Why Holding Cash Now is a Terrible Idea (if you ever want to retire)
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- Опубліковано 20 тра 2024
- Research in this video:
Long-Horizon Losses in Stocks, Bonds, and Bills
papers.ssrn.com/sol3/papers.c...
Credit Suisse Global Investment Returns Yearbook 2023 Summary Edition
www.credit-suisse.com/media/a...
Aswath Damodaran US Asset Returns
pages.stern.nyu.edu/~adamodar...
Financial Planning
I am a Chartered Wealth Manager and Partner in a financial planning practice based in the UK. If you would like to find out more about our services, please follow this link: go.novawm.com/getintouch
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00:00 Intro
00:51 You’ve lost sight of your goals
09:08 High interest rates, higher returns?
DISCLAIMER:
This channel is for education purposes only and does not constitute financial advice. Any opinions or assessments expressed are James’ own opinions or assessments, which are not affiliated with any third party. Any representations stated as facts or views based on such facts are relevant to circumstances applicable at the time of publication. This information should never be relied solely upon to make decisions, and James accepts no liability for any investment actions undertaken by viewers. Please seek regulated financial advice or an advisor if you require assistance.
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There are a lot of people in the comments who seem to think they can time the markets, and get back in “when things look better”.
Here’s two investing quotes I think are appropriate:
“Fear has a far greater grasp on human action than the impressive weight of historical evidence.” - Jeremy Siegel
“Far more money has been lost by investors in preparing for [stock market] corrections, or anticipating corrections, than has been lost in the corrections themselves.” - Peter Lynch
In that case they will all end up very rich!
And you don't seem to recognize the demographic and debt-fueled time bomb that will occur within the next 5 years that will take equities over a decade to recover from. It isn't about timing the market, it is about hedging risk. Investing heavily between 1925-1929 was a bad idea and so is it now.
Except the situation is far worst than the 20's.
Speaking personally, I think it's a case of mitigating short-term risk rather than a decision to invest only in cash for the long term. There's a big difference - being willing to forgo a couple of years of (uncertain) growth in equities for a couple of years of certain (but limited) growth for part of my investments. I can still change tack if the market is rising quickly but comparing 30 year averages (or even 130 years) for equity growth is not valid against a couple of years invested in cash and should only be relied upon for investments of 10+ years. Once again, there's a big difference between continuing to invest for decades and drawing-down in retirement, even if you might have another 20+years to live (which has a similar guarantee to stock markets, i.e. none).
@@davem.4003 Everyone needs to do what makes them feel secure.
But what risk are you mitigating if you don’t need the money in the short term?
Engaging in market timing behaviour is likely to leave you worse off.
@@JamesShack As a recent retiree but still below NPA, I am mitigating the risk to my income for the next few (0-5) years. I am not proposing putting everything into cash but cash is a valid component of a balanced portfolio because my only source of income until NPA is pension drawdown.
I am 55, and love your videos, just checked and adjusted the risk profile of my pension after seeing your video explained so comprehensively, thankyou
James your videos are brilliant, always looking forward to the next one.
Thanks for all of the fantastic FREE advice so far.
Send your wallet address for airdrop
Thanks James, first time I have seen your channel. Great presentation, and clearly explained. Subscribed from Perth Australia. Cheers mate!✊
Love this content, reassuring, thank you James
Brilliant advice and a great stress-buster!
Excellent stuff very timely. Shared with someone who has been pushed to holding cash.
I was worried about inflation and holding cash most of my life
Especially the last few years..
I have been investing for 30 plus years. (yeah, 1999, 200, 2001)
Then 2022 happened.
I am 50% Cash now with no interest in FOMO.
I am looking for index's (broad based) and some stocks at better valuation.
Cash is losing money to inflation, but pick the wrong stocks and you can get destroyed.
Also the S & P could be wildly over valued, maybe not.
I will hold a cash position for better opportunities though.
Cash gives options.
An opportunity will present itself,...,patience, not Fomo.
@@stevie1748 Ditto. Recently re-balanced into more cash. Did the same at the beginning of Covid, and bought into the '20 sell-off.
Nice work James
I'm your new fan. So well explained..
Fantastic video, thank you!
Thankyou so much for advice on one of your previous videos. I am retiring early in July
Love your videos James. You have given me the confidence to invest in the stock market thanks so much❤❤
Excellent presentation!
Great video as always James ... I was wondering how this holds vs property. I'm trying to understand whether it's better to hold on to a buy to let flat ... or sell it put the money into the house I live in and then put the 'saving' each month into my pension pot. It seems a hard one to properly judge.
by far the best video so far . I had to share with my husband who is too risk averse and thinks savings account are safer
Thanks for another great video. I really appreciate how well you explain things and the examples you use to make it relatable. I’m sharing this with both my partner and son as it will help with their aims to improve their financial literacy.
I believe you should generally have 3-6 months' living costs in "cash", then build up enough in pension as bonds for 2 yrs living costs by the time you retire. Everything else in stocks! Once you retire: if stocks are up, then sell them to live on; if stocks are down then sell the bonds to live on until the market recovers (at which point you sell stocks to bring the bonds back to enough for 2 yrs). I'd suggest as a rule of thumb that buying 10% to 20% bonds as your pension starts growing is good, then 80-90% is invested in higher growth stocks, but once you hit enough for 2 years' living then reduce bond investment to only enough to keep up with inflation.
Im retired I got 30yrs of living costs.
Great advice. I am retired and have realised that derisking befpre retirement is just not on. When you retire your hopeful expectation of life is at least 20 years so why go safe just keep going for growth. You do need to pay yourself a "wage" from your investments so financially plan for say 2 rolling years of slow disinvestment to reduce the risk should a stock market decide to correct itself and buy perhaps some of those cash deposits paying interest which mature just in time to cover your wages.
