on the specific circumstances of the individual.

 

[gonk]

Don't forget that the original poster seems, by his own admission, to have a relatively low appetite for risk/volatility.

That wouldn't be my take on it:

I wouldn't mind taking a bit of a risk, but nothing too flashy.

And at the risk of repeating myself, many novice investors don't grasp the point that putting money on deposit is risky in itself. In recent years, these have all produced a negative real rate of return.

Anyway, moving away from the specifics of Brian's case, the point I'm making is that the advice often seen on AAM that one should not consider investing in equities for a shorter timeframe than five years is seriously overstating the case.

 

[brianb8802]

Thanks for the reply everyone, ill try to answer all your questions as neatly as i can, but might be a very long post so sorry if it gets confusing

Hi Brian

If you invest in a deposit account, you will get your own money back after 3 to 5 years. It will probably lose a little bit of real value if inflation is higher than the interest rate.

Thanks for the reply brendan, do you think this also applies to robodirect?

If you invest in the stockmarket, it is likely that in 3 years time, that your investment will be worth more as the return in most cases will exceed inflation. There is a low chance - probably 20% that your investment will fall or rise by less than the rate of inflation. Can you handle such a fall? That's up to you, but if a fall won't hurt you too badly, then you should invest in equities.

To be honest i dont think a fall of that much would hurt me badly so I'd be willing to take a risk on it

The best way to do so would be though a fund which has no exit charges and no initial charges. This means that you could cash it in whole or in part at any time should you need it.

Could you give an example of one of these please brendan

Following on from Brendan's advice, also consider mixing your exposure:

e.g.:
With €20k of the €27k: Stick €10k in Rabo, €10 k into Northern Rock, Feed €1k a month into the High Interest Savings account from Anglo Irish, €300 into AIB, (and whatever into Bank of Ireland and Halifax - check the sub-forum for the exact details).

With the remaining €7k: Invest in stock

Thanks for your reply superman, I like the way you split it up, but unfortunately since i wont be working a permanent job over this time, i wont be able to put the €1,300 a month into Anglo Irish and AIB.

Hi Gonk,

Brian says he may need access to the money in three years. In three years' time, the value of an equity-based investment may have dropped and so he'd either have to sell the investment at a loss or defer selling until the value had recovered.

But I take your point - the five year rule of thumb is not based in any real scientific reasoning, to the best of my knowledge. I guess it's primary role is to be long enough to discourage inexperienced investors from attempting to "get rich quick" in a rising market, without being aware of the potential downsides. There's a minor point also that many equity-based managed fund products contain early encashment penalties in the first fve years, but they exist for commercial reasons.

I think the important part of the advice for anyone considering equity investment is that they muct have flexibility as to their exit date. If there is a definite need to access the cash after three years, I'd still hold that equity investment is not suitable.

Regards, Liam

Thanks for the advice Liam, i see what you are saying about cashing in early. But if i was going to suffer serious penalties for getting out early i would deffinately leave it be. Even if i was seriously strapped for cash i could never see myself cashing in and losing my profit.

Brian says he has €27k to invest for min 3 years, max 5, so he has the flexibility which you suggest is required in which to pick his exit point if he goes for equities. He will not be forced to exit at a low point in the market. (Unless that low persists for two years, which I grant is possible.)

Hi gonk, check the parargraph above

In my view a perfectly reasonable option would be to split between deposit and equity-based investments - say 50/50 between a deposit account and an ETF like the ISEQ 20 ETF.

ETFs have none of the drawbacks with regard to early encashment you mention and have very low management charges.

I have not heard of an EFT before but i checked out the ISEQ 20 EFT brochure here. I like the looks of the companies that are in it.

Don't forget that the original poster seems, by his own admission, to have a relatively low appetite for risk/volatility.

Thanks for your response Clubman, I wouldn't say i would have a low appetite for risk. Its just id prefer to take calculated risks rather than jumping in the deep end.