Brilliant, brilliant, brilliant. 👏👏👏👏👏👏👏👏
Cheers, Jamatron!
Very well explained video
Glad you liked it
Brilliant video
Hi James. I've just discovered your channel, and have been binge-watching - excellent stuff! I've just transferred a pension into my sipp, so it arrived as cash (now parked in a moneymarket fund - thank you!) I've also analysed all my pensions so I know that I want to spend about 70% of that cash on equities, and about 30% in UK bonds. The question I'm wrestling with is how to schedule my buy-in. Lump sum? Monthly? Limit orders? Most likely some combination of the 3, but one of your worked examples based on historic data and probabilities would be fantastic - I imagine there are a few people in similar scenarios
ua-cam.com/video/lMYflVzok30/v-deo.htmlsi=Iamz1U8-EZkfVWy5
However, typically, when we do a pension transfer, the goal is to make sure the money is out of the market for as small a period of time as possible so it gets invested into the new strategy as soon as it's received.
Really thought provoking James. I have been reviewing my cash position recently with a view to add more into my SIPP. The tax relief for one should more than offset any market downturn is what I am thinking.
excellent video!
Glad you liked it!
top man . Thanks😁
Enjoy your videos. I think though having cash allows you to invest more freely when prices are low.
Good video, been thinking lately that cash was looking a better bet but will now leave investments where they are 👍👍
Thanks for bringing this to light. I have been feeling more and more this way now that even here in the EU we're getting 4% on uninvested cash.
Is that the highest right now? Currently there are 2 high street banks that have 6% here in the UK.
I can't find anything higher than 4% for the EU (in Euros). GBP seems to have a couple of options with higher rates. Even those 4% are limited to 50k per person, so if you need to invest more the highest savings account yield I could find was in Spain with 3.75% but now they lowered it for new users to 3.25%. You can lock your money on CDs or the likes but not for much more either and you're stuck waiting maturity.
@@carinaadams6797
In australia theres also some other variables, ie while interest is taxed -> some div stocks offer franking credits and their tax benefits
Great video as always James, thanks for sharing.
Some very odd comments on here, people seem to get very defensive when talking about cash savings.
I’m in the process of selling a rental property, and am going to put a bond ladder together (so a video on that would be wonderful, thank you please 😊).
But that bond ladder will only be there for 3 years or so to allow me to max out my pension and ISA over that time…
It's because people like the "let nature take it's course" approach. It's the default option, and most people opt for the default.
By investing you are actively taking a decision to intervene in the course of your future. That unsettles most people.
I think many people are defensive because they've been burnt in the past by the financial industry - they may have already lost money through pension mis selling, the endowment mortgage scandal, the payment protection insurance scandal, being advised to choose the default "lifestyle" fund if you are risk averse, to name a few. It's difficult to trust an industry after that.
Great video, i like the explanation of risk. I've recently invested through an advisor. I try not to look but can't help myself 😂, however seeing this helps reassure me I've done the right thing. I'm in my 50s and contacting so used up my max pension contributions into a sipp and moved my cash ISA into a stocks and shares isa. Have my funds to take some time out in a high interest easy access account so i think i have the right balance.
Always informative and well presented, thanks James.
It really is that simple ... if you don't look.
I am 2 years or so from retirement and I am preoccupied with checking the value of the dc fund regularly, it leaves me crying into my coffee and I can’t stop worrying !
@@jananderson001It sounds like you need a financial plan so you can segment out what you need in the first few years of retirement and what you don’t needs for 5+ years.
If your near term cash flow is set aside, in a relatively safe place, and you know you don’t need the rest of the money for 5+ years, it’s much easier to think long term about the money that remains invested.
You should speak to a financial adviser if you’re really concerned.
Hi James, I’m in a very similar position to the example of Ben you shared in this video. In fact I’m going to retire next year at 56, and I’m holding too much cash. I know I need to invest it in stock, but my ISA is maxed out, so it would have to be into a GIA. Somebody suggested I look at Investment Bonds. Do you have any thoughts on these?
James, I would love to see a video for those of us who want to start investing but just want to not think about it too much. I'm 40 and have always put my money in property which means I have a house worth £1million with 70% equity (fingers crossed will eventually downsize & use this to part-fund retirement), but I'm trying to make up for my mistake of not investing from the very beginning. I have a self-employed pension that I pay into and have just set up a S&S LISA but am a little clueless about what to invest in. I don't really want to pay a financial adviser or a regular wealth asset manager because I don't think I'll make enough to make the fees worthwhile, but I'd love to just start investing in some 'good enough' longterm stocks that I don't have to think about. I don't want to make money from them in the short-term, I just want the money to stay invested. I know I could probably make more if I either take the time to learn it all or else pay someone, but I'd rather make a little less and save myself the headache. Does that make sense?? I'd love a video on this as I expect there are many in the same boat who know a little about investing but not a lot, and also don't really *want* to know a lot (ha).
@hannah - James has some great earlier videos on this. Low-cost broad index trackers are definitely your best bet. There are a number of them out there but Vanguard are a good place to start. A global tracker is better than a UK only tracker. Which "wrapper" you put them in e.g. LISA, SIPP, etc depends on when you think you might want the money. If it is retirement then a SIPP is likely best although it may depend on whether or not you are a 40% tax payer. Only put money into the stock market that you don't need for at least 5 years. Once you have it set up, contribute to your index tracker regularly and don't worry about ups and downs. Holding for the long term is your friend. Hope this helps.
@@jamkraft thank you! I have a LISA set up and have been buying global stock that shows an increase over the last 5 years, so I'm on the right path. Thanks for your reply. My SIPP is with Vanguard too.
An interesting article as always James. A few observations from my own circumstances. I have a Life Strategy fund and a basket of 12 sensible share options, some uk, some global. I retired in 2019 and am still waiting for my LS fund to return a positive above the capital, before I even consider some draw down on the fund. My shares have steadily decreased in value (some catastrophically so) to the point I am wondering if they will ever return to where they were. The dividends I am currently receiving would be handsomely outstripped in value by investing my whole share portfolio into a bond paying 5.95%. Yes the bond return may be different next year, but currently all my investments are haemorrhaging value at a rate where cash investing at least gives me more than dividends. Inflation is another concern, but money security has to be up there when financial planning(?)
Money security over your 2-3 year cash flow is very important. Or if you're particularly risk averse, maybe up to 5 years.
In those situations, a combination of cash, fixed-term deposits or bonds is very useful.
If you have 3-5 years of a cash runway planned out, it's much easier to take the long-term view with your other more volatile investments that are targeting growth ahead of inflation.
Inflation is a risk, which is why it's sensible to hedge against that risk by also investing in productive assets that keep pace with inflation (over the long term) like stocks or property.
I would have thought that over the time period you describe that bonds and in particular long term bonds have been hammered. Equities in the last few years are flattish? I have money with Vanguard and the 40% Equity is down ten percent. The short term bonds off 5% and Equity only various flat or up a little. Not sure if your equities are funds right enough?
I'm down on my life strategy 60. Minus 2 percent or so. So in theory a lot more than if I put it in savings where I would have been up, but still below inflation. But like James said taking a medium to long-term view that in the end it will offer a better return. My ftse tracker on the other hand is 39 percent up.
@@Pbcheltyour buy of a ftse tracker must have been exceptionally well timed if in last 5 years 🤔
@@wallace-bv4rl piled money in right at the start of covid when it all went belly up.
Thanks for a great video. It does trigger some good discussions.
Although stocks have been fairly flat for around last 2 years which makes people less tempted to take risk while it should be the opposite - as you explained at the end of the video, it is still a bit worrying to see stocks valuations to be very high (e.g. buffet indicator showing above overvalued) and seeing some geopolitical situations turning bad. I think the combination of the last two things plus inflation still not under control makes people tempted to park money in cash (money market fund, savings or short term gilts). I do agree though that very likely one would be best just keep drip feeding the money without being distracted as long as you investment horizon is >10-20years. At the end trying to time it while having long investment horizon is probably going to make you worse off (most active managers - the so called professionals - cannot beat passive index investing 😂).
I guess some people are also worried about the periods of time like 2000-2012 when sp500 excluding dividends gave near 0% return over around 10 year.
Also, don’t you think that for the next few years bond funds may be a good option for lower volatility and potentially higher return? Bond fund do currently have decent yields which you can keep reinvesting. On top of that their price e.g. VGOV is very low (-40% from the peak). Once the bank rates start going down the price will likely pop up strongly resulting not only in yield gains but also price gain.
So it feels like bond funds could be a good alternative for less volatility than stocks while potentially still high total return over next few years (yield and price change).
Again, it is a bit of trying to time it. Seem very tempting though…
Hi James, I do hold cash but I still have a draw down pension and a workplace pension, the problem I have is, I am approaching retirement age and my investments are switching to the safety of bonds, which has proved disastrous recently. I don’t fully understand the bond market but I do know that my inflation adjusted investments/pensions (unlike cash) seem to be losing value at the worst possible time for somebody of my age’62’ I actually anticipated being retired by now but I don’t think I can. Any advice or thoughts? Great video, they always are.
the issue of looking at your investments is spot on, I am still weaning myself off accessing my account but now down to once a week rather than daily. May take a few more months to get to monthly but I will get there.
Yeah, it's almost too tempting, almost like an addiction. It's usually disappointing when I peek.
Always great! Thanks James
There are lots of different opinions here and the simple truth is that there's no "one size fits all" solution. The best solution depends on the calculation of "years to retirement + years in retirement", so the larger the number (especially years to retirement), the more flexibility you have to accept risk in return for longer-term growth. My years to retirement = -1, so I have a need for stability and low risk until normal pension age, beyond which, I can accept a higher level of risk in the hope for better growth because the dependency on drawdown is reduced.
Both inflation and interest rates are likely to be relatively short-term, so comparing them to 130 years of equity growth is not valid. Similarly, most people are really interested in the next 20-40 years, during which there will be some significant ups and downs. "Don't try to time the market" may well be good advice when investing for the longer term but what about when drawing on those investments?
Very interesting James
Love your vids.
10 min earlier
I have just emailed my investment manager complaining about the state of my investment.
I also have a 90 min call with one of your colleagues in a week or so 👍
Atb Graham
This is correct long term, I’m currently in a good ESG 85/15 fund heavy on equities but the majority of stocks are in undervalued companies with good balance sheets it actually gained in 2022 when majority of stocks crumbled. There’s no emerging markets in the mix at present to maintain stability. Getting back to the point though for a lot of people going cash in the near term for say 1-2 years makes perfect sense at the current moment. Higher interest rates are now filtering through as global economies are contracting slowly as inflation is barely coming down. There’s way too much speculation in the markets right now and the famous 7 ie Apple being one of them are still trading stupid high multiples. Always good idea to have dry powder on the side alongside undervalued stock. I’d even go as far as saying index investing over the next year will be a bad move in this environment. Undervalued stock, gold/silver etf, cash is where I’m at.
Have you actually looked at the price of gold? It is no better than a bet on Apple…18 months ago, maybe…
This video aged so well 5 months later! Good job James!
It has, indeed. It always would if you gave it enough time.
Generally true, except now the Shiller PE is sky-high, so the equity premium may well be lower. Plus the risk of a crash is substantial according to many analysts (although they're often wrong).
It may well be lower, but it’s still positive.
If analysts say a crash is imminent then this is the bottom 😂😂
I think a crash (an ugly one) will happen in the next couple of years, in which case it's great to have plenty of cash to invest in the stock market.
@@Jalleur14325 but what if it doesn’t and you miss out on a decent market rise 🤔
Great vid as always James, love the content. I think I have quite an interesting questions for you.
I’m currently travelling so don’t have enough capital to continue with the dollar cost averaging into my Globally Diversified index fund. Would it be worth taking half of my savings out of the ISA I’m invested in, put that money in a 4% instant access savings account and then dollar cost average it back into the index fund over the next year until I start earning again?
That might make sense if you think you’re going to need to spend that money in the short term.
Great video James, can I suggest that rather than quoting the data you show, that perhaps from your 112k subscribers you do a poll to see what their experience is on stock returns over time. I have been with several financial advisors over my 30+ years of working. Across that time period some funds have performed but with a "balanced portfolio" the other stocks have not done well. In summary my 25 years under financial advisors I have regularly saved but not made any money! Since taking control I have started marking money on my investments. I would be very interested in your 112k subscribers how many of them have seen the average 9% gains over time while in the market. Just a thought / suggestion
Very good idea I'm guessing the majority have not made any more than they would have putting money in an ordinary bank account or cash ISA. My private pension has earned less than it would have done in a savings account and fees have been substantial.
Many thanks James for this very good video. I have 2 comments. 1. The situation is significantly worse. Capital tax is often forgotten. in Germany around 27%. i.e. if inflation is 5%, the interest payments must be at least 6.8% to maintain the real value. 2. What prevents me from increasing my shareholding to eg 70% is my fear of major losses in value. How do I get this under control? Apparently knowing about the historical performance didn't help me!
Its only a loss when you sell, till then its a drawdown. You can estimate the beta of your portfolio and adj it accordingly or you can hope and pray.
Put your money in SSAC and there will be almost no risk of your portfolio doing badly in the long run.
If you can't handle short term downturns, put your money into MVOL.
@@me-myself-i787 except the long run is shorter when retired.
Nothing is forever and holding more cash during times of high interest is hardly the end of the world.
Yeah, he said that. It's important to have an emergency fund.
Agreed, the high interest times wont last forever but while they do cash is king! Higher yields and much less risk than anything the stock market can offer is a no brainer. Plus you don't pay 2% fees to financial advisers like James! Yes it can't keep up with inflation but neither can the stock market (unless you have a crystal ball and can time it or pick the perfect stocks). Even wages are not keeping up with inflation so I don't think inflation is really relevant here. A person getting a sudden chunk of money (eg £500k from an inheritance, property or pension) could hardly do better than put it all in NS&I savings at 6.2% fixed for a year with guaranteed growth and the entire sum guaranteed by the government.
@@JohnBlackburn1975 A large sum in a savings account means a saver will lose between 20 to 45% of interest in tax depending on their total annual income. If it was me I'd put £20k in a cash ISA and use the rest to buy a UK gilt with a low coupon as they rely on a high capital return instead of income (interest) . UK gilts are exempt from capital gains tax.
A 5% interest rate is not high. It's barely normal.
Yeah but historically the interest rates are low, not high at all
I'd be interested to know where bonds fit into this picture given high interest rates and thus yeilds are currently driving down prices.
if the stock market crashes youre not going to retire either. Ideally you should have part of your portfolio in tangible assets like real estate or silver/gold. I think having a diversified portfolio gives you the best mix between returns and not losing everything when a depression hits.I think paying off your mortgage is one of the BEST investments you can make.
Also in a recession cash is king
Yes ask those in Chicago, Baltimore, Ukraine, Hawaii, how good those real state investments are doing...
In bad times real state stinks, only gold shines
Real estate and commodities, including precious metals, are also volatile investments. My real estate investments fell by more than 30% in the past two years and I'm not expecting them to fully recover for a long time because COVID drove some major changes in commercial property valuations (online shopping and working from home has massively reduced the demand for such properties). In the UK, high interest rates and tax treatment has also reduced valuations for residential property, driving lots of small investors to move out of "buy to let" as it's no longer profitable and there's also no realistic expectation of short-term growth in asset values.
As you state, diversification is key: "never put all your eggs in one basket".
You will lose money when the market goes down/crashes, but if that happens right now, I got 15 plus years to recover. Now if I was to retire next year, then I would definitely have some of my investments in less risky stuff indeed like bonds. I also do dividend ETF investing. Good luck with your strategy.
@@joseCalderon1976 "... If that happens right now, I got 15+ years to recover" which demonstrates the point - we are all different and have different needs, so our personal plans must be adjusted to match our own individual circumstances.
This is fine in the general sense and you can say whatever you want about the EMH and timing the markets. The data shows we are long overdue a major stock market correction in the order of 30-50%. We've seen excesses like with Nvidia and Apple. We're due a softening of the housing market (or perhaps we've already got one). There's an affordability crisis with most unable to save for retirement as they'd like. The M2 contraction rate is at its highest since the 1930s. The mainstream might tell us there is no recession and there won't be one, but in real-terms we're already in a recession. It's not rocket science to hold cash and cash-like equivalents and then use them to buy the dip after recession has been officially declared in 2024
Typically they’re usually a year late announcing a recession.
Exactly this still averaging into stocks each month but holding plenty in cash ready for a dip
Great video James. Love it
Excellent video. So, with 6 months to retirement i will be 64 and looking at taking a decent TFLS. Is a short fixed term annuity, say 3 years, a win / win? a decent monthly income with the same investment paid back at the end of 3 years. Having a mixed asset portfolio with 70% invested is stocks and shares is increasing the number of grey hairs!
Hi, some of my pensions when you divide the pot by the annual payout I would have to live to 110 to drain the pot, and most the pot would still be invested and growing. Am I getting fleeced by providers? I don't plan living that long!
I've just signed up / opened a fixed rate cash with virgin money; but I haven't yet deposited any cash into it.
Having now been better educated by your video do I still have the option of opening a stocks and shares isa and put my £20k allowance in that instead?
This was masterfully succinct. And totally convincing. As ever, TIME IN the market, not TIMING the market.
I have a question: could you please do something on a) bonds b) bond funds? NB I don't mean Premium Bonds.
I am 62 and hold nearly everything (ISA, non-ISA stocks and SIPP) in equities. I have some of the 80% of Vanguard Lifestrategy. I also have *some* (not much fortunately) in Vanguard UK Government Bond Index Fund. Over the past couple of years it's been, like most bond funds, in a word, a SHOCKER. And have the years prior to that, when equities have been storming generally, been much better? Er, no. If I **understood** why bonds go up and down a bit, as I understand (more) the way equities do, I'd be more inclined to buy more bonds (should it be bonds or bond funds?), sit back and let things happen, accept volatile movements. But I don't. Not a bit. I absolutely don't understand them at all. The alleged "countervailing" movements of bonds relative to stocks (as covered by another of your vids) doesn't really seem to be a thing in practice, much, either. I'd love to see what you have to say about them.
Maybe you might be able to show, with stats and graphs, that historically this countervailing characteristic is undeniable. Maybe you can also use them to illustrate the irrefutable virtue of having a higher holding in bonds (bond funds?) at my sort of age... ?
Stocks are easy compared with bonds. But bonds can be very useful in certain situations. I’ll be doing more content on them soon.
Over simplification, but FI hates inflation. Look to the 70's for the last time this happened. There is a degree of luck when it comes to timing your retirement and in my view, now isn't a great time but hey ho, we do all have to make the most of and enjoy our lives.
I also struggle to understand how bonds work…you’re not alone! All I know is I’m glad I wasn’t holding them in the last year or so!
@@malcolmhedges7346 This observation of yours is no doubt true. But you've illustrated the problem there. Take a look at that Vanguard fund (Govt Bond Index Fund) I mentioned on Morningstar. Its vertiginous plummet (to use technical jargon) began in late 2021. I believe inflation was already deeply embedded by then, but if so very few were saying so. If I recall correctly I think I may have been more concerned about it at the time than Andrew Bailey.
And maybe some other people already knew. And maybe that explains it. But as far as I know the financial press didn't really start flashing red on UK inflation until about a year later. Is that the explanation for the fall, or might other factors also have been involved? I repeat: I simply don't understand how bonds behave, so it seems foolhardy to punt on them.
@@stevegeek I'm glad for you - my pension fund was a "lifestyle" fund. Almost 70% of it was in bonds, because I'm seven years from state retirement. Needless to say, I took a big hit. The bulk of my pension fund is now in a SIPP, rather than with that particular company (I don't see why I should trust a company who's default pension fund is a lifestyle fund).
There is also the issue of tax on any interest on savings. As other have pointed out £20K at 5% hits the £1000 a year maximum allowed for a basic rate taxpayer before they get taxed on everything above this.
This isn't true if your £20K is in an isa. If you are talking about investments outside of an isa, then you will have to count capital gains tax, tax on dividends, and the US withholding tax. If you are buying individual shares, you will also have to consider stamp duty.
@@MattMcQueen1 Matt, I’m talking purely on money saved in banks / building societies etc within the UK. Yes if money is in an ISA currently all gains are tax free.
There are accounts offering 5% and better so £20K is your limit to hit basic rate tax payer limit of £1,000. Higher rate tax payers it’s only £500, so they would start to pay tax.
@@guyr7351 Yes, I realise that, but if you want to compare stocks to cash, and you don't intend to use an isa, then you would also have to include capital gains tax, tax on dividends, withholding tax for American investments, and stamp duty, as well as currency fluctuation if you have foreign investments. Personally, I'd have the £20K in an ISA, in a money market account (or perhaps short-term bonds).
If you don't have a job you can earn about £15k per year in interest before paying any tax. Eg married couple with one partner earning a salary. Put all money into other partners savings account.
I'm 23 and have been watching James regularly since September 2022. Coincidentally that was the same time I opened up a Vanguard S&S ISA account. I'm diversified across VUSA, VUKE and ESG... currently up 6.8% after DCA regularly. I plan to continue this for many years to come. Thanks for the great content James!
ps it's PCA (£ cost averaging) in the UK :)
Great information Don't understand the figures retire in a year got a pension do this year worth £43000 AN Advisor as advised me to put it in a company called Fidelity with moderate risk and l think I will need some of the money to help me maybe take some out now and again when I retire in a year Do you have any advice would be very welcomed Thank you
He was right! This video was made October 13, 2023 when the S&P was 4,327.78. Three months later, it’s now up 16% to 5021.84.
Many investment platforms charge a monthly fee, for example ii charge me £10 per month for an ISA, this must affect the real rate of return. Do the numbers given here for investing in the stock market take account of that fact?
Great work , thanks for the reminder. Some Caveats 1. We are nearing the end of the long term debt cycle , (see Ray Dalio, which is equivalent to the late 1920s ) the crash then was monumental . Maybe all charts should go back 100 years ( but then the currency was gold backed then) 2. UK, US governments have massive debt will/they or wont they devalue their FIAT currencies. 3. UK retail investors tend to invest in the FTSE which has trod water for the last 20 years. A 100% cash solution , as you have pointed out is risky , but a 100% stock portfolio is risky too ( if the US/UK decide that they have tired of ultra low interest rates and QE , seems unlikley I know, there could be big market crashes) . I guess that what I am saying is , if in doubt , spread it about , ie. Cash, Bonds, Stocks. Gold, Commodities, Property , even Crytpo, but at what ratios ? In 20 years time you will know what you should have done. But if Carl Icahn can get it wrong .......
What’s best global index fund for starting out ?
I get this and I did start investing in S&P 500 but I sold out of my positions as I just started and I am young straight out of uni and I don’t think right now is the best time to invest as I don’t have an income right now until what happens in my next steps. I am holding cash at 5% but it’s interest value gain is low which is annoying but it’s better than nothing. I hope to pick back up investing when I am in a better position in the future
I checked last 10 year global stock market returns and it turned out almost identical to RPI. I.e. inflation adjusted returns are zero. In the financal system, the house always wins.
What global stock market are you looking at?
The MSCI ALL world index is up about 180% over the last 10 years, RPI is up 50%, CPI is up 32.5%.
www.google.com/finance/quote/HMWO:LON?hl=en&window=MAX
I've lost about 40k in the markets in the last 5-6 years. Brexit, ecological disaster, Trump's trade war, then now Ukraine & Israel and the hyper inflation caused by reckless QE, have all made investing much more dicey. I personally have been reducing my allocation out of stocks into savings, and will probably invest in some property.
Mmm. Plenty of people invested in pensions that held their portfolio in stocks and retired with nothing as the market crashed. So there's that.
Be risky when young, safe when you are old..
Which time period are you talking about where the market crashed at retirement and then remained at that level for the next 20 or so years of retirement?
The days of retirement as point in time are long gone in the UK. Yes, you used to have to buy an annuity on a single day and were subject to the vagaries of the market on your 65th birthday.
But today it's completely different. Essentially your sipp is like a bank account and you can withdraw small slices when you need it
@@ChrisShawUK Fairs, however are you saying a stock market crash has no influence at all on when you can retire?
@@Len_J_ I stopped work in 2019 and had a three year cash buffer. The following year I watched my portfolio fall 32% during COVID. But I didn't need to access it because I had my cash buffer.
People view their portfolio as all or nothing. Whereas the reality is that it's an asset that unwinds slowly over 30-40 years if you're lucky enough to live that long.
So, for me personally, it makes no difference what the stock market is doing, either now or back in 2019. Every now and again I sell small slices to top up my cash back to three years of expenses.
great video, thanks. but what do the long term stock market returns that you quote include or exclude? what big assumptions are made? do they include fees? if so which fees, how much on average per year as fees have reduced significantly recently but we’re significant in past decades. what about tax assumptions? do the stock market returns assume tax free, fee free reinvestment of all dividends? basically, how robust are these long term stock market returns?
These returns do not include fees.
@@JamesShack thanks James. Fees whilst low today (fund + platform + FA) weren’t always so low. How much did it cost to invest in the S&P index when Vanguard first launched their funds in the 1970s? What about before the S&P500 which launched in the 1950s? Was it even possible to generate these returns as retail investors? What were the actual returns in GBP after FX margins and costs are taken into account (in past decades)? I ask because long term stock market returns need to take all of these things into account if comparing to compounded cash returns for a truly accurate picture.
@@robertyeo9070 The proxy used for cash was money market instruments, which you would likely have to use a fund to access which would have similar fees associated with it.
If you tried to do this with just bank accounts, it's highly likely the bank is going to be taking a margin between the market rate and what they offer you.
You face fees whichever way you look at it.
Oh yeah, thanks for looking at the past and drawing conclusions about the future. I’m sure that’s a solid strategy.
Do you recommend a particular Vanguard fund? 72 years old.
5% interest is quite good and hedges risk. I like the all weather portfolio, something like 50% cash (bonds, treasury yields), 35% stocks, and 15% commodities (gold, silver, oil, corn). These are relatively uncorrelated assets, which hedges risk quite well. A general plan is to use this portfolio during times of recession or uncertainty, and once something happens that signals a large upside or an over correction I’m the market you transition back into like 70% stocks. In my opinion the market right now is to unsure of itself to go all in on stocks… just be patient and strike when the time is right rather than being impulsive. Historically the all weather portfolio does something like 7 or 8% a year if you never change the portfolio… but you can do much better by rebalancing it when all the signs towards a bullish stock market transition are screaming at you
nice! if you had to pick x1 commodity to get started, would you go gold, silver oil or corn?
@@GenuinePlukoFWIW, I have 5% physical Gold ETF and looking at adding WisdomTree Enhanced Cmdty ETF - (WCOB). This seems to add some good diversification, not tracking equities.
@@GenuinePluko commodities are for trading not investing… imo. Invest in things which produce a return.
Not investment advice but gold long term, oil short term until it reaches 100 a barrel@@GenuinePluko
Great vid as always James…..I’m an expat aged 64 living in Florida and frightened of retirement as I earn good money, have a younger sadly unhealthy wife, two dependent kids and medical costs here are horrendous. I’ve got a nice pot with Fidelity and QROPs but they never seem to give returns like say S & P and I’m really nervous about a stock market crash and advice is all other the place. Any recommendations? Thanks!
Average person should find a couple of good index funds with a good 10 yr track record and just forget about it.
I'd be wary of relying on past performance and instead aim for global diversification across developed and emerging markets and companies of all sizes.
FTSE Global All Cap Index as an example.
If you just focus on past performance, you may end up only investing in the -S&P 500- .... The Australian stock market as that's been the best performing.
If stocks are at higher than long term average valuations, then the additional equity risk premium above the cash interest rate needs to come either from increased earnings or lower valuations? Is this correct? I learnt it from another UA-cam channel and it seems to make sense.
Yes that is right. That’s why when interest rates increase asset prices typically fall, as we’ve seen in stock and bonds over the last 18 months.
In 2022 US stocks had the 6th worst year of the last 100. Bonds had the worst year… ever, by a long way. And In real terms it’s even worse.
But…. It means that expected returns are higher going forward.
James, thank you, good information as always.
But what about those of us who need the money now? I am 60, and though not officially retired, have no income or job apart from a small pension. I have a decent amount to save or invest but I need an income. I can't really wait 10 years for equity investments to even out. 5%+ fixed income bonds will at least give me an immediate, regular monthly income.
I could go for dividend stocks, but obviously whilst there's chance for growth with those, there is also risk. A bank offering 5% with cash in a bond for 12 months (and no more than £85,000 in any one bank or bank group account) is safe.
So am a little unsure what to do just now.
That’s the dilemma when you are close to retirement or already retired. His advice seems good for people in their 30’s and 40’s, but the older you are, the more risky stocks are, when you consider your investment horizon. I am retired and pull 3% of my nest egg out every year, pay the taxes, and put the rest into my money market account. The nest egg has a good mix of stocks and bonds, so I’m not overly exposed to the stock market. Bottom line, when you’re near or in retirement, it’s all about de-risking your portfolio.
If you have a SIPP, then you can withdraw £16k a year tax free until your state pension kicks in (crystalise 16k, 25% is tax free and the remainder is within you personal allowance).
Assuming you are in good health, you absolutely can (and need to) wait 10, 15, 20 years for the rest
@@samg2620thank you, that's very useful.
@@ChrisShawUKthanks, helpful advice. Good point, yes I can wait, at least five years. Still looking for some form of day to day income - could come from employment or self-employment. But if I can't find that in the near to mid-term, need to get the savings working for me in some way.
@@MikePhillips-pl6ov be careful about falling into the income trap ... lots of people do. Just because a bond pays 5% or a share pays a dividend, that is not a magical thing all of a sudden.
If you think only about total return and that everything is capital, you'll keep your head clearer.
I'm 55 today, so I can finally draw my first slice of tax free money from my sipp. I'm going to do that by selling units in the index fund. I'm doing it to minimise the amount of withdrawal tax I pay overall.
It's just money. Whether the underlying shares are paying x% or y% is immaterial.
Wow, That was enlightening! I wonder how cash and stock market compares to gold and silver in the long-term. I don't have much money at all to invest so I put a tiny bit aside for silver, I wonder if the stock market would be better or about the same in the long-term.
You can easily look at charts for this. APMEX has charts with overlays for the DOW, S&P500, gold, silver, oil, BTC.
As some have said a downturn is coming surely. I’m going to take money out of all but my high dividend shares and wait to buy during the slump. Did this during COVID and it worked well, bought a couple of months before the bottom and have seen good results over the last 18 months. I’m 55 and biggest mistake was not putting money into funds 20 years ago.
I just retired, i am moved my Emergency and "Cash Bucket" into Capital One 360 at 4.30% and am considering some CDs? At mayve 6% but the rest of my money is still invested in Stock/Bonda balanced funds.
Hello James. I am Canadian and like your amazing videos for two reasons: the information as well as your British accent. I try to copy your accent. Keep up the great work James!
Back in the 70s my Aunty did keep her money under the mattress!! But I'm hoping time have moved on. I've got about 10% of my portfolio in cash. Making between 2 and 4% a year. The majority of my money is on Pensions and stocks and shares isa. But the stocks and shares isa has made next to nothing in the last 3 years!!
I personally haven't sold any of my ISA held stocks and shares but my most recent deposits have essentially been as cash invested into a money market fund tracking the base rate of interest, with a ratio of 75/25. I just think of it as diversification and even a lot of larger investors and fund managers are doing similar things and re-balancing at the minute. The markets are fairly volatile right now, with various conflicts and oil price worries along with rising inflation. The peace of mind for a lot of people to hold some cash can't be measured by returns, and for that reason I don't agree with the basis of the video suggesting it's a terrible idea. Can people retire and reach their goals while remaining diverse and flexible with some cash holdings? Absolutely. Should they make a habit of only holding cash long term? Probably not.
Personal finance is… personal, so you need to find what works for you.
But my job as an adviser, and goal as a content creator, is to point out bias and behaviour that is likely to lead to worse results - no matter how small - so viewers are armed with the information to decide for themselves.
Market timing behaviour is something I come down hard on. Because even though it seems small and innocent at first, maintaining the belief that you (or others) can time the markets seeps into lots of other decisions and can make your life more stressful.
From experience, people that fully subscribe to market efficiency, keep a conservative emergency fund and invest every month on autopilot, no matter what, are not only likely to have better results but are also much less stressed.
Set it and forget it is the best strategy for most people. Not everyone, but most.
I’m just at the start of my investing journey. Miles too late though at 44. But I am currently building a cash buffer for a few months wages for emergencies. However, I also started a s+s ISA that tracks S&P500 and a Global index to increase diversity.
If by the end of the financial year this ISA + cash reaches my 3 month salary goal, I may stick the cash in the ISA, then open a new, similar s+s ISA for the long term saving goal, and use this initial one as my emergency fund.
You can do a lot in 20+ yrs, so forget your age.
Not too late at all, you have 23 years before standard retirement age and a good 10 - 15 years if you want to quit in your fifties. That's a decent period to save and compound.
I started saving in a S+S ISA at the age of 45, I'm 48 now and sitting at 25% yield on what I have placed in the ISA myself. This will increase over the years as I add more and compounding takes effect. I will have a tidy lump sum when I retire that I wont get taxed on which feels great. Just keep plugging away. Defiantly aim for an all world tracker especially if you are living outside the US of A. Not only are you taking into account stock market fluctuation but you are also at risk of currency fluctuations. For me is was not worth the hassle. Good luck and keep up on saving what you can, it all counts.
You just made a great argument for ditching the 60/40. I am personally using bondlike investments instead. When I was a kid there was a good interest rate. Even the 5% now compares poorly to that
I’m 85/15
Hello @James Shack have you made a video on how to invest please?
Whilst I get your point for me my stocks were negative for a couple of years and i didn't see much changing.
Past performance (which is not a guarantee) is fine if you have 100 years to wait but for me i shifted to cash to get some growth.
My intention is to hold in cash for a couple of years and then review.
It's amazing people are switching to cash to get growth in the past it was the opposite! Will things go back to how they were or is this the new normal?
The global stock market is up 50% in the last 5 years.
Please reference/declare your source of the 9% return you quote?
It depends what your goals are.
I appreciate there is no way to see this but stock market returns since this video was made were phenomenal
I gave up trying to time the market a couple of years ago and instead invested in a highly recommended fund that had strong returns, back in October 2021. Now its down 65%. What the hell? Now I need a 200% gain just to get my money back. OK so I shouldn't be looking, and then I wouldn't know and everything will be fine 8 years from now? I don't have the nerves for it!
There's only one thing worse than timing the market and that's buying an active fund.
Something like 80% of active funds fail to beat the market over the long term. It's a real lottery to pick one that does.
I don't envy your position ... You need to decide whether the fund strategy is capable of beating the market over the next 10 years (regardless if you recover the original capital or not).
If you don't think it will, then you might be better off with an index fund and chalk up the loss as an experience.
The other choice would be to go with another active fund who you think will grow the 200% to get your money back. But the chances are it won't.
Pheeeewww, bad news, and only made worse if you get divorced (assuming you are married) that will be another 50% gone.😮
Is very interesting to hear your story I'm sure you are not the only one! They say 5% will not keep up with inflation well -65% sure won't either!
“Dont look”. Sounds like good old Jack Bogle😀
Aside an emergency fund: what percentage of funds should be in cash?
Thanks
You should hold cash for an emergency fund and any large one-off expenses you can foresee in the next 3 years.
Therefore, everything else should not be needed for 5+ years and could be invested.
@@JamesShack THANK YOU SO MUCH!
My pension adviser invested in a globally diverse fund of stocks and bonds for 17 years. My average yearly rate of return after costs was 2.7% after charges. I was very disappointed and am now in the process of investing in a Sipp.
Currently most of my money is in cash and I will invest again slowly..
But I am earning more than my adviser managed to get me over a 17 year period.
Am 61
Tax implictions on interest in the UK? In the US interest is taxed each year as income, unless in a tax advantaged retirement account (e.g. IRA or 401K). Unrealized gains on ETFs, funds and stocks see no tax. Qualified dividends are not taxed for most of our population, just like realized long gains are not taxed for most.
@JamesShack - is it 'better' to drip feed into a S&S ISA over a year or put in a lump sum at the start of the year?
ua-cam.com/video/lMYflVzok30/v-deo.htmlsi=p-AlJmPd97b8I8gn
@@JamesShackthank you
dunno in UK..but you forgot the TAXATION of stocks and savings is different..here in NL they gradually but SURELY are INCREASING the taxation on stocks profits..meaning you really must gain A LOT (more than 10% yearly) to outpace the taxation... there is no more "quiet" safe stocks to hold a position in for long term..you have to get VERY active in changing stocks all the time...
That sounds so complicated and disincentivising! 😢 Do you have to pay tax on all interest/profits? I think James assumes that in the UK we are investing using one of our tax free wrapper banking products. Explanation below if you can be bothered!
In the UK we can invest tax free into our ISA up to £20000 a year and our pensions. Pensions allow you to save £3600 gross if you're not working or up to your salary if you are, with a max of £60000 a year. The government gives you tax relief on this on the way in, though it's taxed at income tax rates when you take it out. But you can't touch pensions until 55.
But ISAs and pensions both grow tax free here. Outside of those two wrappers we pay the same rate as our income tax on savings interest or profit after the first £1000. I think for most people those limits within the tax free wrappers are generous enough to invest without worrying about tax on your growth. I'm sure it's more of an issue for the very wealthy.
I bet I wouldn't invest if I had to calculate the tax on my profits. 😢
@@papiyarussell5630good explanation. One extra thing to add is everyone has £12.5k tax allowance. This is often underused if one partner isn't working. If not working you can earn about £15k pa in interest before paying any tax on that interest. So married couple could put all savings in non earners bank
Thanks for this 🍻
“Average stock market returns” is a bit of a blanket term, I’d love to see what the Nasdaq would have done without the FAANG companies and / or various stocks doing well due to Covid and war (Gas oil and the like)…I keep a mix of investments, that’s the way I prefer it….
Average stock market returns are guaranteed if you buy an index fund.
They are not if you try and beat the market with your own blend.
What is your opinion in hold bitcoin as a long term investement.
Great explanation of an unintuitive topic